A report from the Wall Street Journal. “In China, a crowd of startups is looking to cash in on a hot real-estate market by disrupting the way apartments are rented. In some ways, their business model resembles that of U.S. office-space startup WeWork, but applied to residential housing, said James MacDonald, head of Savills China research. Also like WeWork, many present themselves as technology companies, the argument being that they use mobile apps to manage their dealings with tenants and partners.”
“Apartment operators also commonly arrange loans to help tenants pay the rent. The money is typically lent by banks or online lenders for 12 or 24 months, and goes to the startup, which uses it to cover renovations, marketing and other business needs. Individual renters repay the lender, usually with no interest—that cost is borne by the apartment operators, who also guarantee the loans.”
“One potential pitfall of working through a middleman: Financial trouble for the apartment operator can mean eviction for the tenant. Young people forced out of their apartments have held protests in cities including Hangzhou, Nanjing and Xi’an over the past 18 months, but have mostly had little recourse. Hu Jinghui, chairman of the China Alliance of Real Estate Agencies, estimates that more than 70 Chinese apartment operators that managed more than 500,000 apartment units have run into financial trouble since 2017.”
“Q&K International Group Ltd. , one of China’s largest apartment operators, went public in the U.S. in November, listing on Nasdaq after raising $45.9 million. Describing its mission as ‘providing homes for China’s young people,’ the company manages roughly 100,000 units in major cities, carrying an average rent of less than 2,000 yuan ($284) a month. More than half of occupied rental units are paid for with rent-installment loans, with annual interest rates—which the company pays—of 4.75% to 8.5%.”
“It doesn’t add up to profit: For the nine months to June 30 Q&K reported a net loss of 373.2 million yuan ($53 million), on 897.9 million yuan in revenue. Beijing Haoyuan Hengye Real Estate Brokerage Co. at its peak managed about 100,000 apartment units, and many of its tenants had rental loan arrangements. Late last year, Haoyuan ran into cash-flow problems, with renovation costs high and rental income insufficient to meet its obligations to landlords. Tens of thousands of renters were evicted in October 2018, even though most hadn’t defaulted.”
The New York Times. “China’s companies racked up some towering bills as they expanded, and the world’s investors and lenders rushed to offer them even more money. Now the bills are coming due, and a growing number of Chinese companies can’t pay up, in a sign that the world’s No. 2 economy is feeling the stress from its worst slowdown in nearly three decades.”
“Two high-profile companies — a giant government-run trading firm and a conglomerate backed by China’s most distinguished university — are the latest to join a long list of Chinese businesses that have run short of cash when it was time to pay back their debts. Chinese corporate borrowers have defaulted on nearly $20 billion in loans this year.”
“Once rare, defaults in China are rising. The value of loans on which Chinese companies have defaulted has surpassed the total for 2018. ‘This is not over yet,’ said Christopher Lee, a China credit specialist at S&P Global. ‘We are expecting defaults to rise. There are many other companies that are operating in a very difficult environment.’”
From Bloomberg. “A major Chinese commodities trader became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in a moment of reckoning for Beijing as it struggles to contain credit risk in a weakening economy. Tewoo Group Corp. announced results of its unprecedented debt restructuring, which saw a majority of its investors accepting heavy losses. This is expected to reshape investors’ perceptions about government-owned borrowers whose identity has for years offered a relatively strong sense of security.”
“It’s also seen offering a road-map for resolving similar debt crises in the future as the prospect of more failures by state-backed firms looms. The one-time Fortune Global 500 company from the northern port city of Tianjin said dollar bond investors representing 57% of the the total $1.25 billion have agreed to be paid just 37 to 67 cents on the dollar, depending on the maturity of the debt. Bondholders representing 22.6% of these bonds voted to exchange their debt for new bonds with sharply lower coupons to be issued by Tewoo’s offshore debt manager, a state asset manager from Tianjin.”
“‘This is one form of default based on our definition,’ said Ivan Chung, a Hong Kong-based analyst at Moody’s Investors Service, noting that the debt revamp has resulted in losses for investors.”
The Epoch Times. “In China, abalone is served at fancy banquets and sold at high prices in retail markets. But the situation has changed as abalone prices have dropped significantly since last year due to a slowing economy, overproduction and pollution. Overproduction of abalone has become a problem in recent years because local governments have encouraged many residents to engage in abalone farming, according to Li Lianpao, a former representative of the People’s Congress of Shishi City, Fujian Province.”
“Chinese agricultural researcher Mr. Yan told The Epoch Times in a Dec. 5 interview that the impact of the economic slowdown is the main reason for the abalone price drop in China. ‘China is currently in an economic depression, and consumer spending is declining. As a high-end commodity, abalone certainly cannot sell well,’ he said.”
“Chinese economist He Junzheng, a dissident who was one of the student leaders in the pro-democracy movement in Hunan Province in 1989, agrees with Yan’s analysis. ‘Many commodities [sellers] in China are cutting prices this year, including daily necessities,’ He said. ‘If you look at the price drops on Taobao [China’s equivalent of Amazon], many products are selling at 50 percent discount compared to previous prices. This is because China’s economic growth is suddenly coming to a halt. These sellers need to liquidate their assets to make preparations for the next year.’”
“Li Lianpao, the former representative of the People’s Congress, made critical remarks about China’s overfishing problem and controversial practices used in fish farming industries to boost production. ‘Nowadays people crave quick profits and disregard basic rules,’ Li said.”
The Globe and Mail. “Government policies aimed at reducing speculation in Vancouver’s property market have worked to curb foreign buying and speculative demand. That was merely part one, says high-profile immigration lawyer and analyst, Richard Kurland, who’s been studying the impact of those policies. Mr. Kurland says that people holding high-end properties who haven’t been transparent about worldwide income may choose to unload those properties instead of face an audit, bringing more supply onto the market.”
“‘That’s how you get these multi-million dollar homes that are barely occupied,’ he says. ‘Under the old way, if you had six of them, you declare each one as your personal residence. For each one you say, ‘I’m resident here for income tax purposes and I don’t have to pay capital gains,’ when in fact, none of the above is true. They are not income tax residents, so they [are not allowed] a capital gains exemption and it’s not their principal residence. But no one checked. It was an honour system. But no longer.’”
“‘So the multiple property holds are now all subject to this new game. Their choice now is, ‘How do I unravel my holdings without taking a bath?’”
“As to whether Hong Kong’s conflict with Beijing could cause passport holders in that city to return to Vancouver – and trigger another wave of property buying – Mr. Kurland doesn’t see it happening any time soon. He examined applications from Hong Kong for different kinds of sponsorships, work permits and study permits, and he couldn’t find any increases in people applying for entry.”
“‘It was zero, across the board, and the data was as current as September,’” he says. ‘I was flabbergasted. They are not coming. They aren’t even applying to come here.’”
The Vancouver Sun. “Owners of single-family homes in Metro Vancouver are likely to be the most disappointed when B.C. Assessment Authority valuations are sent out in the new year. For example, owners of single-family homes in Vancouver, Burnaby, and the North Shore will likely see their property value fall between 10 and 15 per cent. Condo owners could see their values fall by as much as 15 per cent, although some condo values will hold up.”
“This will come as no surprise to market watchers who have seen hundreds of thousands of dollars shaved off the value of homes sold in Vancouver, especially among single-family homeowners who bought at the peak of the market in the spring 2016 and are selling now. The fall in valuation will also impact some owners’ personal finances, as the assessed value of a home is used by banks and credit unions to determine how much owners can borrow against their property, and will generally deplete owners’ equity.”