China Developers in Northern City Face Payment Woes, Xinhua Says

Local authorities in China’s northern city of Handan sent work teams into 13 developers to contain risks after a failure to repay funds raised illegally from the public sparked panic, Xinhua News Agency reported.

Thirty-two homebuilders raised a combined 9.3 billion yuan ($1.5 billion) in illegal fundraising or high-return deposits, Xinhua reported today, citing the government in the city, located in Hebei province neighboring Beijing. The police have detained 94 people and are pursuing another 43 in a crackdown on such activities also involving small-loan companies and rural cooperatives, according to Xinhua.

Handan’s case highlights risks after China’s small developers resorted to more costly funding like trust products or even illegally raised funds from local residents to cope with falling sales amid tight bank credit, according to Credit Suisse Group AG. Zhejiang Xingrun Real Estate Co. became insolvent in March with 3.5 billion yuan in debt, and its founder was detained for illegal fundraising, a local official said at the time.

“Such risks may exist in many other places too, but not to such a serious extent,” Jinsong Du, a Hong Kong-based property analyst at Credit Suisse, said by phone. “This should still be an isolated case.”

China’s home sales slumped 11 percent in the first eight months of this year amid an economic slowdown after banks tightened property lending to curb default risks. New-home prices fell in all but two cities monitored by the government last month as tight credit damped demand even as local home-purchase restrictions were eased.

Falling Sales

Credit quality worsened at 12 of the Chinese developers rated by Moody’s Investors Service in the first half of this year due to slow cash collection from contracted sales, weak revenue and higher debt, Moody’s Hong Kong-based analysts led by Kaven Tsang wrote in a Sept. 16 report. They predicted that “negative rating actions will likely outstrip positive ones” in the second half as the market remains challenging.

In Handan, a city of 10 million residents, new-home sales plunged 32 percent to 903 units in June from January, according to SouFun Holdings Ltd., the nation’s biggest real estate website. Property sales dropped 6.7 percent last year as unsold apartments jumped 17 percent to 1.4 million square meters (15 million square feet), according to the local statistics bureau.

The city will seek to rescue companies that were operating normally and now facing temporary funding difficulties, according to the Xinhua report, which said the local situation is “controllable.” The 32 developers involved in illegal fundraising compares to a total of 141 homebuilders that operate in the city’s main urban districts, according to Xinhua.

Handan’s property market is in a crisis, with many developers having fled and construction halted at dozens of projects, the National Business Daily reported today, citing unidentified local investors and industry executives.

— With assistance by Dingmin Zhang

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