China Herald: Qingdao

Fraud and scandals have been dragging real estate and commodities down in Northeaster Qingdao, with real estate prices dropping up to 30 percent. Financial analyst Sara Hsu sees it as a potential scenario for shadow banking in more parts of China, she writes in the Diplomat.

Sara Hsu:

Qingdao Port International Company Limited’s initial public offering in Hong Kong on May 30 was weak, a reflection of the potential fraud crisis. The fixed-price IPO raised $377 million, with its retail portion taking up just 15 percent of the shares on offer, in a short three and a half days of bookbuilding. Funds were to be used to expand port facilities, including warehousing for metal and oil commodities. Needless to say, most of these aims will be left unmet. Qingdao’s port is the fifth largest in terms of cargo handled, but investors are waiting to learn the outcome of the commodities fraud before once again stepping up business through the port and funding port expansion.

Qingdao’s decline in (riskier) collateral-based funding due to this scandal will only feed back into the flagging real estate sector. Speculative funds are being choked, as the shadow banking sector faces increased regulation. Mortgage loans from banks, although encouraged by the People’s Bank of China starting in May, have not taken off, since property prices continue to decline; potential purchasers of primary residences are holding off until the bottom is reached.

Qingdao’s commodity and asset market troubles offer an example of how the decline in the shadow banking and real estate markets is playing out in China. It reveals that interconnected degradation is eminently possible and potentially circular, as one shock reinforces another in turn. It is likely that we will see other similar situations emerge in the near future. Qingdao also shows that after-the-fact policies such as loosening mortgage lending are too small to combat full-on market retrenchment. It is hoped that larger reform policies will stimulate economic growth where defensive economic policies cannot. Much is likely to play out through the end of this year.