The Great Developer Wall of China

After the boom following years of explosive growth the economy is slowing down, and there will be casualties.

Shanghai Thousands of small Chinese property developers are expected to collapse over the next two years, as slowing apartment sales and tightening credit markets force rapid consolidation in the once booming sector.

The property slowdown is being mirrored in the steel sector, where the largest private mill in Shaanxi province has reportedly been shut down after failing to repay banks loans.

The prospect of widespread loan defaults across China has spooked global markets in recent weeks and comes as a property developer in the eastern city of Ningbo said it was struggling to repay $US567 million ($626 million) in debt

While analysts believe a cleanout is under way in China’s property and steel sectors, there is no sign at mis stage of credit markets freezing up or rapid home price declines.

“In the last five years, 20,000 property developers have gone broke. I think another 20,000 need to go,” said Hayden Briscoe, the head of Asia Pacific fixed interest at AllianceBernstein.

“It’s another phase of consolidation but I’m not worried about it”

Mr Briscoe said higher interest rates had led to slower property sales, which had placed some developers and steel mills under financial pressure.

The China economist at SocGen, Wei Yao, said continuing loan defaults would not lead to a systemic economic melt-down, as Beijing had the tools to prevent a collapse.

“[The defaults] are a sign that the economic system has problems and economic efficiency has declined,” she said. “But in China the government has the tools to intervene.”

Government efforts to guide property prices lower appear to be working.

A Reuters survey on Tuesday found home prices grew at an annual rate of 8.7 per cent in February. This was slower than January’s 9.6 per cent rise.

The cooling in prices has resulted in slower sales and construction activity.

Home sales across China fell 5 per cent in January and February from a year ago, while in Beijing, sales slumped 46.3 per cent Despite headline grabbing defaults and weak economic data, credit markets in China remain relatively stable.

While volumes in the inter-bank market have dropped away slightly, the benchmark “seven-day reporate” was trading at 2.8 per cent on Tuesday, only slightly higher than 12 months ago.

But volatility has increased. The reporate spiked above 11 per cent in June and then above 8 per cent in December, before settling back below 3 per cent The clean out in the property development sector is being mirrored across the steel industry, helped along by the government’s push to clean up the environment and tackle overcapacity in the economy.

Earlier this month, it was reported that Haixin Steel, the largest privately owned mill in Shaanxi province, failed to pay back its bank loans.

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