China's Markets Face Shakeout as Easy Money Comes to a Halt: Mortgages

Online, April 3, 2014 (Newswire.com) - Zhejiang Xingrun Real Estate Co., a closely held developer based in Fenghua, is insolvent, with 3.5 billion yuan ($562 million) of debt. Its residential projects have been halted and authorities have detained its largest shareholder and his son, according to the city's government.

Developers have proliferated since China began allowing private home ownership in 1998, causing a surge in demand and a rally in residential prices. For years, homebuilders binged on easy credit from banks and shadow financing from non-banks at higher interest rates. Now many developers are struggling with debt as thousands of apartment buildings across the country sit empty and the government abstains from providing further stimulus for the economy.

"It's a positive sign that companies are not being propped up," said Matthew Thompson, Senior Porfolio Specialist at Luxembourg based Financial House James Doyle. Matthew Thompson also estimates there are about 30,000 "true" developers, not including construction and project companies. "That is far too many, even for a country as large as China. Consolidation needs to take place."

More Failures

With lending tight, more developers like Zhejiang Xingrun will go under, Johnson Hu, a Hong Kong-based property analyst at CIMB Securities Research, said. In 2012, there were 89,859 real estate developers in China, according to the latest data on the National Bureau of Statistics website. "Li has already signaled that as long as there are no systematic regional risks, the government won't do much because some cases of default are inevitable," Hu said.

Earlier this month, after the annual meeting of the National People's Congress, Li said the government will control the residential market "differently in different cities," taking into account local conditions. Li didn't provide more details.

Li's predecessor, Wen Jiabao, who stepped down in March 2013, had tried to curb the property market since 2010. His nationwide measures included higher down payment requirements and interest rates for second-home mortgages, increasing construction of low-cost social housing and restricting home purchases in about 40 cities. Authorities also imposed a property tax for the first time, in Shanghai and Chongqing.

Price Growth

Price gains for new homes slowed for a second month in February, rising 10.8 percent from a year earlier. That compares with 11.1 percent in January and 11.5 percent in December, according to SouFun Holdings Ltd., the biggest real estate website in China, which surveys 100 cities.

The value of homes sold in January and February fell 5 percent to 598.5 billion yuan from the same two months a year earlier, the bureau of statistics said. Sales almost doubled in the first two months of 2013.

Developers in regions where the housing market slowed and access to financing narrowed face rising default risks, Standard & Poor's Ratings Services said in a Jan. 17 report. Renhe Commercial Holdings Co. and Glorious Property Holdings Ltd. (845) are two such companies, the report said, without providing information on the developers' debt levels.

'Creative Destruction'

"That is a good thing," said Matthew Thompson. "If you are going to have creative destruction, some companies are doing to have to go out of business." Private companies are likely to be more reliant on non-traditional sources like trust funding, which come with high costs, Fitch Ratings said in a report March 18.

Since 2007, Chinese regulators have limited homebuilders' ability to borrow to buy land, hurting in particular smaller developers, which have found it harder to get access to credit. The People's Bank of China and China Banking Regulatory Commission in 2007 ordered banks not to make loans to developers that will be specifically used to finance land purchases.