HANDAN, China—The property slump is worsening across China, hitting many households and industries, scaring off home buyers and lenders, and leading to bankrupt developers and abandoned projects.
Adding to the turmoil, some developers are fleecing investors with scams, while legitimate firms are increasingly stretched for cash, leading to lending rates approaching 50 per cent in some cities.
In the industrial city of Handan, 250 miles southwest of Beijing, officials are trying to recover US$1.5 billion that they say developers raised illegally, largely from individual investors who laid out money based on promises of fat returns.
“My family and my in-laws are so worried about not being able to recover the money, which was originally meant for my husband and me to buy our own home,” said 35-year-old Cathy Wang, who lent 500,000 yuan (US$81,380) to a developer who promised to repay the loan at an annualized interest rate of 30 per cent.
Agile Property Holdings Ltd. , a midsize developer, is seeking to extend a December deadline to pay US$475 million in loans. Smaller developers in cities such as Baotou in the north and Ningbo and Wenzhou in the east have closed their doors, leaving some projects half-finished.
Average new-home prices in China fell in September for the fifth month in a row, with the pace of month-to-month declines accelerating last month.
Some economists worry that a worsening slump could affect the financial system, although China, with more than US$3.8 trillion in foreign-exchange reserves, could avert a full-fledged credit crisis.
At the same time, it isn’t clear how much of the financial system is exposed to property-sector weakness because many developers rely on non-bank sources for funding—everything from big investment vehicles to individual speculators. Trusts, a type of Chinese investment vehicle and a major lending source, have a total of 1.262 trillion yuan (about US$205 billion) in outstanding loans to the property sector so far this year, up more than 50 per cent from the year-earlier period.
Following the global financial crisis, a housing boom helped China recover quickly, but it led to unsustainable gains in home prices, rising leverage among developers and ballooning inventory. In 2010, Beijing started rolling out measures such as curbs on bank loans to property developers as part of efforts to rein in speculation and to steer the economy away from being overly reliant on investment.
This year, housing sales, prices and construction activity have declined sharply, as a chronic glut of homes and expectations of further falls in prices keep buyers on the sidelines.
So far Beijing has shown little interest in dramatic remedies to help the property market, such as compelling banks to lend to developers. The government in recent weeks made its most decisive move yet by allowing existing homeowners to qualify for the preferential rates and terms enjoyed by first-time buyers. But economists say its efforts so far have shown little impact.
China on Tuesday will report its third-quarter economic-growth figure. Economists widely believe it will slow to 7.2 per cent from 7.5 per cent in the second quarter, according to a Wall Street Journal survey, putting China in jeopardy of missing its annual growth target—set at 7.5 per cent for 2014—for the first time since the Asian financial crisis of 1998. That is in large part because of the property market. In a monthly survey of home prices of 100 Chinese cities, 79 showed a decline in September from August, compared with 32 in last December from November.
“The linchpin of China’s economy is the housing market,” said Alastair Chan, an economist at Moody’s Analytics, who called housing the “key downside risk” to the Chinese economy.
The slowdown is rippling through different corners of the economy. Domestic steel prices are falling—steel rebar is down 15.8 per cent since the start of the year—and Chinese steel producers are exporting more to compensate for weakness at home. Cement prices have dropped 9 per cent since the start of the year.
Construction-equipment maker Zoomlion Heavy Industry Science & Technology Co. said on Oct. 15 that it expects a 65 per cent to 75 per cent decrease in net income in the first nine months this year due to slowing growth in fixed-asset investment, “especially the slowdown in the growth of real-estate investment.”
Meanwhile, lenders are limiting their exposure to the market, worsening the pain. “We’re more cautious in our debt financing to developers and our criteria have gotten tougher this year,” said David Long, president of the investment unit in Grand China Fund, a Beijing-based private-equity fund. His fund now extends loans only to real-estate firms in more-developed cities and looks for borrowers with revenue sources apart from real estate.
“If we loan out one yuan, it needs to be backed by two yuan worth of collateral,” said Mr. Long.