18 August 2019
This 2012 file picture shows Ningbo which has administrative jurisdiction over Fenghua
This 2012 file picture shows Ningbo which has administrative jurisdiction over Fenghua

Xingrun fiasco: How the bubble burst

Is it a prelude to a bigger debacle?

People are beginning to ask that question after the collapse of Zhejiang Xingrun {興潤} Real Estate Co. Ltd. raised the prospect of contagion in China’s property sector.

The fiasco offers an insight into tens of thousands of regional developers and their ability to avoid a similar fate.

In theory, Zhejiang Xingrun should have been able to survive an industry-wide downturn by virtue of its size and location. It is based in Fenghua {奉化}, a wealthy county-level city in eastern Zhejiang province (birthplace of the late Taiwan president Chiang Kai-shek). Also, the 26-year-old developer is the largest in the city, with a dozen sizable, high-end residential projects.

Instead, the company found itself unable to make ends meet. This week, it defaulted on 3.5 billion yuan (US$562.3 million) in debt payments, potentially the largest failure since Beijing stepped up a crackdown on runaway market speculation.

Xingrun is a poster child of China’s property boom from 2009 to 2012 when regional developers played to impress, catering to the rich and powerful and offloading luxury properties as quickly as they built them.    

They also took on massive debt, planting the seeds of a highly-leveraged future. 

Xingrun itself was red-hot. With easy money from local lenders, it bought up land across Fenghua. In January 2010, at the height of its excess, it splashed out 660 million yuan on a plot at an average price of 7,852 yuan per square meter and developed it into French-style townhouses and luxury villas which it sold for 5.7 million yuan to 25 million yuan each, 21st Century Business Herald reports.

The company wasn’t alone in testing its own limits.

Local cadres abetted reckless expansion by providing a steady supply of land. At the height of the building frenzy in 2011, Xingrun bought large chunks from peasants at 10 million yuan per hectare, with the bulk of the money coming from bank loans.

The bottom fell out last year when Beijing began to rein in the housing market and banned lenders from issuing any more loans to developers.

“Not a dime more” became a catchword for tighter credit that Zhejiang officials told bankers in no uncertain terms. Smaller cities like Fenghua, where there had been an oversupply of housing, were among the first to feel the squeeze.

Demand for new homes, which was almost entirely driven by local speculators with money from banks or from illegal fundraising, sharply waned.

Since the second quarter of 2013, Xingrun has been hard pressed to sell its homes, limiting its ability to recoup its investment.

And with the bank loan tap all but closed, the company could not remain liquid, forcing it into the arms of shadow banking operators and loan sharks. Soaring interest costs eroded its already thinning margin.

One thing led to another, finally ending in the spectacle of homebuyers staging angry protests to demand compensation after Xingrun stopped construction on several housing projects.

Fenghua has not been spared from all this. Land auction prices have fallen, causing losses in the value of Xingrun’s land bank and ongoing projects.

In December, Shimao Property (00813.HK) bought a site near Xingrun’s French-style villa development at 3,204 yuan per sq. m., a fraction of what Xingrun paid.

Greentown (03900.HK) is said to have bought farmland there for 3.28 million yuan per hectare last year, more than two-thirds lower than the price two years ago.

That means Xingrun has seen its asset value fall 1.4 billion yuan in the past two years, prompting banks to call in loans to the embattled developer.

Fenghua officials have revealed that Xingrun is in default on loans from 19 banks.

China Construction Bank is owed the most with 1.2 billion yuan, followed by Shanghai Pudong Development Bank (400 million yuan) and Agricultural Development Bank of China (almost 300 million yuan).

Another 700 million yuan comes from high-interest public savings involving 98 people including seven cadres and two micro credit companies, China Securities Journal reports.

What’s left of the company will not be known until it is liquidated, but the best estimates put all its assets at no more than 3 billion yuan, hardly enough to dent its debt pile.

Meanwhile, Xingrun’s president and his son have been arrested on charges of illegal fundraising.

As they say, when it rains, it pours.

– Contact the writer at [email protected]



EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe