Ghost city of Ordos borrowing from private investors to fund expansion

Even though the city has seen business drop 70-90%, it is still expanding!

Caixin looks at the city in Tall Order in Ordos: Giving a Ghost City Life. The main problem for the city today is falling coal prices, not the real estate bubble. Were energy prices to pick up, the city could at least start digesting the inventory, but instead business has ground to a halt.
One property developer said 70 percent of all downtown construction projects have been halted. "Capital chains are broken," he said. "There's no money."

A city construction bureau official said small property developers "have suspended almost all work" on apartment buildings. "Those that are still working are either government companies or subsidiaries of large energy groups."

First-quarter, new apartment sales in one district fell 93 percent from the same period 2011, the government said, to the equivalent of a few dozen apartments of average size.

...Delivering a separate but more serious blow to the government's treasury has been a recent slowdown for the coal industry. Coal sales accounted for more than 60 percent of the city's GDP and 50 percent of government revenues in 2008.

Coal prices have been falling since April, and hundreds of area mines have been affected.
Government is funding real estate development through state owned companies, including the energy firms. This gets to what Michael Pettis describes in his book The Volatility Machine: Emerging Economics and the Threat of Financial Collapse. These firms are all pro-cyclical: their profits come directly from energy prices, the government revenue comes from the energy sector, and they are investing their capital in real estate whose value is tied to the health of the economy. It is going totally bust now as coal prices tumble, joining the real estate sector in deep recession. The entire economy will collapse because instead of investing in counter-cyclical assets, they have bet everything on pro-cyclical investments. They are the exact opposite of diversified.

It gets better though. Since the city is running out of cash, they've started borrowing from private investors:
Banks have dramatically scaled back property lending. The Ordos branch of China Construction Bank, for example, has stopped lending money to property developers, a bank employee said. And only major enterprises qualify for local loans from the Industrial and Commercial Bank of China, a source said.

A source at another state-owned bank said there is little room left for new lending in Ordos. So far this year, the Big Four state banks have issued more than 10 billion yuan in local loans, mainly to coal and power companies.

"There were almost no loans to property companies and for local infrastructure projects," the source said, adding that his bank "seldom cooperates with urban development companies," which function as financing platforms run by the local government.

Urban development companies in Ordos have raised billions of yuan through bonds and trust products in recent years. Since 2009, for example, the Dongsheng City Development Group has lined up some 10 billion yuan.

But debts are rising. The Dongsheng group's liabilities grew to 14 billion yuan late last year from 634 million yuan in late 2008.

And credit has tightened since the central government started strengthening its oversight of government financing platforms in 2011. "There are fewer new loans this year and no plans for new bond issues," said a city government official.

...To get around the lack of bank credit, the city has borrowed money from private firms. The Dongsheng group, for example, borrowed about 2.7 billion yuan from several private companies in the region last year, according to the group's financial report.

Revenues are still officially rising for the Ordos city government, which reported taking in 23.6 billion yuan in the first half, up 8.9 percent year-on-year.

City officials have launched aggressive plans to build another 600 kilometers of expressways, 14 industrial parks and 18 power transformer substations. They budgeted 150 billion yuan worth of private and government investment this year, up from 107 billion yuan last year and 80 billion yuan in 2010.
This is pyramid finance at its finest. The entire Ordos economy and financial system could collapse like house of cards if coal prices sink.


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