Developer’s Default Indicative of Economic Slowdown

In addition to experiencing a slowdown in its property sector, China’s property market received a blow this week with the collapse of real estate developer Zhejiang Xingrun Real Estate Co. Two weeks ago Shanghai Chaori Solar Energy Science & Technology Co warned in a stock market filing that the company is unlikely to meet its interest payment of 89.9 million yuan (US$14.6 million) on the due date of March 7 – and indeed they were not able to, resulting in the country’s first domestic bond default. Some analysts note that these are signs that China’s economic growth is on a path of slowing down, while others warn that this may be likened to the Bears Stearns scenario in 2008, setting off the risk management meltdown of the investment bank industry on Wall Street.

In the case of Zhejiang Xingrun Real Estate Co., the company reportedly has 3 billion yuan of assets on hand, but owes 15 domestic banks up to 2.4 billion yuan, as well as owing individual investors 1.1 billion. Chinese news media reports that Shanghai Pudong Development Bank and China Construction Bank Corporation are the real estate company’s biggest creditors. Facing an unprecedented situation, authorities of the People’s Bank of China were reportedly holding emergency talks with one of its largest state lenders on the possibility of bailing out Zhejiang Xingrun.

The size of Zhejiang Xingrun’s debt sets it apart from other Chinese property developers who have defaulted on loans or faced bankruptcy, and analysts note that this may be the beginning of a pattern of defaults by developers, particularly as many have turned to the shadow-banking sector for relief from tight liquidity. The risk is apparently highest in China’s third- and fourth-tier cities, as these accounted for up to 67 percent of new housing construction in 2013, and developers in these lower-tier cities find it more difficult to obtain finance. First tier cities – Shanghai, Beijing, Shenzhen and Guangzhou – account for around 5 percent of new housing. Not all investors in the real estate market know this, and some take it as a given fact that the activity in first-tier cities is an indicator for the entire country – which it is not.