China’s real estate market may be inching closer to a collapse.
The chairman of Zhonghong Holdings, one of the biggest publicly listed real estate companies in China, has fled to Hong Kong as his company faces mounting debt totaling 4 billion yuan (about $589 million), according to a July 23 report by Chinese news portal Sina.
The company, founded by Wang Yonghong in 2001, is Beijing’s most well-known real estate developer. One of its hot-in-demand properties, located in the busy commercial district of Chaoyang, has more than 9,800 units.
Since 2000, when Wang first invested in a piece of land far from the Beijing city center for mere pennies, the land value has skyrocketed. Wang’s company has since expanded into tourism, trading, and catering services, with resorts, hotels, theaters, amusement parks, and nursing homes throughout Beijing and the rest of the country in its portfolio.
In 2017, one of Zhonghong’s subsidiary companies bought a 21 percent stake in Seaworld Entertainment, the U.S.-based theme park company, becoming its largest shareholder.
Signs of trouble first emerged in December 2017, when Wang’s stakes in Zhonghong Holdings, were frozen by a Beijing court after Zhonghong Zhuoye, a company wholly owned by Wang, failed to repay a loan of over 200 million yuan ($29.4 million), according to Mingtiandi, a real estate news website.
In early April, a Beijing court froze 806 million yuan in bank deposits belonging to Zhonghong Holdings.
Within a few weeks, on April 23, Zhonghong Holdings disclosed in a regulatory filing with the Shenzhen Stock Exchange that it had defaulted on more than 1.1. billion yuan (about $162 million) in debt.
Zhonghong’s woes came amid a central government effort to curb debt and risky lending.
The latest news of Wang’s disappearance has added to investors’ uncertainty about China’s real estate market.
Falling Demand
Economists have long predicted that China’s real estate bubble would eventually burst, as they are artificially buoyed by local governments supplying land to the market, banks issuing loans, and central authorities placing specific purchasing, sales, and pricing limits.
In a July 21 report in The Financial Times, economists warned that as the Chinese authorities plan to scale back on a government subsidy program designed for residents displaced by redevelopment of slums to buy commercial housing, housing sales would decline. Demand would fall in many lower-tier Chinese cities and add pressure to the market.
In addition, government authorities are likely to soon impose property holding taxes, lessening the appeal of real estate investment and speculation for citizens.
For years, local governments have relied on selling land to developers as their primary source of revenue (in China, the state owns all property). But now that much of the land in urban areas is already developed, they need a new source of income: taxes.
“When the pig grows up, it’s ready to be slaughtered,“ Bo Zhuang, China economist at market research firm TS Lombard, told the Financial Times. ”Households have accumulated enough property, and now it’s time for the government to tax them.”
