Looming property default in China raises fears of broader crisis

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http://money.cnn.com/2014/04/15/news/eco...?iid=HP_LN

Fears grow over China property flameout

By Charles Riley @CRrileyCNN April 15, 2014: 9:39 PM ET
housing china
There are signs that China's housing market may be significantly overheated.
HONG KONG (CNNMoney)
The risks of a blow up in China's property market are rising, threatening a slowdown that could hurt global growth.
The sector is second only to the related problem of credit growth on a list of threats to China's economy -- according to economists surveyed by CNNMoney.
Talk of a property bubble in China is nothing new -- economists have long fretted over the meteoric rise of home prices, and the runaway pace of new construction.
Media reports on "ghost cities" -- newly constructed Chinese municipalities that were never occupied -- led to frequent warnings of a crisis, which has not yet materialized.
The sector's continued strength results in a kind of Rorschach test, where the same image is perceived very differently: Pessimists say real estate is emblematic of problems such as rapid credit growth and backward economic incentives. Bulls counter that the boom is sustainable, especially as hundreds of millions of Chinese migrate into urban areas.
The sheer size of the real estate sector -- some 16% of GDP -- underscores the importance of the debate for a world economy that is increasingly connected to China.
The fears of a slowdown have now returned, sparked by a flurry of reports from third and fourth-tier cities that suggest ailing developers are offering big discounts to unload property quickly. Even in some major cities, sales have slowed and homeowners are fretting over lower demand.
The far flung smaller cities account for almost 70% of all home sales, according to Japanese brokerage Nomura.
"In China, the true risks of a sharp correction in the property market fall in third- and fourth-tier cities, which are not on investors' radar screens," Nomura analysts wrote recently.
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Yet it is difficult to make a definitive case that trouble is ahead.
Some statistics point to resilience. One indicator tracked closely by Beijing is the labor market, and that is holding up. Developers may be under stress, but there's no sign yet of a wave of defaults or bailouts.
Official data released by the Chinese government is largely unhelpful in gauging market risk. Prices are only offered for the largest cities, and home ownership statistics are not published.
The lack of data has produced a bevy of "known unknowns" -- or potential problem areas that are known to researchers, but remain clouded in mystery.
How much excess inventory currently exists? To what extent is the banking system exposed? How might Beijing respond in a crisis? Will developers receive government bailouts?
Related story: Top 10 U.S. cities for Chinese homebuyers
Foreign investors would likely be insulated in the short term because China's equity and property markets are largely closed to outsiders.
The immediate pain would be felt much closer to home. Many Chinese view their property as investments, and huge amounts of household wealth are tied up in real estate. Down payments of 30% are common.
But a housing shock could ripple out to the broader economy, especially the banking sector -- which provides financing to many developers. In addition, real estate is closely tied to the manufacturing and services sectors.
"Property sector over investment is the top macro risk because the property sector is currently the keystone of China's economy -- if it slows, systemic risks rise," said analysts at Nomura.
Beijing would have numerous cards to play in response to a crisis. Banks and developers could be bailed out, and toxic loans corralled and sealed off from the financial system.
And there's another reason to think the fallout could be contained: Unlike in the United States prior to 2008, China has not chopped up and securitized its mortgages, lowering the risk of contagion. To top of page


First Published: April 15, 2014: 9:39 PM ET

[greengiraffe]

PUBLISHED APRIL 22, 2014

China plans bad debt fund for foreigners
US$1b fund will help them invest in soured property loans and distressed real estate

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BT 20140422 CHFUND22 1054469
Lower demand: Data has shown China's home price inflation slowing to an eight- month low in March, and analysts expect the easing trend to continue. - PHOTO: REUTERS
[BEIJING] A unit of one of China's biggest bad-debt banks plans to woo foreign investors with a US$1 billion fund for soured property loans and distressed real estate assets, reopening the sector to outsiders after a failed attempt last decade.
That the fund is being launched just as growth in the world's second-largest economy has slowed to an 18-month low and the housing market is losing strength is no coincidence.
China Orient Summit Capital, 80 per cent owned by China Orient Asset Management Corp, will use its connections to help foreigners invest in an attractive but sometimes treacherous market for distressed assets, chief executive Lijian Chen said. "We see the cycle coming," he said, referring to an expected cooling down in the housing market. "Especially since this is synchronised with the economy."
And China Orient Summit wants to be ready. Founded in February, it has sought regulatory approval for its new fund, which would target institutional investors and pension funds in the US, the UK, and the Middle East. "The best deal in any country, always, is going to be the off-market deal," Mr Chen said in an interview at the firm's office in downtown Beijing. "You have to explore the relationship, you have to explore the off-market opportunity."
This was especially important as deals were often sealed behind the scenes, even at open auctions, he said. For instance, at a recent auction for a plot of land in the southern city of Ningbo, the winning bid went to a firm that promised the local government it would move its headquarters to the city, thereby lifting future employment and tax revenues. "So if you just go there and say 'OK, this is open price, so I'm going to put in my bid because I have capital', then you are just too naive."
Direct foreign investment in property is strictly controlled by the government, which fears excessive speculation in the market. Therefore, although foreign investment in property is on the rise, it accounts for only a fraction of total spending.
China has always stood out among investors as a compelling market for buying bad loans and distressed assets, but never lived up to its potential. An attempt to launch a market for distressed assets quickly shrivelled in the mid-2000s.
Foreign investors said that the market died because auctions were rigged, laws were opaque, and governments resisted corporate bankruptcies. In response, Chinese authorities said that foreigners were trying to buy assets at unreasonably low prices.
Mr Chen said that the market is now more transparent, but investors still need to be mindful of social and political sensitivities when negotiating with governments about company closures.
As a unit of China Orient Asset Management Corp, one of four bad-debt banks created by Beijing to clean up the biggest Chinese banks which were technically insolvent in the late 1990s, China Orient Summit has the advantage of state backing.
Beijing Wutong Summit Investment Managing Centre owns the remaining 20 per cent of China Orient Summit.
China Orient Asset Management Corp can invest up to 20 per cent of the new distressed fund.
As China's leaders slow growth rates down so they can overhaul the economy to make it more driven by consumption and less by investment, financial stress is clearly building.
Media reported last week that Nanjing Fudi Real Estate Development Co Ltd missed repayments on a 900 million yuan (S$181 million) loan borrowed from a ship builder, becoming the latest in a string of corporate credit defaults.
Data last Friday showed China's home price inflation slowed to an eight-month low in March, and analysts expect the easing trend to continue.
Mr Chen said that some cities, including Wenzhou and Ordos, are burdened by an excess supply of homes and high prices, but declined to name other cities where distress levels are rising.
Wenzhou, a centre for private businesses, is the only city in China where official data shows house prices are falling. Ordos is a former boomtown for coal miners but now notorious for its empty apartment blocks.
Still, investors who believe China will suffer from a messy bursting of a property bubble are misguided, said Mr Chen. "I have never believed that there is a property bubble. This country is just way too big," he said. "Easily, if you go inland, if you go west, those cities are far from developed." - Reuters

[CityFarmer]

PUBLISHED APRIL 22, 2014

China plans bad debt fund for foreigners
US$1b fund will help them invest in soured property loans and distressed real estate

That is not new, AMC model is the way to solve NPL in China. It seems a profitable venture in China. Quite a number of international distress asset funds are looking at the opportunities, base on the Cinda IPO observations...