Earlier this week I posted Another Credit Guarantee Gone Bust, One Month After Backing A Trust, which covers the latest incident of a debtor fleeing his or her debts. In that case, the debtor is the developer Shi Yubao of Golden Century, who borrowed privately from thousands of people. The result of this episode, and no doubt the defaults earlier in the year that involved similar borrowing practices (see link above for more info), is that Handan residents are now afraid to purchase a home. They fear the others developers could also run away too since many of them have used the similar methods to raise capital.
Many developers in Handan have closed their sales offices and are in no mood to sell homes, they're looking for a way out instead. Besides the home buyers disappearing, the lenders want their money back. Suppliers and contractors want their money too. Normally, they would settle their accounts with developers at year end, but now they want to be paid in advance for fear the developer could skip town.
There is nearly a ￥10 billion black hole of private lending. Dozens of developers have 300 projects underway in Handan, at least half used private money. About ￥6 billion is already in trouble, but it could grow to ￥10 billion as other developers get into trouble. Interest rates on money raised from individuals can exceed 20%, and in order to keep up with debt costs, developers need rising home prices. With the market cooling, the developers can no longer out run their interest costs. According to the article, price growth through August is only 3% since 2012. Back in 2012, the estimated average profit on a home sale was only 19%. With construction costs rising, financing costs piling up and prices barely rising, profits have no doubt tumbled.
Handan developers are intimately tied in with local government and non-local developers avoid the market. Golden Century CEO Yu Shibao, the man who has fled town and precipitated this latest crisis, was appointed to a supervisory position in the Hebei Province People's Procuratorate. The firm also obtained the best pieces of land in Handan at preferential prices. Other developers also have ties to provincial government offices.
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