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Last year, officials in Shaoxing, a city in China’s eastern Zhejiang province, resolved an urgent challenge: finding a developer to revive Rice Wine Town, a halted tourism and real estate project named after one of the most famous products in the region.

Rice Wine Town was initially developed by Jinggong Group, a local private conglomerate that collapsed in 2019 under the weight of its debt. According to banquets fueled by shots of Shaoxing’s best grace, according to two people familiar with the negotiations, managers of the Chinese real estate group Sunac China Holdings agreed to purchase four plots at the partially completed development for an average of Rmb7,000 ($ 1,082) per square meter.

It looked like a bargain. By May this year, the average price of new homes in Shaoxing, a short commute from the provincial capital, Hangzhou, was R26 000 per square meter, compared to R10 000 per square meter five years ago.

But in recent weeks, the debt crisis at Evergrande, China’s second-largest developer through sales, and President Xi Jinping’s determination to cool red-hot real estate markets across the country is echoed by Rice Wine Town and the broader real estate market.

Evergrande’s settlement was caused by “red lines“Which was introduced last year and strictly limited real estate companies. The crisis has eroded buyer confidence and affected sales for other developers, such as Sunac, who said their leverage is in line with government requirements.

According to data from the local housing bureau, the number of new homes sold in 30 of China’s largest cities fell a third in September, compared to the same month last year.

Privately, Sunac and local officials blame a turnaround in buyer sentiment after the Evergrande crisis came to an end, as well as Xi’s attempt keep property prices in check.

“President Xi is making a property policy, not us,” said a local official who asked not to be identified. “We must all follow what the big boss says.”

But Shaoxing officials still advised Sunac’s local office to write to the local government and branches of the local state bank last month to request ‘policy assistance’, according to people familiar with the project.

The company and officials did not expect this request for assistance to fund managers and the media to leak, which would cause a 16 percent drop in Sunac’s share price over two trading days and invite speculation that it could be the next domino to come after Evergrande can choice.

Sunac’s letter says that Rice Wine Town is experiencing ‘significant difficulties’ in registering land titles for intended purchases, which means that the dwindling number of willing buyers cannot get mortgage loans to complete transactions.

Sunac and local officials blame change in buyer sentiment over Evergrande’s misery and Xi Jinping’s policy © ROMAN PILIPEY / EPA-EFE / Shutterstock

“We are the largest developer in Shaoxing and have invested R7.7 billion in Rice Wine Town, but have only recovered $ 200 million in sales,” the developer wrote. It added that ‘due to the stricter policy of [the central bank and banking regulator], we closed R11.7 billion in cash, either in custody accounts or affected by restrictions on use. ”

Sunac’s intention was “to get the government to speed up the registration process to improve its cash flow, which was undermined by sales in the aftermath of the Evergrande crisis,” said one of the people familiar with the negotiations.

“Sunac did not ask the government for a bailout or tax cut – just a normal business environment to work in.”

The Shaoxing municipal government declined to comment on the controversy surrounding Rice Wine Town.

Xiaoxi Zhang, a China policy analyst at Gavekal Dragonomics in Beijing, noted that “the now-funded environment is the deliberate creation of regulators” who do not want to lose credibility, but should also be wary of greater market panic. That panic ran the risk of dropping more developers and forcing their bank creditors to increase provision for bad loans.

“Reducing exposure to property developers in the financial system has so far been a predominantly policy-driven process,” Zhang said in a research note on September 28. ” Strengthening the vicious circle that slows down construction activities and home sales. ”

Sunac’s shares rose after the developer issued a statement on September 28.

The ‘projects across the country are normal and sales are good’, the developer added, referring to a 33 per cent increase in January to August, compared to the same period last year.

However, most developers have yet to announce sales figures for September — usually a stomping month with big holiday marketing campaigns over the annual Mid-Autumn Festival. In a warning to investors on September 14, Evergrande said he expects a “significant sustained decline in sales” in September.

The prospects for Rice Wine Town also remain bleak, according to one person familiar with the development. “As with all other places, sales of Rice Wine Town were very weak during the mid-autumn festival,” the person said.

Additional reporting by Xueqiao Wang in Shanghai

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