Chinese property developer near bankruptcy with debt exceeding $500 million: report

SHANGHAI (REUTERS) - A Chinese property developer owing billions of yuan to banks and individuals is on the verge of insolvency, and its owner has been detained for illegal fund-raising, government sources in the city where the company is headquartered said on Tuesday, confirming domestic media reports.

The state-owned China News Services, quoting anonymous sources, said on Monday that Zhejiang Xingrun Real Estate Co, based in Fenghua city in eastern Zhejiang province, is on the brink of bankruptcy, owing 15 domestic banks 2.4 billion yuan (S$491.3 million) and individual investors another US$1.1 billion (S$1.39 billion).

The news pushed down Chinese property bond and stock prices.

An employee in the Fenghua city government's financial office, who spoke on condition of anonymity, broadly confirmed the reports about the company's troubles, but said the debt amounts were exaggerated.

Wang Ruilin, in charge of the city's real estate management office, also confirmed the reports and said that the company owner and his son had both been detained for illegal fundraising.

State-owned media reported that in addition to bank loans, the owner had illegally raised money from from 98 individual investors.

Wang would not confirm this number.

Such private fundraising is common but illegal in China, and regulatory concerns about companies using such backdoor channels to secretly increase their leverage have led to numerous court cases, including one death penalty sentence.

The financial office employee said Wu Yongben, head of the city financial office, was currently in a meeting with representatives of China Construction Bank and Shanghai Pudong Development Bank discussing how to resolve their outstanding loans to Zhejiang Xingrun.

Calls to Zhejiang Xingrun, China Construction Bank and Shanghai Pudong Development seeking comment were not answered.

"As far as we know, this is the largest property developer in recent years that is at risk of bankruptcy," wrote Zhang Zhiwei of Nomura Securities in a research note.

"We believe more property developers will face similar pressures as transaction volumes slow and cash flow conditions tighten."

Bankruptcies and bank loan defaults in China are common, but the size of Zhejiang Xingrun's outstanding loans, and the fact that the near-bankruptcy troubles come shortly after China's first public bond default on March 7, rattled investors.

The Shanghai property index was down 0.6 per cent in morning trade, dragged lower by Beijing Capital Development Co Ltd, down more 2.8 per cent, Xingye Resources, down 2.5 per cent, and Poly Real Estate, down 2.7 per cent.

"While this news will definitely impact some property stocks, I don't think a domino effect is likely," said Du Changchun, an analyst at Northeast Securities in Shanghai.

A bond analyst at Shenyin Wanguo Securities in Singapore noted that Zhejiang property developers have been in trouble for over a year now given massive speculation, particularly in Ningbo and Wenzhou, which have both seen steadily dropping housing prices.

Offshore Chinese property bond prices are still down half a point from the levels before the report, having clawed back some of their losses, but lower quality names are seeing no activity, traders said, as investors wait for more clarity.

China's red-hot property market has shown signs of losing steam since late 2013 as local governments took further tightening measures and banks gradually tightened lending to this sector.

The March 7 bond default was followed shortly by instructions from banking regulators to Chinese banks ordering them to reduce lending to industries in overcapacity by 20 per cent.