China’s Rapid Growth Hits the Brakes

By NEIL GOUGHMARCH 18, 2014

The New York Times

HONG KONG — New pockets of economic weakness in China emerged on Tuesday, as the collapse of a highly indebted real estate developer and weak home sales pointed to a slowdown in the sprawling property sector.

The latest batch of difficulties add to the continuing debate over China’s commitment to economic reforms. While Beijing is pushing through initiatives to reform its economy, the worry is that the country’s slowing economy will prompt it to reverse course.

The nation’s growth has decelerated to its slowest pace in more than a decade. The default of the developer, the Zhejiang Xingrun Real Estate Investment Company, is likely to heighten the concerns that growth will remain sluggish, at least by China’s standards.

The vast real estate market, which has accounted for a significant portion of the gross domestic product, is an essential piece of the economic puzzle. And recent data has prompted concerns about the health of China’s housing market. In the latest example, growth in new-home sales in several of its biggest cities slowed last month from January, data released on Tuesday by the National Bureau of Statistics showed.

As the property market comes under pressure, real estate developers are feeling the pinch, especially those with huge debt.

Xingrun, a small developer in the coastal city of Ningbo, was unable to repay more than 3.5 billion renminbi ($566 million) in debt, according to reports in Chinese state-run news media on Tuesday. While it is not unheard-of for Chinese property developers to default on loans or to face bankruptcy, the size of Xingrun’s debt load is particularly notable.

The failure of the developer also comes two weeks after China’s 8.5 trillion renminbi domestic bond market experienced its first default in recent history. The Shanghai Chaori Solar Energy Science and Technology Company, a maker of solar cells and panels, defaulted after not making an annual interest payment of 89.8 million renminbi on a bond of one billion renminbi.

Beijing indicated last week that more defaults were inevitable, although the government would aim to contain the damage.

Xingrun had been in financial difficulty for months after having accumulated debt that included bank loans from 19 institutions. China Construction Bank, Shanghai Pudong Development Bank and Agricultural Bank of China were the company’s biggest creditors, according to multiple reports in Chinese news media.

“Xingrun is not the first developer to default, and for sure it won’t be the last,” said Bei Fu, a director of corporate ratings at Standard & Poor’s who focuses on the real estate sector. “We expect to see a wave of such small developers running into problems this year, both from a financing and operational perspective.”

Law enforcement officials in the city of Fenghua, which is part of Ningbo, have detained Xingrun’s legal representative and its controlling shareholder, a father and son, on suspicion of illegal fund-raising activities, the state-run China News Service reported on its website on Friday. In addition to the bank loans and other debt, local officials found the developer had tapped China’s ubiquitous, but illegal, informal lending networks, raising about 700 million renminbi from 98 individuals, according to the report.

Phone calls to Xingrun’s offices went unanswered on Tuesday. A person who answered the phone at the Fenghua government’s information center said he had no information on the case.

Chinese property developers are being challenged by a tighter liquidity environment. Banks and other sources of debt financing, like trust companies, are growing cautious as the risk increases that borrowers will be unable to repay loans and interest.

At the same time, home prices have been increasing at a slower pace in recent months. The figures released on Tuesday, covering the property markets in the 70 biggest mainland cities, showed that the average price of a newly built home in Beijing rose 0.2 percent in February from January. That compares with an increase of 0.4 percent in January from December. In Shanghai, new-home prices rose 0.4 percent in February, down from a 0.5 percent increase a month earlier.

Any slowdown in China’s property market can affect the broader economy, from rattling the balance sheets of the banking system to curbing growth in household consumption. Some analysts have expressed concerns that given the building boom in recent years, China’s residential property market might eventually find itself dealing with significant oversupply.

Zhiwei Zhang, the chief China economist at Nomura, described real estate as “a pillar of growth for China” that makes up 16 percent of the country’s gross domestic product, accounts for 26 percent of new loans and contributes 39 percent of government revenue, based on 2013 data.

“The local government debt problem and the shadow banking issue have caught investors’ attention, but alone they are unlikely to cause a systemic crisis in 2014, as the government can bail out troubled trust products and roll over debt,” Mr. Zhang said.

“If property investment slows sharply, policy easing may not be effective, as fundamentally the sector faces a structural oversupply problem.”

Bettina Wassener contributed reporting.