* State media report Zhejiang Xingrun owes 3.5 bln yuan
* Owner, son under arrest for illegal fundraising - official
* Report comes as Chinese property market softens,
* Housing prices falling in Wenzhou, Ningbo
(Updates with housing market performance, background)
By Umesh Desai and Clare Jim
HONG KONG, March 18 The looming bankruptcy of a
Chinese developer owing billions of yuan to domestic banks has
raised worries that a softening property market is heightening
risks for the financial system.
But the localised focus of the firm, and the nuanced
reaction of investors, shows that financial markets are not
pricing in the bursting of a real-estate bubble just yet.
Government officials told Reuters on Tuesday that Zhejiang
Xingrun Real Estate Co, based in the coastal city of Ningbo in
Zhejiang province, is on the brink of bankruptcy. State media
have estimated the company owes 15 domestic banks 2.4 billion
yuan ($389 million) and individual investors another 1.1
billion, with only 3 billion yuan of assets on hand.
By raising that money from individual investors, Zhejiang
Xingrun's owner also broke Chinese law, and local officials told
Reuters that the company's owner and his son are in custody,
accused of illegal fundraising.
Calls to Zhejiang Xingrun seeking comment were not answered.
The news of the expected bankruptcy came amid growing
concerns about debt in China following the country's first
domestic bond default earlier this month.
Yet analysts said they did not expect a domino effect
following Tuesday's news, given that investors are aware of the
distinctions in quality between different bond issuers, while
Xingrun's property portfolio is highly localised.
"The offshore names are the higher quality names, so there
isn't much panic reflected in bond prices," said Manjesh Verma,
head of credit research and strategy at Credit Agricole in Hong
Kong, referring to Chinese property bonds traded in the offshore
"But if (a company) is not localised in one city and the
defaulter has a multiple province/city presence, it will be a
big red flag," he added.
Property bonds in offshore markets underperformed on the
day, but losses were contained.
Share price declines were more pronounced. The Shanghai
property index was down 0.9 percent in afternoon trade,
dragged lower by Beijing Capital Development Co Ltd,
down 3.9 percent, Xingye Resources, down 3.2
percent, and Poly Real Estate, down 2.8 percent.
"While this news will definitely impact some property
stocks, I don't think a domino effect is likely," said Du
Changchun, an analyst at Northeast Securities in Shanghai.
China's government has been trying for years to tame surging
home prices on concerns they were stoking an asset bubble.
But they worry that too sharp a fall could drag further on
the world's second-largest economy, which slowed markedly in the
first two months of the year.
Data released on Tuesday showed that Chinese home inflation
slowed for a second straight month in February, due to
government policy curbs and declining domestic demand. Some
markets saw outright price declines, in particular the Zhejiang
cities of Wenzhou and Ningbo, where Zhejiang Xingrun is based.
Some industry observers noted growing instability among a
group of Chinese property developers, in particular those that
overindulged in speculation financed by money borrowed at high
rates in the shadow banking market.
"Underground private banks are very active in the Zhejiang
and Jiangsu areas, and many companies have already gone bust
because their owners personally borrowed a lot from these
underground banks and then were not able to repay," said an
executive at a real estate developer with projects in eastern
China, who spoke on condition of anonymity.
"We have been hearing a lot of cases like this but this one
is of a much larger size," he added. "I think by letting this
news go public, the government wants to send a message to the
The true test of Beijing's commitment to risk reform will
come when it confronts a potential default by one of the
state-owned enterprises that dominate loan and bond markets.
"The X-factor here is (whether) the government will step in
if some big guys start facing stress and big banks will be asked
to provide more loans. If that doesn't happen and we start
seeing medium scale defaults onshore, then we will see an easy
15-20 point drop in bond prices," said Credit Agricole's Verma.
(Writing by Pete Sweeney; Additional reporting by Xiaoyi Shao,
Koh Gui Qing and Kevin Yao in BEIJING, Tu Lianting in SINGAPORE
and the Shanghai Newsroom; Editing by Chris Gallagher)