Chinese debt-ridden developers fail to finish projects

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    ZHUOZHOU, China- In Zhuozhou, a small city in China’s north, Zhu has stopped making mortgage payments on her apartment after its developer did not build a promised rail line that would have allowed residents to commute to Beijing for work.

    The accountant is one of some 1,000 home owners in the housing project who ceased payments in anger last year, according to Zhu and two other buyers campaigning for compensation who spoke with Reuters.

    “I didn’t do anything wrong, so why do I have to bear all the consequences?” said Zhu.

    In the picturesque city of Dali in the southwest, Li, a small business owner, is still waiting to move into an apartment that was meant to be handed over more than two years ago.

    “The developer has postponed delivery four times since the end of 2018. We have completely lost trust in them,” said Li, who is currently squeezing his family into a small rental apartment with his parents.

    Li and another buyer in the project said they had been told by the developer it could not hand over the keys to the apartments because it doesn’t have the money to pay its contractors.

    The developer behind the Dali project, Dali Haidong Development & Investment Group, did not respond to a request for comment. China Fortune Land Development, the Shanghai-listed developer of the project in Zhuozhou which has grabbed headlines with defaults on some $5.7 billion of debt, also did not respond to requests for comment.

    The plight of Zhu and Li, who asked that only their surnames be used for fear of harassment, underscores the growing debt woes of developers active in smaller cities.

    Many of them indulged in unbridled borrowing amid a red-hot market between 2016 and 2018 but now find themselves grappling with too much debt, sharply weaker demand and tighter regulations.

    Analysts say the problem is largely confined to smaller cities and that relentless demand in big cities will keep large listed developers in business, but they expect debt defaults in the sector to climb and worry about the potential for the fallout to affect lenders and local governments.

    “We will probably see rising debt defaults this year, and the market should closely monitor developers with high debt ratios and whose business is concentrated in smaller cities,” said Song Hongwei, a senior analyst at Shanghai-based property consultancy Tospur.

    Bond defaults by property developers quadrupled last year to 26.6 billion yuan ($4.1 billion) and as of mid-March this year, developers, led by China Fortune Land, had already defaulted on 8.7 billion yuan of bonds, according to data from the National Institution of Finance & Development.

    Onshore and offshore bonds from developers maturing this year are set to jump 42 percent to a record 900 billion yuan ($138 billion), the data also shows.

    China’s developers have come under more pressure this year with the advent of new caps on debt-to-cash, debt-to-assets and debt-to-equity ratios that have been set by regulators keen to limit lending to the sector, including by trust funds and other parts of the country’s shadow banking industry.

    Analyst worry about the potential for systemic risk that debt defaults may bring, although they add it is difficult to assess how large that risk is.

    “Some real estate companies with high leverage and weak capital turnover are facing a relatively high amount of pressure on short-term debt repayments,” economists with Beijing-based Zhixin Investment Research Institute said in a report.