Bank Grabs Assets of Defaulting Chinese Developer

A government-owned bank in the city of Jinan has confiscated and begun selling off the assets of a delinquent local government real estate company, after successfully suing the property firm in court.

Qilu Bank Co, announced last week that it had seized property from Licheng District Comprehensive Development Corporation of Urban Construction after successfully suing the real estate development firm belonging to Licheng District in Jinan. The lawsuit was brought after Licheng defaulted on loans in excess of RMB 40 million ($6.4 million).

Although the loan amounts are relatively minor, the case is significant because of the state-run bank’s apparent refusal to roll over or renegotiate the loan to the local government funding vehicle. The loan by Qilu to Licheng District Comprehensive Development Corporation of Urban Construction was guaranteed by Jinan Chengtou Corp., a financing vehicle under the Jinan municipal government.

First Local Government Default in China

As originally reported by Pete Sweeney in Reuters last week, and further detailed by Esther Fung in The Wall Street Journal, while the original RMB 35.2 million loan by Qilu to Licheng was made in 2005, it was rolled over in 2008, and then refinanced in 2010, before Licheng finally defaulted in 2012.

The Reuters report referenced a research note from Japanese investment bank Nomura which said that, “To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan.” An LGFV is a local government financing vehicle, and as China’s property market has slowed this year, the dependency of most local governments on land sales for revenues has been a growing cause for concern.

A recent credit report on the southern Chinese province of Guangdong revealed that even in a relatively developed province such as this, which has a diversified economy by local standards, more than half of the provincial government’s revenues came from land sales in 2012. As China’s appetite for new home sales has dropped this year, land sales fell by nearly one-third during the second quarter, according to one recent report.

Licheng Development Didn’t Do Much Developing

Although 2012 – when Licheng finally defaulted – was a slow year for China’s real estate market, extended difficulties that Licheng had in meeting its obligations to the bank appear to make this much more of a story about local government financial struggles, than a tale of a failed property firm.

According to a local media report, the developer hadn’t actually brought a project to completion in more than a decade, and that the company hadn’t paid its staff for more than 18 months.

However, the city’s real estate market does seem to be under some pressure this recently, as its government last week indicated that it will soon join several other Chinese urban centres in revising restrictions on home sales as real estate markets sag across the country.

According to the latest data from China’s National Bureau of Statistics, the average price of new residential housing in Jinan fell 0.4 percent in May, compared to June. While the average price figure was still 5.9 percent more than the average price recorded in May 2013, the decline marked the first month on month fall in prices in June 2012.