Credit crisis begins to cripple Chinese cities

Discussion in 'China' started by Star Wars, Aug 20, 2013.

  1. Star Wars

    Star Wars Regular Member

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    By ​Keith Bradsher

    New York Times Aug 17, 2013, 04.39AM IST

    As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China.


    Top luxury clothing stores in this city's downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city's business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions.But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted.

    Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city's car dealerships have failed. The owner of the city's largest jewelry store was detained by the authorities a week ago after creditors found him secretly packing millions of dollars' worth of gold and jewels into cases and accused him of preparing to flee the city without settling his debts. A top restaurant closed a day earlier, and its owner left town, as have the founder of the Fortune Garden and many other executives.

    "It's an economic crisis just like the United States has had; just like it," said Wang Ting, an operator of an illegal casino in Fugu, near Shenmu. "There's no cash, everyone stays home without a job, there's no way the economy can recover."

    Shenmu, and nearby cities like Ordos and Fugu, are at the leading edge of broader troubles that are beginning to afflict the entire Chinese economy. Across China, growth has slowed. With the slowdown have come rising defaults on loans made outside the conventional banking system, chronic overcapacity in many industries like coal mining and steel production and, in particularly troubled cities like Shenmu, a sharp decline in previously debt-fueled prices for real estate and other assets.

    The cracks are showing in many sizable cities like coastal Wenzhou, where informal lending, a big part of so-called shadow banking, has dominated for a quarter-century. Cities with economies linked to commodities with falling prices have also been affected, as more people have defaulted on loans. The biggest, most economically diverse metropolitan areas like Beijing and Shanghai seem considerably less affected, but also have many small and medium-size businesses that depend on informal lending.

    Lending has collapsed here in northern Shaanxi province, where it had been particularly speculative and frenzied, and where the local coal industry has also been crippled by steeply falling prices.

    As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court.

    "Almost no one will give you a loan," said a construction executive who gave only his surname, Xie, as he stood next to his white Toyota Land Cruiser outside a project that had been halted.

    Although changes are being slowly introduced, state-owned banks have long been allowed to lend only at low, regulated rates barely above the inflation rate, with the total value of loans controlled by quarterly quotas. All over China, these loans go overwhelmingly to large state-owned businesses, government officials and politically connected individuals, who then relend the money at much higher interest rates to small and medium-size businesses in the private sector that need money to grow. :cheesy:

    Liu Linfei, a government official from nearby Yulin, stood on a Shenmu street corner in a T-shirt and shorts on a recent weekend afternoon, outside two high-rise hotels where construction had been stopped just before the windows could be installed. He said he had borrowed 600,000 renminbi, almost $100,000, from a bank shortly before the collapse, at an interest rate of 4.1 percent a year.

    Liu then lent the cash to moneylenders here at an interest rate of 10.4 percent, planning to pocket the difference.

    The moneylenders who borrowed from Liu defaulted, and now he is struggling to repay the bank. "I'm not going to lose my house, because I'm repaying it little by little with money I borrow from my relatives," he said.

    The Chinese are finding it harder to repay loans because the economy is slowing. Most analyses of China's economy look only at the real economic growth rate, around 7.5 percent this year. But for companies' sales and profits, which determine their ability to repay debts, what really matters is the nominal growth rate, which is real economic growth plus inflation.

    I cant post links ....its an economic times article ....
     
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  3. amoy

    amoy Senior Member Senior Member

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    Shenmu was prosperous on the back of coal mining similar to Ordos. But now commodity prices are at all time low. Hence the food chains are broken apart.

    Wenzhou was once leading in private SME then gradually nouveau riche shifted from back-breaking manufacturing to property speculation and shadow banking country wide for "easy & quick bucks".

    Do pls come back with more typical samples to prove Chinese cities' bubbles going bust!

    Sent from my 5910 using Tapatalk 2
     
    Last edited: Aug 20, 2013
  4. rock127

    rock127 Maulana Rockullah Senior Member

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    Not sure about this example but heard a lot about ghost towns of China where thousands of flats are vacant.
     
  5. Star Wars

    Star Wars Regular Member

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    why are you annoyed ..lol...Blame economic times for the article..not me
     
  6. drkrn

    drkrn Senior Member Senior Member

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    surely one/two cities falling down hardly has any significance.but still its a matter of concern as it shows ever growing internal problems within china
     

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