94 people were detained in a growing funding scandal involving real estate developers and private lenders in the northern Chinese city of Handan recently as a slowdown in housing sales exposed risky funding practices.
A report in the official Xinhua news agency today said that government work teams had been sent in to investigate thirteen local real estate developers in the city in southern Hebei province after a total of thirty-two property firms illegally raised RMB 9.3 billion ($1.5 billion) in funding for new projects in Handan.
In addition to the 94 people already in custody, the police are said to be pursuing another 43 individuals in a crackdown that was triggered by the collapse last month of one of the leading property developers in Handan. In all the shadow bankers are said to have borrowed cash from an estimated 10 percent of the population of the city of 1.3 million people.
Macquarie-Backed Developer Brings Down a Shaky Industry
The illegal fundraising in Handan came to light after a public panic caused by the collapse in August of Handan Golden Century Real Estate.
Golden Century’s boss, Shi Yubao allegedly fled the city after the developer was unable to make payments on RMB 2.9 billion ($506 million) in debts. A large percentage of the liabilities were borrowed at interest rates of up to 30 percent from trusts and other funding vehicles, according to local media reports.
Statistics from Soufun show that sales of new homes fell 32 percent in Handan during June of this year, compared to January. Home sales nationwide were down nearly 12 percent during the period from January through August, compared to the first eight months of last year according to Soufun.
The fall off in housing demand meant big trouble for Handan Golden Century, which was also the guarantor for a trust product launched during July by Sino Australian International Trust Company (SATC), a shadow banking entity which is nearly 20 percent owned by Australia’s Macquarie.
Since Handan Golden Century defaulted, there has been a widespread run on private trusts in the city as individual lenders attempted to collect their funds out of the loosely-regulated shadow lenders.
Handan Trusts Offering Interest Rates of 3.5 Percent – Per Month
According to a Xinhua report, private lending to real estate projects in Handan has surged this year as the industry lost access to bank loans and other funding sources. In some cases the shadow banking entities were offering interest rates of 3.5 percent per month in order to entice lenders into the market.
A staffer from a trust company who spoke to Xinhua attempted to explain the breakdown in the company’s financing. “Starting last year, bank would no longer give us loans. If we could still get bank loans we would not need to turn to personal financing,” said the employee on condition of anonymity.
However, starting in July this year, a number of private lenders became unable to meet their commitments to their customers. Now the only occupants of many trust offices in Handan are angry lenders attempting to collect on their loans, or government work crews poring over records for evidence of wrong-doing.