China Slowdown Sends Ordos to Bust as Li Grapples With Credit; “Now the economy has collapsed, they’ve all gone.”

China Slowdown Sends Ordos to Bust as Li Grapples With Credit

Posters of the Chinese character for good luck adorn shops bolted shut in the northern city of Ordos, where cranes stand silently above half-finished developments and doors on workers’ dormitories creak in the wind.

Apartment sales have come to a virtual halt in the central district, real-estate agent Zhang Wei says. With the municipality’s revenue gains diminishing, the Inner Mongolian city that saw a surge in building during China’s record credit boom is now a showcase for the speculative financing Premier Li Keqiang is trying to curb.

“In the past few years there was a lot of coal so people came from all over the country,” says Gao Wei, 30, smoking in an office that deals in second-hand construction machinery and had no clients that day. “Now the economy has collapsed, they’ve all gone.”Ordos’s implosion stands at one extreme of a national slowdown that a government report yesterday signaled may deepen this quarter, with industrial output gains last month matching the weakest since the 2009 global recession. The challenge for Li’s administration is to assure growth is resilient enough for the world’s second-largest economy to weather busts in local finance and industries ridden by overcapacity.

“Ordos is a warning to other places in terms of how to guide the local economy and in what not to do,” said Yao Wei, China economist at Societe Generale SA in Hong Kong. “The local governments are still not waking up to what they should do in this new environment.”

Industrial Output

China’s growth slowed for a second quarter to 7.5 percent in April-to-June, yesterday’s National Bureau of Statistics report showed. Factory production rose 8.9 percent in June from a year earlier, equal to the lowest since 2009 excluding January and February, when the Chinese New Year holiday distorts statistics.

The report boosted speculation that the government will act to defend its 7.5 percent growth goal for 2013. Nomura Holdings Inc. forecast China will lower banks’ reserve-requirement ratio four times by a total of 2 percentage points through June 2014. Bank of America Corp. said authorities will “introduce some fiscal expansionary policies on a limited scale.”

The government has already started to fine-tune policies and support growth, HSBC Holdings Plc said in a note yesterday. State Council announcements this month encouraging investment in public housing, energy saving, environmental protection and technology infrastructure will help counter the slowdown, HSBC said.

Nomura yesterday cut its growth estimate for next year to 6.9 percent from 7.5 percent, while JPMorgan Chase & Co. lowered its forecast to 7.2 percent.

‘Temporary Pains’

“We are all undergoing the temporary pains of restructuring,” Sheng Laiyun, a statistics bureau spokesman, said at a briefing yesterday in Beijing.

Fueled by a boom in coal production, Ordos saw a building spree in recent years, with an expanded airport, a sports stadium and the new area of Kangbashi where high-rise apartments surround an artificial lake. Many local residents owned two to three homes each, said Bai Pusheng, a real estate agent.

Now the local government’s revenue is falling because the property crash has scuppered land sales, while residents no longer have compensation to buy property and make loans, according to real estate agent Zhang. About 70 percent of Dongsheng district’s real estate market was funded by private lending that has now stopped, he said.

Ordos’s January-May fiscal revenue dropped by 15.8 percent from a year earlier, according to official statistics.

Boom Halted

When the government sold land over the past few years, it always used the funds for infrastructure construction, Zhang said from the sales office of a new apartment complex with 1,000 units. “Now they don’t have any money.” Meantime, the city’s coal rush has dried up amid sluggish domestic demand, with prices dropping to an almost four-year low.

That hasn’t stopped efforts to keep the boom going. Authorities are planning construction for residents to see green spaces every 300 meters and a park every 500 meters, according to Guo Xiaojun, a publicity official from the Dongsheng government.

Such projects may be getting harder to finance. Some Ordos district governments had to borrow money from companies to pay municipal employees’ salaries, Economy & Nation Weekly, published by the official Xinhua News Agency, said in a July 5 report on its website. The Dongsheng government didn’t respond to a request for comment made through Guo on the magazine’s story.

Financing Vehicles

Much of Ordos’s borrowing has been through local government financing vehicles, special-purpose companies set by authorities across China to fund infrastructure construction. The entities have amassed debt that the National Audit Office estimated was 10.7 trillion yuan ($1.7 trillion) at the end of 2010.

While state-owned policy bank China Development Bank “greatly supports” the projects of local government vehicle Erdos Dongsheng City Construction Development & Investment Group Co., other banks have become stricter and won’t lend for public-works projects such as roads and parks, said Dai Haishu, financial controller and senior accountant at the company.

“Our projects should have no risk,” he said from his office overlooking unfinished concrete apartment blocks. “The economy has had an impact but we don’t have to repay all our money at once.”

A February 2012 bond prospectus for investors in Erdos Dongsheng forecast “fast growth” for the district and rapid gains in local government revenue. The company is continuing to borrow, and CDB loans have maturities of as long as 10 years, Dai said.

“In the short term we will see some hiccups and problems and sometimes even defaults and forced restructuring,” said Louis Kuijs, Royal Bank of Scotland Group Plc chief China economist in Hong Kong. “The way out will in part involve higher levels of government stepping in because they have the money.”

–Henry Sanderson. With assistance from Kevin Hamlin, Zhou Xin, Nerys Avery and Sarah Chen in Beijing. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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