Last month, one real estate developer Zhejiang Xingrun Real Estate Co. experienced an insolvency. It couldn’t pay 2.4 billion Yuan to bank and nearly 1.1 billion Yuan to other creditors, which was almost $600 million. This was the biggest ever real estate firm default since 2008. The local government in Fenghua hold a meeting to determine what to do with a default of such a huge amount of money. As reported in WSJ:
While China has seen developers default before, government officials have arranged bailouts for troubled firms that allow their underlying financial problems to fester. On Thursday, analysts argued that authorities have to be willing to address the other option: Let the companies go broke, and send a warning to markets, even if it leads to some financial turmoil in the near term.
It’s not a news that Chinese real estate market is slowing down, more and more people start to wait for a lower price. More potential house purchasers anticipated that the rapid growth of house market in China has comes to an end, as the new centre government carried out executions rigorously, now more and more small real estate developers can’t get enough support fund from bank, either they will go bankruptcy or refer to usury.
There are many reasons why more and more real estate firms in china are suffer from default. Few years ago, as Chinese house market start its surging in scale and price, more and more small real estate developers without much fund thought they could win a tons of money from the market. Some houses were built without enough fund support, so the properties developers thought of a new strategy: they sell the houses first, and use those huge amount of money from house purchasers to build their projects. Because the cost of construction is far lower than the price, this is a win-for-free strategy. However, now they are suffering from the risks they buried years before. With less and less people willing to buy houses at such a historical high price, now the properties developers can’t get enough fund to support their construction, which turns out to be “unfinished residential flats”. That is, the building projects are far away from available, developers has no money to continue construction, and those who already paid for their houses can’t either get the house or their money back, and they still have to pay their mortgage loans to bank. Witnessed more and more “unfinished residential flats” in China, Chinese house purchasers have more incentives to stop their purchase plan.