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A northern Chinese powerhouse grapples with a slowdown as credit curbs hit
[TIANJIN, China] Cracks are appearing in the economy of the northern Chinese port city of Tianjin as the local government struggles with a crackdown on the credit-fuelled investment that has transformed its skyline in recent years.
Some state firms are defaulting or scrambling for funds to meet obligations and some lenders are refusing to lend to Tianjin companies, according to creditors, government sources and documents viewed by Reuters.
In the city's sprawling new business district - once billed as China's answer to Manhattan, now slightly more modestly as its Canary Wharf - many skyscrapers stand unfinished or empty.
With an economy the size of Vietnam's, Tianjin's troubles will be a high-profile test of President Xi Jinping's commitment to pivot China's economy away from a credit-fuelled growth model. The city sits on the coast, on Beijing's doorstep, just a 30-minute high-speed train ride away.
Tianjin's problems also reflect growing strains on China's economy as curbs on pollution, local government debt and shadow financing hit home. On Thursday, China said investment growth in May grew at the slowest rate in more than 22 years.
Tianjin's state-owned firms have been particularly hard hit by Beijing's efforts to rein in risky lending and curb bad debts by closing off shadow financing channels such as trusts, among other measures.
Their plight is compounded by the deteriorating finances of the Tianjin government as property speculation curbs cool the city's real estate market, government sources said.
A major state bank recently prohibited its Tianjin branch from making new loans to the city, according to a source with direct knowledge. The source declined to name the bank due to the sensitivity of the matter.
A trust firm with outstanding loans to state companies in Tianjin has made a similar decision due to fears of rising default risks, according to a source at the company.
"We are not making any new loans to Tianjin," the source said, adding that the trust firm believed some state companies had "given up" on timely repayment of debts.
Zhiwei Zhang, chief economist for China at Deutsche Bank, said local governments like Tianjin had faced relentless pressure to tighten fiscal policies.
"It has been building up and we expected some events like this to happen this year," Zhang said. "The pressure is on, the pressure is persistent."
In the past two months, CITIC Trust and Guotong Trust have issued warnings about the debt repayment abilities of Tianjin state conglomerates like Tianjin Municipal Development Co and Tianjin Real Estate.
Both companies invested in large debt-financed projects in Tianjin as part of the local government's drive to boost economic growth.
In recent years, Tianjin has been reshaped with a spate of high-profile construction projects like the Binhai New Area, a vast development that includes finance and high-tech zones, a new futuristic library that went viral online when it opened last year, as well as some of the tallest skyscrapers in China.
The city also hosts meetings of the World Economic Forum every two years in an enormous convention centre on the outskirts of town.
Development in the city has also been driven by bodies like the China Development Bank as part of an effort by the Chinese government to integrate the economies of Tianjin, Beijing and Hebei province. The policy lender pledged 2.1 trillion yuan to the region between 2015 and 2017.
Those building efforts have cooled as Beijing reinforces a ban on local governments giving implicit guarantees to projects and amid a nation-wide campaign to reduce debt risks.
The Tianjin government did not respond to a faxed request for comment.
The two companies that were said to be at risk of default appear to be making amends. Tianjin Real Estate repaid maturing loans in May and Tianjin Municipal Development said it would make payments in June, according to documents viewed by Reuters.
Neither company responded to faxed requests for comment.
But investors remain concerned about the city's growth prospects.
Tianjin reported 1.9 percent economic growth in the first quarter, the lowest among provincial-level regions, with fiscal revenues plummeting 17 percent. Fixed asset investment plunged 25.6 percent.
The city's difficulties were evident during a recent visit to Yujiapu, a financial district in Binhai, which sprawls across a bend in the Hai river to the south of city.
One proposed pillar of the zone, the Rose Rock International Finance Centre, has yet to be built even though ground was broken in 2011. The undeveloped site is now home to a rose garden.
In the high-tech zone, construction on Goldin Finance 117, supposed to be one of the country's tallest skyscrapers, has been halted for more than two years. The building remains uncompleted, with tall weeds sprouting from its foundations.
"Private investors are lured in by the government's new concepts and promises and then reality falls short," said a real estate source involved in Binhai's development, referring to the stalled projects. The source declined to be named.
The vacancy rate of Binhai's grade A offices stood at 67 percent at the end of the first quarter, according to JLL, a commercial property agency.
Tianjin has long counted on the sale of land use rights to cover the bulk of its interest payments on the debt incurred during its construction boom, a government source said.
The ratio of liabilities to government revenue for Tianjin's state-owned enterprises was the highest in China at more than 600 percent last year, according to Moody's Investors Service.
But since tightening measures were strengthened last year to cool property prices, the market has slumped. In the first quarter of 2018, a category of government revenue mainly comprised of land sales fell 10.8 percent from a year earlier. Deed transfer taxes and land value-added taxes dropped 31.5 percent.
Tianjin Municipal Construction Group - parent of Tianjin Municipal Development, and itself directly owned by the municipal government of Tianjin - had a loss of 26.6 million yuan last year after generating a profit in 2016, according to a financial report disclosed on May 2.
Tewoo Group Co, a state firm, started raising funds this year by issuing loans of 500 million yuan in its own name through Everbright Trust.
Another government source with ties to local government funding vehicles in Tianjin said Tewoo used to raise funds only through subsidiaries.
"This highlights how bad the situation is and how hard it is to raise funds for all these local government financing vehicles in Tianjin," the source said.
A Chinese policy think tank source who visited Binhai last month and met with local officials said that they saw sales from an abundant land bank as the key to recovery.
"Binhai's debt problem is severe, but they say 40 percent of their debt could be 'resolved' by beefing up land sales," the source said.
However, Tianjin has already been criticised by state media for undermining property curbs with a campaign to attract talent to the city by relaxing some purchase restrictions targeting outside speculators.
Investors, meanwhile, have been frustrated by the local government's tendency to block defaults and bankruptcies.
"Investors are showing huge concerns about Tianjin's commercial and legal environment," said a senior manager at National Trust, which is chasing nearly 700 million yuan in overdue fees from two subsidiaries of a state-owned group.