A closely held Chinese real estate developer with 3.5 billion yuan ($566.6 million) of debt has collapsed and its largest shareholder was detained, government officials familiar with the matter said yesterday.
Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.
The collapse of the company, based in the eastern town of Fenghua, adds to concern of strains in the nation’s real estate sector and comes less than two weeks after the first bond default by a Chinese company. Shanghai Chaori Solar Energy Science & Technology Co.’s inability to repay its debt may become China’s own “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, Bank of America Corp. said March 5.
“Chinese developers are extremely exposed to the easy credit that is used to finance purchases and investment,” said Patrick Chovanec, the New York-based chief strategist at Silvercrest Asset Management Group LLC, which oversees $14.1 billion in asset, by phone. “When credit is reined in even slightly, it undercuts demand. This is potentially an inflection point.”
Stocks and bonds issued by Chinese real estate companies slumped after reports of Zhejiang Xingrun’s collapse added to concern that defaults are starting to mount as the nation’s economy slows and the government reins in lending.
Prices on the dollar bonds sold by Evergrande Real Estate Group Ltd., the nation’s fourth-largest developer by market value, fell 0.5 cent on the dollar yesterday, sending yields to the highest since August. Prices on Kaisa Group Holdings Ltd.’s bonds maturing in 2018 dropped to a seven-month low. American depositary receipts of E-House China Holdings Ltd., the online real estate services provider, slid 2.6 percent while SouFun Holdings Ltd. retreated for a seventh day.
Zhejiang Xingrun’s collapse was reported earlier yesterday by the Chinese-language National Business Daily, which cited an unidentified government official for the news. The report blamed the failure on mismanagement and high costs of private lending, according to the newspaper.
The city of Ningbo has jurisdiction over the town of Fenghua, which is the birthplace of former Chinese nationalist leader Chiang Kai-Shek. Fenghua is in discussions with the banks and Ningbo on how to repay the debt, the people said. They said Zhejiang Xingrun has assets worth 3 billion yuan.
Two calls to the chairman’s office and financial department at Zhejiang Xingrun weren’t answered yesterday. A woman who answered the phone at the Fenghua government’s news office who declined to give her name confirmed the company can’t pay its debt. A Beijing-based press officer at CCB said the bank asked for more information from its local branch about the report and hasn’t heard back.
“We think the default of the developer will alert the banks on escalating risk from developers amid the liquidity tightening,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research. “We maintain our view that banks may revisit loan policy on property and may take a stricter stance on property development loans, particularly for small developers.”
The property market in smaller Chinese cities faces “true risks of a sharp correction” due to oversupply and investors may have underestimated the risk, Nomura Holdings Inc. economists said in a March 14 report.
Property shares slid to a 16-month low in February after Industrial Bank Co. suspended mezzanine financing for developers, adding to concerns that smaller developers may default on their borrowings amid the government’s property curbs and an economic slowdown.
New home prices in Ningbo rose 7.1 percent in January from a year earlier, according to the National Bureau of Statistics. The city in February recorded the 10th-lowest yield on residential investments in the past year among 116 Chinese cities, with negative 1.1 percent, according to a March 13 report by Zhongjin Standard Data Research Ltd., a Hong Kong-based data provider.
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