Chongqing looks to sell distressed assets after Bo scandal, says source

CHONGQING/HONG KONG (May 2): 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 (RM174.15 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 publicised campaign against organised 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 centres, 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 programmes, causing some foreign investors and executives to worry that Bo's ouster will now cool investment in a city that attracted US$10 billion (RM30.22 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."

Hutchison declined to comment on whether it had been offered a list of distressed projects to consider, saying only that its existing projects in Chongqing were proceeding normally.

"All our property projects in Chongqing have been completed or being developed as planned," spokesman Jeremy Lau said.

Shui On Land, which is embarking on a 37.5 million sq ft 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% in the first quarter and are likely to slide another 10% to 20% 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.

"If Hong Kong investors are willing and we think their interest rates are reasonable, we will consider them," said Sun Lida, chairman of CCCIC, which has raised billions of dollars for urban infrastructure including large-scale public housing estates on Chongqing's periphery.

CCCIC now owes some 36.3 billion yuan in outstanding debts.

"The biggest problem that these companies face is that they only have one revenue source but extremely large projects," said Zhou Xiaohua, a professor at Chongqing University who has written a book on the city's financing vehicles.

"The coming two years will see a peak in loans that must be repaid, and that's a problem that needs to be addressed."

Deals under the microscope
City officials are trying to keep Chongqing in the middle of the investment radar. Computer maker Hewlett-Packard recently agreed to set up a printer and imaging equipment factory in the city, Xinhua news agency said, while Foxconn, Apple's major global supplier, is building a mega factory in Chongqing.

Chongqing has relied on build-transfer deals to fund major infrastructure projects, with private firms financing and building them before transferring them back into public hands.

Some of these deals are being scrutinized as part of the central investigation of Chongqing's finances, and authorities are now reluctant to strike fresh build-transfer deals given the political uncertainty, two Chongqing business sources said.

The head of Chongqing's National Development and Reform Commission, Yang Qingyu, whose body approves such projects, said that not all build-transfer projects were frozen.

"Those projects that have the right conditions and capital-raising ability, whose debts aren't high and who fulfill the BT (build-transfer) project criteria, can still be approved. It's not to say all projects aren't being approved," Yang said.

Rong Donghong, general manager of a construction firm at the Zhonggeng City residential development in Chongqing's Beibei district, a fast developing northern suburb, said home sales were fairly brisk, with 600 of a total of several thousand apa r tments already sold with the project half-finished.

Others, however, were less sure.

"There will be a short-term impact, some transition period," said Xia Lihua, the owner of a firm selling heavy construction equipment including earth movers in a Beibei industrial estate.

"We'll have to wait and see." — Reuters