Amid the cluster of half-built brick townhouses surrounded by budding peach groves on the outskirts of Fenghua city, south of Shanghai, workers last week could be seen taking down metal scaffolding and hauling away steel plates.
They had heard the news about “Cement Shen,” the nickname of the developer whose Zhejiang Xingrun Real Estate Co. became insolvent this month with 3.5 billion yuan ($563 million) in debt, according to an official in the eastern Chinese city of Fenghua, 120 miles (190 kilometers) from Shanghai. Authorities detained founder Shen Caixing and his son for illegal fundraising, Xu Mengting, director of the government information office, said in a March 21 interview.
“The developer owed us hundreds of thousands of yuan” for scaffolding and steel, said workers Xie and Wang, who would only give their surnames as they collected dozens of long metal plates. “We are taking these materials back for now, because there’s no work here.”
The insolvency may portend difficult times ahead for small developers. China has almost 90,000 of them nationwide, National Bureau of Statistics data show. As new-home price growth slows in China and cash-flow conditions tighten, more local builders like Xingrun will face defaults, Fitch Ratings Ltd. Hong Kong-based analyst Andy Chang wrote in a March 19 report.
China’s smaller cities have experienced a building boom. About 67 percent of housing under construction in China last year was in less-affluent cities like Fenghua, according to a Nomura Holdings Inc. report.
With Chinese characters meaning Peach Blossom Palace, the development of two-story homes, some with Tudor-style turrets, was to be sold to the wealthy of Fenghua and the nearby port city of Ningbo. The elder Shen founded Xingrun, the biggest local developer, 14 years ago and was chairman of the local Real Estate Association, according to the city government website.
Wu Xijuan, a 50-year-old property agent at Tengfei real estate agency in Fenghua, said Shen was a celebrity and seemed to be “a pretty decent guy.”
“Everybody called him ‘Cement Shen’ because he started out with a renovation and cement business,” said Wu, adding that Shen’s stature at an estimated 1.6 meters tall (5 feet 2 inches) made him “a very low-profile guy” that “you probably would think is just some farmer and wouldn’t know is rich.”
Fenghua, population 500,000, is the birthplace of former Chinese nationalist leader General Chiang Kai-shek, and is home to textile, farming, fishing, and tourism industries, as well as a factory for mobile-phone maker Ningbo Bird Co. (600130) The city has a number of pawn shops and microcredit agencies offering high-interest loans, a practice known as shadow banking, which is frequently used to fund property development after China’s banks were restricted from lending into the sector.
The annual per capita disposable income of Fenghua’s urban residents rose almost 9 percent in 2013 to 39,414 yuan, according to city government data.
By that measure, it would take 145 years for an average Fenghua resident to afford the cheapest Peach Blossom Palace home. Prices ranged from 5.7 million yuan for 285 square meters (3,077 square feet) to 25 million yuan for 500 square meters, according to listings on SouFun Holdings Ltd. (SFUN:US), China’s biggest real estate website.
Along the road leading into Peach Blossom Palace, which the developer had named Taoyuan Villas in English, are advertisements for the homes. One shows a woman in a Marie-Antoinette-style, 18th-century French wig beside a horse. Signs are printed in poor English: “Dominating the World, Lead to the Revolution on Pure Villa in Fenghua” and “A Mansion to Cash the Dream on Arcadia That You Expect to All Life.”
Xingrun had probably been insolvent since as early as 2010, while the shadow banking loans it took had involved many government civil servants, Oriental Outlook, a magazine published by the official Xinhua News Agency, reported today, citing an unidentified head of a local bank and homebuyers in Fenghua.
Gates at the site were half-open, leading to about 50 to 60 half-finished structures with exposed brick walls, cement foundations, and square holes where the windows should be.
A report in the 21st Century Business Herald identified the founder’s son as Shen Mingchong and said the elder Shen was born in 1953. The name and date couldn’t be independently confirmed.
Neither Shen nor his son could be reached at Xingrun’s listed phone numbers, nor could they be found at the company’s main office, which was no longer there. Another Xingrun office and showroom for the Peach Blossom Palace was closed. China doesn’t have telephone listings for individuals.
Xingrun owes 2.4 billion yuan to banks including China Construction Bank Corp. and Agricultural Bank of China Ltd., 700 million yuan to private lenders and the rest to construction companies, said Xu, the city official.
“There are several reasons for Xingrun’s insolvency. The main reason is that the company wasn’t run well,” said Xu. “Fluctuation of land prices” also played a role.
To build the development, Xingrun acquired three plots measuring 140,083 square meters in January 2010 for 660 million yuan, according to Fenghua’s land bureau. In December, the government auctioned three plots totaling 163,258 square meters in the same area for 576 million yuan to Shimao Property Holdings Ltd. (813), suggesting land values slumped around 30 percent in three years.
“Xingrun was the big brother in town. It was one of the very first companies in the property business, with no previous experience or professional sales teams,” said Zhong Yongjin, a Ningbo-based researcher at Centaline Property Agency Ltd., China’s biggest real estate brokerage. “But these local developers usually don’t have risk controls, and they operate in ways regardless of market changes.”
Ningbo’s home-price growth slowed for a second month in February, rising 6.1 percent compared with 7.1 percent in January, according to the National Bureau of Statistics.
The Peach Blossom Palace showroom is in a luxury residential high-rise complex built by Xingrun in downtown Fenghua in the early 2000s. Yangguang Mingdu, which translates as Sunshine Tea City, is one of the highest-end housing projects in town, according to Centaline.
Taped to the unlocked glass door of the empty, dusty showroom was an unpaid February utility bill for 224 yuan. A model of the Peach Blossom Palace development sat in the center, with sales information on the surrounding walls.
A man called He, who wouldn’t give his full name, had taken up residency, living with a colleague in two of the former office rooms. Suitcases and a bed could be seen, along with cups of instant noodles and tea.
“Living conditions here are not good, but we want an update about the incident,” said He, who said Xingrun owed his construction advisory and planning company several million yuan. “There are two sides pulling against each other in the debate over what to do because there are too many local interests involved. Some want the government to step in and bail Xingrun out, while others prefer some private companies to take over Xingrun’s assets.”
He called Peach Blossom Palace a “high-quality project” and said he expected the situation to be resolved to his satisfaction, “but we just don’t know how long it will take.”
While half of the 10 biggest developers by sales in Ningbo, which has jurisdiction over Fenghua, are local, the remaining projects have been built by China’s largest listed firms, including China Overseas Land & Investment Ltd. (688) and Shimao, based in Hong Kong, and Shenzhen-based China Vanke Co. (000002), according to Centaline.
While large developers are able to borrow at cheaper interest rates from banks, unlisted small Chinese developers have more difficulty getting credit amid the country’s four-year efforts to tighten the property market, according to a March 18 Standard & Poor’s Ratings Services report.
“Local developers suffer,” said Centaline’s Zhong. “They usually spend a lot of time and effort on government relations. But when big developers enter the city, the government will quickly turn to them, because they bring along more stable tax revenues.”
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