2014-09-23

Handan Credit Bubble Affects Entire City Economy

I try to shy away from using exaggerated headlines and I suspect the government may intervene to prevent widespread bankruptcies. Without intervention, the credit bubble will collapse rapidly. It is not only developers that have borrowed; the developers' suppliers are also deeply in debt to private lenders, as are mines, farms and others. This is a text book credit bubble imploding, what makes it different from Ordos and the cities in coal-rich Shanxi and Shaanxi is that it wasn't triggered by a depression in the main industry (energy), but by the end of the inflation. There was plenty of speculation to go around, but at this point, many firms need high interest loans just to survive because bank credit is nearly impossible to obtain.

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." -Ludwig Von Mises

April 2014: Handan Farm Cooperative Goes Bust; 100,000 Rural Households Invested Over ¥140 million; Boss Has Fled

In April, a rural cooperative that had been paying double the interest rate of banks in order to attract deposits to fund......vegetable growing schemes.......started going bust. Another plan was to truck coal from Inner Mongolia and then ship vegetables back. In reality, the most likely borrower was developers. The cooperatives started having trouble in 2013 when monetary conditions tightened, and by 2014, with real estate slowing, the game was over. The amount wasn't huge in comparison to the amounts raised by developers directly, but more than 100,000 households had deposited money in the bank. Later, this bankruptcy would be described as the aircraft carrier going down.

July 2014: Hebei Rural Cooperatives Go Bust
Hebei's economy is experiencing a serious slowdown due to the weakness in heavy industry, particularly steel. Rural cooperatives pay up to 5 times the interest rates that banks pay. They are supposed to help develop the agricultural economy, but there's no way they're doing that at 16% interest. Furthermore, the rural cooperatives employed agents to drum up deposits and many urban residents also deposited money. A big cooperative went down at the end of March in Handan. Now the bosses of other cooperatives have fled (the other type of bank run) and the whereabouts of the depositors money is unknown. A wild guess: they invested it in real estate, either directly or through high interest (20% and up) loans to developers.

August 2014: Another Credit Guarantee Gone Bust, One Month After Backing A Trust

Developer Golden Century goes bust. The firm had raised billions of yuan in privately funded loans, roughly 20 times the amount raised by the "aircraft carrier" cooperative that went bust in April. In addition to real estate development, the CEO also had a credit guarantee firm that only one month before backed a trust product. The CEO makes like a tree and leaves.

September 2014: Handan Residents Afraid to Buy Homes; Market Frozen With Developers on the Brink

The total amount of private lending to developers is now estimated at ¥10 billion, about 70 times the size of the cooperative that failed in April. Many developers have fled, leaving behind huge debts and unfinished construction projects. Home buyers will not prepay for homes for feat the developer will run away. Without bank loans or private fundraising, developers have no money to finish buildings. The real estate market grinds to a halt.

Credit Bubble Collapses in Handan; Arrests Made; Developers Repaying Suppliers With Property

The government sweeps in only days after reports come out. Over 90 people are arrested for involvement in illegal fundraising. (Private lending is illegal, but only punished when the bubble bursts.) Analysts estimate that Handan has 10 years of housing supply under construction and enough new homes to house the entire city population. With no cash, developers are paying suppliers in homes, who are then trying to sell them into a frozen market.

Now there is the report below which reminds everyone that private lending at high interest is the lifeblood of the bubble economy.
Not only that, in addition to real estate, building materials, agriculture and animal husbandry, energy, construction, medicine, etc. use private financing. With the debt default detonated in the real estate industry, these industries are also going into default. Recently, the Handan municipal government announced that Dongshan iron ore, Central Asia Calcium Carbonate, Green Beauty animal husbandry and other companies are involved in illegal fund-raising.

It is understood that Hebei Green Beauty animal husbandry borrowed more than 300 million yuan for more than 1 year from private borrowers; Handan Wu'an Dong Shan Iron borrowed 700 to 800 million yuan, Central Asia Calcium Carbonate borrowed nearly 1 billion yuan. These firms that have fallen into the vortex of private lending are almost all private enterprises, loan defaults are also a concentrated outbreak.

The real estate crisis has a direct impact on the downstream industries, Handan city has at least three mixing stations directly impacted by the high interest rate debt crisis, some construction companies have also been directly impacted, which in turn directly affects many migrant workers wages.
More in the Google translation below.

The most important part of the story is that Handan is no different from hundreds of other cities in China. A concentration of events has burst this credit bubble, but other bubbles exist all around China. As long as real estate prices continue to decline and credit remains tight, there will be more Handans.

From 21st Century Business Herald: 民间借贷风险集中暴露 实体企业“求钱若渴"

In recent years, the high cost of financing has existed, to this year, and gradually evolved into a solid industry, lack of money, especially in the real estate industry. Handan other places developer funding strand breaks occur and "foot" phenomenon. Today, some of the traditional consumer-oriented industries also began to receive funding constraints impact.

"Now more and more difficult to do business entities, we can say difficult, enterprises are faced with a dilemma, quit is to die, do it there may be a death wish, the main problem is the lack of funds." Recently, a livestock enterprises in Inner Mongolia to the "Daily Economic News "reporters reflect, with the capacity to close the sheep season arrives, companies do not have the liquidity they can not loan, to gain a foothold and development.

Button text of the new financial commentator told the "Daily Economic News" reporter, said that the problem is not the entity enterprise funds tight monetary aggregates, but our mechanism of monetary policy tightening, financial support fewer corporate entities.

Loan defaults frequent

Yesterday (September 22), the "Daily Economic News" reported that some real estate companies appear Handan funding strand breaks, triggering a chain reaction - on foot or lost contact many developers, dozens of real estate appear downtime involved in private financing The developer has 9.3 billion yuan of private capital appeared unable to meet, the government posted housing prices to 13 working groups.

Not only that, in addition to a number of industries, real estate, Handan City, building materials, agriculture and animal husbandry, energy, construction, medicine, etc. are to private financing. With debt default detonated in the real estate industry, these industries also appeared breach of a collective phenomenon, recently, Handan municipal government informed Dongshan iron ore, PCC Central Manufacturing Co., green beauty of the source animal husbandry and other companies involved in illegal fund-raising.

It is understood that the United States and the source of animal husbandry, Ltd. Hebei green in a years time deposits from the public more than 300 million yuan; raising the scale of Handan Iron Mountain 武安东 at seven billion, Central calcium carbonate there are nearly 1 billion yuan. These fall into the vortex of private lending companies are almost all private enterprises, loan defaults are also concentrated outbreak.

Real estate crisis has a direct impact on the downstream industries, in Handan city has at least three mixing stations and also due to the high interest rate debt crisis, some construction companies have also been a direct impact, which in turn directly affects many migrant workers wages.

These companies involved in private funds in addition to speculation, financial strain is one reason. There are developers told reporters that now banks do not lend, the project has been built into the half, could not make it unfinished, only through private financing.

Boss foot phenomenon not only in Hebei, previously, Fujian Longyan housing prices Tiancheng Group Chairman Huang Mizuki "escaped 1000000000 flee," the funds mainly 2-5 points of interest came from the private fund-raising; Guangxi Liuzhou turbot Group actual control Liao Rong satisfied fled, burdened by private lending more than 30 billion yuan; Hangzhou department chairman Yangding Guo are absconding, corporate debt amount more than 2 billion yuan; Jiangsu Jiang Yin Fengyuan small loan company for any standard running, involving debt capital of about 10 million.

A combination of factors affected by the economic downturn, tightening liquidity and other factors, the country of illegal fund-raising Xi Chu, a substantial increase in private lending disputes and other cases. Insiders pointed out that a number of high-leverage, high-cost expansion of enterprise funds strand breaks, private loans overdue high incidence of cases of default, the boss at running frequently staged, marks the private lending-based private financial risk into the focus of the exposure period.

Companies complain getting loans

Many business people told reporters that the reason why there is so much private lending and disputes, the current funding constraints, limited access to credit is an important reason, "if not because it is difficult to credit the money, corporate entities and will not withstand the high interest loans. "

Inner Mongolia above company official said, "all the real estate mortgage loans are closed, we do not know is that in addition to the deposit bank which loans can also publicly disseminated."

Every September, companies need a lot of money to close the sheep. "Now is the season to close the sheep, a goat count by 500 yuan, one million only 500 million yuan, the original local bank plans to put 40 billion yuan, and now even 4 million yuan are not, not a few able to borrow money, all Sheep is a patchwork collection of funds, which can not form an industry if you do not inject funds, it is difficult to hang on until the end of the enterprise. "the official said.

In the first half of this year, the central bank has twice implemented a targeted drop quasi encourage financial institutions to increase the proportion of loans to configure the "three rural" and the need to support small and micro enterprises and other areas. Directional drop quasi intention is to support small and micro enterprises to expand production and boost the real economy. But many small and micro enterprises to reflect, still difficult to borrow money. Informed sources have said, there is also the phenomenon of corporate executives to obtain bank loans for other purposes.

Recently, the National Bureau of Statistics released data show that over August-scale industrial added value increased at a slower-than-expected annual rate to 6.9%, down to six-year low. Faced with weak data, economists Tengtai think, real estate, infrastructure, business investment in plant and equipment and other three appeared nonlinear fell enlarge the risk of the economic downturn in 2014, in which funds are tight, the high cost of financing is one of the main reason.

Niu Wen said a new, modern corporate entity and exchange rate policies relating to financial constraints, the whole tend to be more short-term finance. "China is not lack of money, a lot of money supply, but the high tension of funds, without the support of Industry funds are financial arbitrage funds, China's financial in alienation, is wrong and not the total amount of structural The problem, too many short-term arbitrage capital, occupying much of the money supply, making the funds to support the real economy less and less. "

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