Chongqing looks to sell distressed assets after Bo scandal

Thursday, May 3, 2012
By James Pomfret and Alex Frew McMillan ,Reuters

CHONGQING/HONG KONG -- China's biggest municipality, Chongqing, has approached Hong Kong investors with the aim of selling distressed property assets and bolstering its finances, which are under a cloud after the fall of its ambitious leader, Bo Xilai, a source said.

Bo's removal as Chongqing's Communist Party boss in March, amid police suspicions that his wife had murdered an expatriate British businessman last year, has triggered a party review of his leadership, including Chongqing's financial affairs.

That — plus fears of a purge of Bo's business allies — have created concerns over the debt accumulated by the vast municipality of some 30 million people in southwest China.

An estimate of Chongqing's real public debt burden is elusive: the municipality's latest available records, for 2010, show that 12 of its largest investment vehicles had racked up 363 billion yuan (US$57 billion) in debt.

The inclusion of liabilities taken on by state-owned firms and developers, along with district level financing vehicles across the municipality, mean Chongqing's overall debt levels could be several times higher, according to analysts.

“They are very keen for fresh capital,” said a source familiar with the recent approach made by Chongqing officials to several Hong Kong conglomerates.

The officials discreetly reached out to billionaire Li Ka-shing's Cheung Kong and Hutchison Whampoa as well as property developer Shui On Land to test their interest in buying distressed real estate projects, said the source who declined to be named because of the sensitivity of the matter.

The list of assets were not disclosed but included those seized from businessmen under Bo's highly publicized campaign against organized crime in recent years, the source added.

Under Bo, the sprawling city on the Yangtze river became one of the world's fastest-growing urban centers, a standard-bearer of his populist crackdown on crime and a vehicle for his ambition to join the top ranks of the central leadership.

But his so-called Chongqing model of state-led capitalism relied on debt to fuel expensive projects and social programs, causing some foreign investors and executives to worry that Bo's ouster will now cool investment in a city that attracted US$10 billion last year alone, up from US$1.2 billion in 2007.

“Some foreign firms are hesitating,” said the head of a private equity and investment firm in Chongqing who declined to be named given nagging concerns surrounding the Bo case.

“They are particularly sensitive to political events so they'll wait and see. A lot of people don't dare do anything until late in the year.”

Shui On Land, which is embarking on a 37.5-million-square-foot (3.48-million-square-meter) development in the city, including three towers and an entertainment district, said it remained upbeat on Chongqing despite concerns of a housing glut.

Cheung Kong declined to comment.

Land Values Falling

However, Thomas Lam, head of research for greater China at property brokerage Knight Frank, said the Bo scandal would have a chilling effect in Chongqing.

“I believe Hong Kong developers may slow down their investment in the short term,” he said. “Some investors will adopt a wait and see approach.”

Chongqing's investment vehicles have been using government-granted land as collateral to raise loans, a technique used by local governments across China to finance new infrastructure.

It was a reliable funding tool when land values were soaring but has hit problems now that Beijing has taken steps to cool the property market: Chinese home prices fell 5 percent in the first quarter and are likely to slide another 10 to 20 percent over the rest of 2012, a Reuters poll showed.

Some foreign investors in Chongqing, as well as sources close to Ford Motor Co. and Mazda Motor Corp., also say they have become concerned about a possible longer-term impact from the Bo crisis on the city's investment climate.

The foreign investors, speaking on condition of anonymity, said some top Chongqing bureaucrats held similar fears after South Korea's Samsung Electronics in March overlooked Chongqing as the site of a new flash-memory factory. Samsung chose Xian instead.

Like many cities in China, Chongqing's government set up a slew of financing vehicles that embarked on major construction projects to build highways, bridges as well as one of China's most ambitious initiatives to provide cheap public flats to some two million low-income residents in the coming years.

One major investment vehicle, Chongqing City Construction Investment Corporation (CCCIC), said its debt was sustainable and it remained open to borrowing fresh overseas capital.

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