Developers turn to shadow banks as Chinese property market slows
“It was a market with great prospects back then and land prices were cheap,” he said.
“I built offices and residences and, at the time, it was easy to get money from the bank and prices rose rapidly.”
His latest project is a large multi-function entertainment centre.
Construction has been completed but he has run out of liquidity to finish fitting out the interior while other aspects have stopped completely.
“The problem is, national policy changed and it was practically forbidden to lend money for property development any more,” said Li. “Before it was easy to get money from the banks, now it’s not possible at all.”
Like many others in his position, Li turned to the trust firms. There are 64 if them in China with sales offices in major cities. They combine characteristics of commercial and investment banking, private equity and wealth management.
They pool household savings to offer loans and invest in real estate, stocks, commodities, even bottles of sorghum liquor. No other financial firms operate across all these asset classes.
“Trusts make us nervous; their demands are too high,” Li said. If he is not able to pay back the investment in a year, the trust will take over big chunks of his property. Three years ago, the trust invested 300 million yuan (€37 million) and he paid it back in a year, but the pressure was intense.
Developers are now waiting to see what happens following the recent 8th Communist Party Congress.
“The central government will try to do more to improve people’s livelihoods and it’s possible that these ghost developments will be turned into low-rent housing or as places to settle people who have been moved out of their homes,” Li said.
“Our only hope is to rely on the local government, to see if there are any new policies, to see what they can do for us. Otherwise we have no other way out.”
One of the reasons for the rise of the shadow banking sector has been the fact that it is difficult for Chinese investors to find vehicles for their money
The ruling Communist Party has promised to promote freer movement of capital in and out of the country for investment purposes and to make the exchange rate more market-based. The government has also promised to keep an eye on shadow banking to make sure that it does not get out of hand.