Tuesday, October 25, 2011

Ordos and Wenzhou Roundup

Key take aways:
Half of Ordos real estate businesses have gone under or are going under.
Only 35% of private lending invested in businesses, most money invested in real estate.
80% of real estate development on Ordos financed by private lending.
One failing hotel can stiff 4000 creditors.
25% of Yangzijiang Shipbuilding's profit came from interest earned in the shadow banking sector
90 percent of all loan-lending enterprises are SOEs (State Owned Enterprises)

The influence of a crash on private lenders will be far reaching and much harder to bail out.

Lending Crisis Stokes Fears of ‘China Economic Model’ Collapse
Many people were engaged in speculative real estate investments a few years ago, according to Ms. Song, an Ordos resident. But recently almost half of Ordos’ real estate businesses have closed or are facing closure, a real estate agent told The Epoch Times.
“Many real estate companies in Ordos have been facing disruption of their capital chain, which will get worst by the end of the year,” financial analyst Li Huizhong, who investigated private capital in Ordos, told China’s National Business Daily.
More than 80 percent of property development in Ordos has been financed by private lending, according to the report [from the Ministry of Housing and Urban-Rural Development].
A lot of money from private lenders has also gone into the real estate market, Zhou Dewen, chairman of Wenzhou's Small and Medium Enterprise Development and Promotion (SMEDP) told Zheshang Magazine. Only 35 percent was invested in businesses, according to a report by the Central Bank’s branch in Wenzhou.

China's borrow-and-die epidemic spreads north

Su Yelu is the latest property developer to be detained by public security officials after allegedly fleeing last month with a large amount of unpaid debts. Two years ago, Su was only a restaurant boss in the downtown area in Ordos. Ambitious to build a hotel, she borrowed money through her workers and their families, who hoped to earn high interest, according to some mainland media.

As the property sector in Ordos tightened when Beijing acted to cool the property market, Su's business failed, her hotel not finished. Her case is said to have involved 4,000 creditors.

Shadow banking casts a cloud in China
The temporary profitability of informal banking seems to have also lured many SOEs to participate in the business, sometimes on-lending funds borrowed from banks to earn high spreads. Even listed companies got into the game, including Singapore-listed Yangzijiang Shipbuilding; it was reported that more than 25 per cent of the company's pre-tax profits in the second quarter came from its loan activities.

Shadow banking risky (from China Daily)
According to Japan-based Nomura Securities, the size of China's shadow financing could amount to 8.5 trillion yuan ($1.33 trillion). Liu Jigang, a researcher from ANZ bank, estimates it could even be as high as 10 trillion yuan. These estimates may not be accurate, but they nonetheless highlight the problem of shadow banking in China.
None-bank loans were only 8.7 percent of the total yuan loans in 2002, but had grown to 79.7 percent in 2010. This growth in finance means the loan size is no longer an index of money supply-demand relations.
The high returns attract more economic participants and even State-owned enterprises (SOEs) have joined the game. According to the Financial Times, several jumbo SOEs have financial platforms, while 90 percent of all loan-lending enterprises are SOEs.
This last one is interesting as it is written by a researcher at the State Information Center. The usual pattern of articles with any dire economic tone is to follow the bad news with a policy section. I always assumed the bad news was a kind of semi-official red flag to warn the reader that the central government is serious about the policy in question. This article contains no policy announcement.

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