China Developer Collapses Under RMB 3.5B Debt – Owner Held for “Gangster Funding”

A private real estate developer in the Chinese city of Ningbo reportedly failed yesterday under the weight of RMB 3.5 billion ($566.6 million) in debts, and the company’s owner is said to have been detained by authorities.

The pressures currently facing many Chinese property firms, tightening credit, slowing sales and rising land prices apparently left Zhejiang Xingrun Real Estate Co without sufficient cash to repay loans to more than 15 banks.

According to a story in Bloomberg, Zhejiang Xingrun’s biggest creditor is China Construction Bank Corp (HKG:0939) which has been left with more than RMB 1 billion in outstanding debt.

The collapse of the developer, which is based in the Ningbo suburb of Fenghua in a wealthy part of eastern China’s Zhejiang province, follows soon after China’s first ever commercial bond default on March 7th, when Shanghai Chaori Solar was unable to cover a RMB 89.8 million interest payment to creditors.

“Gangster Fundraising” and 98 Creditors

Xingrun’s majority shareholder and his son (who is the company’s legal representative) are being held by police in the face of charges of illegal fundraising.

In addition to RMB 2.4 billion in bank loans, Xingrun is said to have borrowed from the public (allegedly including 98 companies and individuals) more than RMB 700 million, with local media referring to the company having used “gangster funding.” China’s real estate developers frequently rely on trusts and wealth management products to raise short-term financing for projects at rates of more than 25 percent per annum.

Slowdown in Housing Transactions Squeezes Developers

The slowdown in China’s economy, particularly for real estate prices, have made lenders more cautious, just as borrowers are finding their revenues squeezed.

The double-digit growth in housing prices that had fed developer margins have slowed markedly in recent months. More importantly, for developers borrowing short-term money, sales of new homes have nearly ground to a halt in some cities.

During February, sales in Beijing were down 68 percent compared to January levels, and a report on the Shanghai market indicated that new home sales in February fell to their lowest point in the last two years.

Predictions of Doom

The shuttering of Xingrun was presaged last week when the CEO of one of China’s mid-sized developers predicted tough times for the nation’s real estate firms. Hoi Wa-fong, CEO of Hong Kong-listed Powerlong Real Estate told the press that, “It’ll be quite normal if 20 per cent of property firms die this year.”

Commenting to Bloomberg on the subsequent collapse of Xingrun, Patrick Chovanec, the New York-based chief strategist at Silvercrest Asset Management Group LLC, said, “When credit is reined in even slightly, it undercuts demand. This is potentially an inflection point.”

Many analysts believe that while Xingrun is a relatively small company, its death could have a significant market impact. There is the potential that the collapse of the developer, following soon after the Chaori Solar default could create a “Bear Stearns moment” for China’s real estate industry. And perhaps for the economy as a whole.