Near-bankrupt Chinese property firm offers lesson in lending risks

Thu Apr 3, 2014 1:43am EDT
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By Pete Sweeney

FENGHUA, China (Reuters) - To understand why many of China's small property developers are struggling, look no further than Zhejiang Xingrun Real Estate.

The once little-known regional developer is now on the brink of becoming one of China's biggest real estate bankruptcies in recent memory.

As China's property bubble shows signs of deflating in some areas - in peripheral neighborhoods in lower-tier cities - privately held developers like Zhejiang Xingrun are falling by the wayside, victims of a toxic combination of unjustified optimism about the property market and sky-high interest rates.

Government officials said last month Zhejiang Xingrun is on the verge of bankruptcy with 3.5 billion yuan ($564 million) in debt offset with only 3 billion in assets. The news heightened concerns a slowdown in the property market and the economy was adding to the risks in the financial system following the first default on a domestic bond.

Chinese home price inflation fell for a second straight month in February, following government policy curbs aimed at cooling what has been a red-hot market. Some markets saw outright price declines, in particular Ningbo. Zhejiang Xingrun's investments were in the satellite city of Fenghua within the port municipality of Ningbo in eastern Zhejiang province.

"It's not just Ningbo, it's Hangzhou, and Nanjing has a problem too. Even Beijing," said Zhang Yongmin, director of the Centre for Global Finance at Nottingham University's Ningbo campus. "Real estate has a problem; it's over built. And on the policy side the government is implementing controls, so banks are very cautious."

To be sure, Zhejiang Xingrun's investments were focused in Ningbo, so the company does not represent a broader threat to stability, Chinese officials and bankers said.

But many of the problems faced by the company are symptomatic of the pressures on many other similarly sized developers, which Fitch Ratings cited as oversupply in smaller cities and significantly slower growth rates and profit margins.   Continued...

A labourer walks on a crane at a construction site in Nanjing, Jiangsu province December 14, 2011. REUTERS/Sean Yong