China's Debt_ China’s ghost towns highlight risk of debt crisis after property boom

TODAY

China’s ghost towns highlight risk of debt crisis after property boom

Published: 4:16 AM, May 25, 2015

BEIJING — China’s Ordos city, where towers that sprang from Inner Mongolian farmland now sit empty, is showing the hangover has just begun from a decade-long building boom.

Ordos City Huayan Investment Group, a developer whose chairman headed a group of livestock researchers, is at high risk of defaulting on 1.2 billion yuan (S$258.7 million) of bonds if investors exercise an option to offload them in December, said Haitong Securities Company and China Investment Securities Company.

Also in the city, Inner Mongolia Hengda Highway Development Company asked noteholders to defer rights to sell back private securities last month due to cash shortages, said China International Capital Corp.

The city, whose fortunes reversed as a coal boom turned to bust, is grappling with China’s slumping property market that researcher SouFun Holdings Limited said led to more than 10 “ghost towns” across the country.

Five years after the first building was completed in the eastern city of Tianjin’s replica of Manhattan, the district remains almost deserted. Locals in the city of Handan in Hubei province, where a burst property bubble left half-constructed high-rises, have also blocked streets to protest soured investments.

“Many small-city developers are running into financial trouble,” said Mr Liu Yuan, a Shanghai-based research director for Centaline Group, China’s biggest property agency. “It’s the problem Ordos faces after its property bubble burst.”

China’s slowest economic growth since 1990 and a shift toward the service sector from traditional smokestack industries are adding to stresses in less developed areas. That is frustrating long-standing efforts to boost the regions through steps such as the “Go West” campaign launched in 2000 to cover six provinces including Inner Mongolia.

Cities suffering from declines in fiscal revenue need close scrutiny for potential debt failures, said Mr Zhang Chao, a bond analyst at China Investment Securities in Shenzhen. The highest-risk areas rely on resource production such as Inner Mongolia and Shanxi, and also include north-eastern provinces such as Heilongjiang and Liaoning, he said.

President Xi Jinping must balance efforts to rein in record regional borrowings that swelled after a 4 trillion yuan stimulus package in 2008, with steps to prevent contagion in the nation’s money markets. Two landmark bond defaults last month, one at a state-owned company and another at a homebuilder based in Shenzhen, showed that companies in larger cities have also become vulnerable.

“The city’s (Ordos) property market is experiencing a big slump following the over-expansion in previous years,” said Mr Zhang, That has contributed to the financing crisis at Ordos City Huayan, which faces a high chance of default on its borrowings due this year, he added.

Ordos City Huayan, which builds apartments as well as commercial properties, had only 21.33 million yuan of cash compared with 6.69 billion yuan of debt as of the end of last year, its annual financial statement showed. It had 170 million yuan of overdue bank loans as of Dec 31, after suffering a loss of 726.1 million yuan last year.

Fiscal income of Ordos, which sits on one-sixth of China’s coal reserves, declined to 43 billion yuan last year, showed official data. Job growth in the city slowed to 4,169 new hirings in the first quarter, 967 less than the same period of last year due to falling demand from the mining and construction industries, municipal data show.

Premier Li Keqiang has pledged to allow market forces to play a bigger role in the economy and strip power from the government since he took office in March 2013.

“Whether the central and local governments will allow builders in smaller cities to default will depend on their determination to restructure the economy and on whether the possible defaults will cause any systemic risk,” said Mr Liu Dongliang, a senior analyst at China Merchants Bank. BLOOMBERG

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