Shanghai Island Shows Property Boom Promise as Debt Balloons

Property prices are booming in an island town of 60,000 people near Shanghai while the market slumps elsewhere. It comes at a cost: swelling borrowing that’s threatening local-government finances.

Tang Chunmei, a 43-year-old real estate agent in Chenjia Town, 45 kilometers (28 miles) from China’s financial hub, said average apartment prices may rise 35 percent in seven years. That contrasts with cooling nationwide, as home prices fell 0.3 percent in May in the first monthly drop since June 2012. Chenjia financed its expansion in part with a 800 million yuan ($128 million) bond sold through a financing unit last year, exceeding the town’s 120 million yuan of fiscal revenue, to build affordable apartments for farmers as rice fields are turned into tourist attractions.

“We’ve been so busy we can’t even take days off on holidays,” said Tang, who now lives and works in a neighborhood whose name means wealthy and grand, after relocating from a rural house nearby two years ago. “I don’t know if I’m concerned about the local-government debt. Life is better than before.”

Premier Li Keqiang must balance plans to build 36 million new homes for families like Tang’s, as he champions urbanization to spur economic growth, with steps to rein in local liabilities that have swelled to 17.9 trillion yuan. Debt in counties such as Chongming, which includes the island where Chenjia is located at the mouth of the Yangtze River, soared 77 percent through the end of June last year from December 2010, outpacing the 62 percent increase for provinces, according to audit bureau data.

Heavy Borrowers

An official at Chenjia’s local-government financing vehicle, who asked not to be identified, declined to comment on the source of funds for debt repayment. A press official at Chongming County also declined to comment.

“There’s a mismatch between local government revenue and resources, which is particularly conspicuous on the county level,” said David Cui, China strategist at Bank of America Corp. “There will be problems in the future for many local governments that borrowed heavily without adequate fiscal revenue.”

Regional authorities in the world’s second-largest economy established more than 10,000 so-called local government financing vehicles, or LGFVs, to fund construction projects after they were barred from directly issuing bonds under a 1994 budget law. Local governments are responsible for 80 percent of spending, while getting only about 40 percent of tax revenue, the legacy of a 1994 tax-sharing system, the World Bank said.

Better Life

Tang in Chenjia said the debt-fueled development in the town where she grew up has brought benefits. Her family gave up their one mu (1/6 of an acre) of farmland and two-story house in return for three separate apartments and hukou, the urban household registrations that give access to perks including health care and pensions.

A former housewife, Tang got her job at the real estate company after the move. She now earns as much as 60,000 yuan a year, three times the salary for a factory worker on Chongming Island, she said.

“The apartment is cleaner without all those agricultural tools,” said Tang, standing in her 114.5 square-meter three-bedroom, two-bathroom house, on which she spent 120,000 yuan decorating.

Farmers-turned-urban dwellers can put the apartments on sale three years after the ownership certificate is issued. Most buyers are Shanghai residents, Tang said.

Prices Jump

On the south side of town, wealthy people from Shanghai are buying villas along the coast as investments or vacation homes, according to Zhu Ana, a saleswoman at Boee Real Estate, a Zhejiang-based developer. The company built Tuscan-style villas priced up to 16 million yuan in the area, which also has a five-star hotel, the Hyatt Regency.

Second-hand housing prices in Chongming Island have climbed more than those in Shanghai every month this year, rising 19.8 percent in May compared with 15.8 percent in the financial hub, according to data compiled by Anjuke, a Shanghai-based property-listings site. By contrast, home prices nationwide dropped 0.3 percent from April, according to SouFun Holdings Ltd., the country’s biggest real estate website owner.

Too much inventory in other markets could see developers cut prices to meet their ambitious sales targets, Standard & Poor’s said in a report today. On average, rated developers set targets this year 20 percent higher than actual sales in 2013, which was a stellar 12 months for most companies, S&P said.

As the market slumps elsewhere, Chenjia aims to more than triple its population to 210,000 by 2020, according to a brochure provided by the LGFV. Planned projects include a conference venue, polo club, theme park and marina.

Relocation Woes

That’s all coming at a cost. Debt at Chenjia’s LGFV climbed to 6.6 billion yuan at the end of 2012, compared with 5.0 billion yuan in 2010, according to the bond prospectus. It estimates 2.84 million yuan of profit from the affordable housing project and 99 million yuan from store leases, while it gets 400 million yuan in subsidies from the central and the municipal governments, according to the filing.

Pressure to refinance old borrowings is forcing China’s LGFVs to issue a record amount of bonds this year. They sold 966.3 billion yuan of notes since Dec. 31, the most in the same period since at least 2002, according to data compiled by Bloomberg on 2,450 so-called chengtou bonds issued by the financing units.

Muni Trial

Chenjia’s debt-financed development hasn’t pleased everybody.

“Relocation’s not necessarily a good thing,” said Wang Kai, a 42-year-old taxi driver who works in Shanghai. “Prices go up when you move to the new neighborhood. Vegetable markets are more expensive. Old people in particular have nothing to do.”

Investors should exercise caution and consider the long-term viability of Chenjia’s development model, according to Hu Yifan, the Hong Kong-based chief economist at Haitong International Securities Group Ltd.

“The current price rise in Chenjia could be a short-term phenomenon given shrinking housing sales volume and falling sales prices nationwide,” Hu said. “Another concern is that the kind of LGFV bonds issued in Chenjia lack sufficient transparency.”

China will let some local governments repay notes themselves this year in an expansion of a municipal debt trial, the Ministry of Finance said in a May 21 statement. “Developing the muni market is a positive step because it should entail greater disclosure to investors,” Hu said.

The People’s Bank of China said May 6 it will strengthen monitoring of credit extended to LGFVs, real estate companies and industries with overcapacity. Premier Li has spoken of fine tuning policy as he juggles curbing excessive lending with steps to meet a 7.5 percent economic growth target this year. The government in early April rolled out tax breaks and sped up spending on infrastructure and social housing.

Chongming’s economic output grew 6.8 percent in 2013, according to figures posted by Shanghai Statistics Bureau on its website, lagging the 7.7 percent national growth.

Lu Haitao, a 35-year-old Chenjia-native who comes back to stay with family on days off from work in Shanghai, said the urbanization has increased opportunities even though there’s room for improvement in expanding options beyond blue-collar jobs.

“It’s good we’re moving forward,” said Lu, who was playing badminton in the neighborhood’s cultural center. “It’s good we no longer need to grow our own rice.”

— With assistance by Judy Chen, and Gregory Turk

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