2015-06-22

Real Estate Debt Bomb Exploding Across Third and Fourth Tier Cities

Ordos, Handan, Loudi, Henan and now Ninghua joins the long list of housing busts turning into debt crises. If real estate bifurcation continues, how many more small cities will see their local economies collapse, their citizens life savings frozen in concrete skeletons, ten-storey tombstones marking another failure of central planning?


iFeng: 房地产崩盘:下一波危机将是中国广大县级市
All the land that needs to be sold is sold, all the homes are built in the suburbs, but there's a problem: no people. This describes many cities in China, with Ninghua the latest example.

Ninghua in Fujian province, an economically backward mountainous agricultural county, has been involved in a frenzied whirlpool of real estate development. There are less than 100,000 people in the county seat, but there are dozens of buildings going up. The arrival of real estate broke the tranquility of this quiet old border town, it's like a huge maginal "money sucking stone," so that billions in private capital is involved in the eye of that storm and it is difficult for them to extricate themselves.

"I do not know what I'll do in the future, just take it one day at a time." Lin Xu (a pseudonym) told reporters that his goal in life now completely changed, all day long, only one thing - "debt collection." Every day dozens of creditors get together and discuss the next move.

After retirement, Lin Xu gathered up his savings. In order to increase the value of money, he though of many methods, but in this small town there's no good investment projects until the rise of real estate. In 2012, he took his own savings, plus a loan of several hundred thousand yuan, raising a total of 1.5 million yuan and through a middleman named Zhong Yunsheng lent to a real estate developer from Sanming Haiyun Real Estate Development run by Chairman Luo Haiyun.

Now Lin Xu has become an angry creditor, which has become a phenomenon in the wake of Ninghua's crazy real estate growth: building materials suppliers, contractors, construction workers, creditors ...... holding a piece of paper to prove their claim, by lawsuits and other means fight for their hope.

Now, people in Ninghua are learning that the money will never come back. Developers and debtors have "run away", large amounts of cash lie dormant in unfinished buildings - they devoured the life savings of many people.

At first, nobody thought it would fade so quickly, the cost is so great, terrible "consequences" beginning to show, its consequences far beyond the border townls ability to bear this pressure. In any case, because the real estate madness in Ninghua was followed by a debt crisis, it is worth studying this example of the aftermath in a Chinese county-level city.

Angry creditors

Ninghua located in western Fujian at the border of Jiangxi province, once a famous revolutionary base area, known as the "Soviet Ukraine." As a mountainous agricultural county, the economy is relatively backward. According to statistics, in 2014, Ninghua GDP was 10.158 billion yuan, of 58 counties in Fujian it ranked 44th.

In recent years, Ninghua new leadership took office, in order to change Ninghua economic and urban landscape, the introduction and approval of a number of major construction projects: such as economic development zone, cultural park, business city, hotel, museum ......

"Although the names of these projects are different, most of them are made by real estate developers." Ninghua government official told reporters.

According to public documents show that Ninghua government attaches great importance to the introduction of the project, county government officials responsible for each major project "in-depth focus tracking" on-site office for the project pulse, and to coordinate and solve the difficulties and problems that exist in the project progress . From the project, land use approval, land acquisition and relocation to every aspect of construction, the local government are involved, reflects the strong and supportive attitude.

The government support for developers unwittingly evolved into an invisible credit asset.

"At that time, only because I saw the Ninghua government give official documents to real estate developers, did I decide to lend money to them, who will think there will be problems?" Luo Changhao told the Economic Observer newspaper reporters. Initially, when a "middleman" Zhong Yunsheng found him, he brought Ninghua government official documents for the construction of Ninghua Overseas Chinese Economic Development Zone and land transfer approval documents, and claimed that the project has a "special background, certainly make money," through understanding and we found that indeed the developer "with a relatively cheap price obtained" the land.

Based on the above, Luo Changhao scraped together 900,000 yuan and through Zhong Yunsheng lent to developers from Haiyun.

At that time, Luo Changhao never expected that "special background" project would eventually became an unfinished building, "middleman" Zhong Yunsheng woudl be impossible to find, his 900,000 yuan nowhere to be found and he himself spend all day on debt collection.

Based on the reporter's understanding, the developer Luo Haiyun through Zhong Yunsheng borrowed a total of 24.6 million yuan, covering 76 creditors. Now, when these creditors got together to find two projects to invest in the new world of Luo Haiyun Ninghua, when Xinghewan office, only to find Luo Haiyun had secretly changed these two items of property and shareholder rights.

One fact is this: Luo Haiyun is from Shaxian in Sanming, after the rise of Ninghua estate developers, most of them are from Shaxian.

"Before 2008, none of the Ninghua developers were from Shaxian, including contractors engaged in public works, no one is from Shaxian. After 2008 until now, I guess 95% of the people engaged in civil engineering, from the developers to the contractors and foreman are from Shaxian, almost all Shaxian people." A construction businessman told the Economic Observer newspaper reporters.

In bidding many projects, many moves are also puzzling. For example, the bidding process for a project in Ninghua, the government conducted the bidding thousands of kilometers away in Hunan province, at a Changsha hotel. Moreover, the tender information was published in media outletes outside the province, a paper that no one in Ninghua can see.

In fact on this from the private lending disputes, Ninghua relevant departments coordinate the matter, and set up a coordination group, led mainly by the heads of the county and relevant departments. Even so, the effect is still not ideal.

How to explain the government?

Now, private lending has affected all sectors of society, including government officials, but also ordinary people, everywhere are debt collecting contractors, construction workers, and home buyers who paid their money, but have no home, they form an enormous population. Many people think that, in this real estate madness the local government should bear the primary responsibility for engaging in a Great Leap Forward-style of engineering, political engineering.

"A small town, the land is sold out, the houses have been built on the outskirts, the so-called new city, planned to be very beautiful, everywhere are European-style propaganda posters, full of hospitals, schools, supermarkets and everything complete, but the only problem is no people." A retired bureaucrat from Ninghua government told the Economic Observer newspaper reporter said.

The retiree believes it will take several years before the inventory of homes in Ninghua can be sold, moreover Ninghua is economically backwardness, the majority of urban and rural young people have chosen to leave the county, moved to Fuzhou and large cities such as Xiamen. Currently, the only people remaining in remote towns are elderly, the so-called "urbanization demographic dividend" has been stretched. At night in Ninghua's newly constructed city, you can count the number of lights on one hand.

In the case of real estate over-development, Ninghua Land Resources Bureau in an interview with the Economic Observer newspaper reporter in a telephone interview that: "from the central, provincial and municipal to the county, all are looking for a solution, each county has a different approach." When a reporter asked what measures will be taken, he said: "specifically the Construction Bureau is in charge."

Ninghua County Planning and Construction Bureau Jiang Chenlin admits Ninghua real estate industry overcapacity phenomenon does exist, but he believes that is not surprising, because "many places in China are almost all like this."

Zhang Yong (not his real name) is a real estate boss in Fuzhou, previously, he often received an invitation of some government officials, engaged in a number of prefecture-level city real estate development projects until 2012, then he felt there is a huge risk in fourth-tier city real estate development, he decisively stopped.

Today, Zhang Yong has become a survivor, his trapped developer friends struggling to survive, are "riding the tiger" with projects: if construction continues, certainly dead, if you do not build, also dead. Even more sad is that the local government refuses to let home prices fall, otherwise it'll be unable to sell land and thus unable to repay debt.

"Although I do not know how many Chinese real estate developers have jumped [off a building], but I think a lot of owners have considered it." Zhang said. These real estate companies are either overwhelmed when the high interest payment crisis appears, or the homes don't sell, are insolvent.

Zhang believes that the hardest hit in the next wave of crisis will be China's vast county-level cities, the real estate development in those places full of crisis, whether it is engaged in commercial and residential, or engage in shopping malls or various forms of economic development zone. He came to this conclusion on the basis of very simple, who will buy? Every city built a complete urban complex, in the mall you found the staff outnumber the customers, how will consumption rise?

In order to avoid social conflicts caused by real estate. July 2014, Ninghua Government set up a "county real estate market risk emergency leading group", leader of the group by the Magistrate Yang Sheng as the remaining members of each unit as the principal leaders. In public documents, the functions conferred Ninghua the group is: "for the effective prevention and rapid disposal of the county real estate market risk emergencies, reduce damage and loss of real estate market emergencies to society, to maintain stable real estate market healthy development and promote steady economic growth and maintaining social stability. "

Ninghua's perilous situation may represent a considerable part of Chinese county-level cities, over the past few decades, China's third- and fourth-tier cities had a Great Leap Forward in real estate, causing a serious surplus of real estate, such excess may be beyond people's imagination. Now, Ninghua's creditors have stopped expecting to get back their money, they began playing with the idea of ​​barter debt, as long as real estate developers can trade property for debt, they would not pursue it. This may be their last glimmer of consolation amid despair.

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