Cross posted from Investing in Chinese Stocks
Handan’s housing crisis is centered on illegal fundraising. Earlier this year, banks that used illegal fundraising collapsed, and now developers are going down. Ten of thousands of residents and roughly ￥10 billion is at stake. The local government has formed work groups to deal with the situation, with at least 13 companies already in trouble. One person who helped raise the money said 10% of Handan households may be involved, and in the case of one developer alone, there are more than 10,000 lenders.
Investors were offered high interest rates and preferential pricing on homes. Chen Wei Real Estate had one project where buyers who prepaid ￥50,000 ahead of time could see their pre-payment appreciate 30% in one year, plus received a VIP card good for ￥50 yuan off each square meter purchased. The firm stopped paying interest to investors in July though. The project was to start in August 2011, but today the site is still under construction. No one knows where the money went.
Another developer said they would not have used private money, but last year the banks stopped giving out loans. It borrowed ￥750,000 yuan at 3% monthly interest for 6 months, but could not repay lenders when the contract came due in July. The firm says that except for the cash crunch, business is normal.
Handan is a historic third-tier city of 1.6 million in Hebei province, but the total population covered by the city is nearly 10 million, making it the third largest administrative region after Baoding and capital Shijiazhuang. At the peak, there were 500 developers in Handan and 300 buildings doing advance sales. According to the article below, several projects have enough space to house the entire city population of 1.6 million. Sales in the first half of the year were only 5800 units, but 1300 of those came in January and by April, sales were down to 750.
Analysts estimate Handan has 10 years of housing inventory.
Some developers have resorted to paying their suppliers with property, or at least giving property as collateral. The result is suppliers are now trying to offload properties in order to pay their costs.
Officials have begun arresting those involved in the fundraising. From Mingtiandi: GOVT RAIDS 13 HEBEI DEVELOPERS AFTER FUNDING SCHEME COLLAPSES
94 people were detained in a growing funding scandal involving real estate developers and private lenders in the northern Chinese city of Handan recently as a slowdown in housing sales exposed risky funding practices.
The government can restore order and a sense of justice, but it cannot restore confidence in the market with arrests.