China: Special Update – 19 March 2014

Early this month saw China’s first onshore corporate default, when a Shanghai based solar company defaulted on its bond repayments of RMB 89.8 million (around US$14.7 million). This has been followed this week with a collapse of an unlisted private property development company.

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Collapse of a Chinese property developer raises fears. We urge caution.

Early this month saw China’s first onshore corporate default, when a Shanghai based solar company defaulted on its bond repayments of RMB 89.8 million (around US$14.7 million).

This has been followed this week with a collapse of an unlisted private property development company, with the scale of the debt far more significant. The Zhejiang Xingrun Real Estate Company is reportedly unable to repay its debts – which total RMB 3.5 billion (around US$569 million) – of which RMB 2.4 billion consists of bank loans (from 15 different banks), RMB 0.7 billion in illegal borrowings and RMB 0.4 billion in owed wages and accounts payable (according to reports in Chinese language media sources).

The company’s assets are reportedly between RMB 2.7-3 billion, having declined by around RMB 1.4 billion over the past four years – due to falling land prices in the city of Fenghua.

The size of illegal borrowings highlights the growing role of shadow banking inChina’s property sector. Credit controls intended to slow the real estate sector instead pushed developers to seek alternative sources of finance – with one report suggesting that interest rates on Xingrun’s illegal deposits were between 18% and 36%. Many developers used land as collateral, banking on rising real estate prices to service their debts.

Defaults in the property sector are relatively unusual – with firms typically selling projects or arranging equity partnerships rather than entering bankruptcy – however there have been examples in recent times, such as Hangzhou Glory Real Estate (also in Zhejiang province) and Guangdeye Property Development (based in Guangdong province) in 2012

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