Chinese Property Developer Zhejiang Xingrun Defaults on $400M Bank Loans; The default is unusually large for a developer in one of China’s most affluent regions

Chinese Property Developer Zhejiang Xingrun Defaults on Bank Loans

Default Is Unusually Large for Developer in Affluent Region of China

DINNY MCMAHON and ESTHER FUNG

March 17, 2014 10:59 p.m. ET

BEJIING—Zhejiang Xingrun Real Estate Co., a property developer based in a small city south of Shanghai, is unable to repay almost $400 million worth of bank loans, a person at the local government financial affairs office said Tuesday.

The default is unusually large for a developer in one of China’s most affluent regions. The person from the financial affairs office in Fenghua city said local government officials have been meeting in recent days to determine how to deal with Zhejiang Xingrun’s 2.4 billion yuan worth of bank debt and dispose of the developer’s remaining assets. The person declined to give her name and to provide further details.

Calls to Zhejiang Xingrun’s office Tuesday morning went unanswered.

The default comes as China’s financial system is increasingly showing cracks. Last week, solar components maker Shanghai Chaori Solar Energy Science & Technology Co., became the first Chinese company to default on a domestically-issued bond. Moreover, a number of trust companies have signaled that their borrowers are unlikely to be able to repay their debts.

 

Chinese property developer at risk of massive loan default-sources

Mon, Mar 17 2014

(Adds government confirmation, analyst quotes)

By Pete Sweeney and Umesh Desai

HONG KONG/SHANGHAI, March 18 (Reuters) – A Chinese property developer owing billions of yuan to banks and individuals is on the verge of insolvency, and its owner has been detained for illegal fund-raising, government sources in the city where the company is headquartered told Reuters on Tuesday, confirming domestic media reports.

The state-owned China News Services, quoting anonymous sources, reported on Monday that Zhejiang Xingrun Real Estate Co, based in Fenghua city in eastern Zhejiang province, is on the brink of bankruptcy, owing 15 domestic banks 2.4 billion yuan ($388.5 million) and individual investors another 1.1 billion.

The news pushed down Chinese property bond and stock prices.

An employee in the Fenghua city government’s financial office, who spoke on condition of anonymity, broadly confirmed the reports about the company’s troubles, but said the debt amounts were exaggerated.

Wang Ruilin, in charge of the city’s real estate management office, also confirmed the reports and said that the company owner and his son had both been detained for illegal fundraising.

State-owned media reported that in addition to bank loans, the owner had illegally raised money from from 98 individual investors. Wang would not confirm this number.

Such private fundraising is common but illegal in China, and regulatory concerns about companies using such backdoor channels to secretly increase their leverage have led to numerous court cases, including one death penalty sentence.

The financial office employee said Wu Yongben, head of the city financial office, was currently in a meeting with representatives of China Construction Bank and Shanghai Pudong Development Bank discussing how to resolve their outstanding loans to Zhejiang Xingrun.

Calls to Zhejiang Xingrun, China Construction Bank and Shanghai Pudong Development seeking comment were not answered.

“As far as we know, this is the largest property developer in recent years that is at risk of bankruptcy,” wrote Zhang Zhiwei of Nomura Securities in a research note. “We believe more property developers will face similar pressures as transaction volumes slow and cash flow conditions tighten.”

Bankruptcies and bank loan defaults in China are common, but the size of Zhejiang Xingrun’s outstanding loans, and the fact that the near-bankruptcy troubles come shortly after China’s first public bond default on March 7, rattled investors.

The Shanghai property index was down 0.6 percent in morning trade, dragged lower by Beijing Capital Development Co Ltd, down more 2.8 percent, Xingye Resources , down 2.5 percent, and Poly Real Estate, down 2.7 percent.

“While this news will definitely impact some property stocks, I don’t think a domino effect is likely,” said Du Changchun, an analyst at Northeast Securities in Shanghai.

A bond analyst at Shenyin Wanguo Securities in Singapore noted that Zhejiang property developers have been in trouble for over a year now given massive speculation, particularly in Ningbo and Wenzhou, which have both seen steadily dropping housing prices.

Offshore Chinese property bond prices are still down half a point from the levels before the report, having clawed back some of their losses, but lower quality names are seeing no activity, traders said, as investors wait for more clarity.

China’s red-hot property market has shown signs of losing steam since late 2013 as local governments took further tightening measures and banks gradually tightened lending to this sector.

The March 7 bond default was followed shortly by instructions from banking regulators to Chinese banks ordering them to reduce lending to industries in overcapacity by 20 percent. ($1 = 6.1781 Chinese Yuan)

 

China Developer With $567 Million Debt Said to Collapse

By Bloomberg News  Mar 17, 2014

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.”

Securities Slump

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.

Bank Talks

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.”

Property Curbs

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.

To contact the reporter on this story: Steven Yang in Beijing at kyang74@bloomberg.net

 

About bambooinnovator
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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