A closely held Chinese real estate developer with 3.5 billionyuan (US$566.6 million) of debt has collapsed and its largestshareholder was detained, said government officials familiar withthe matter.

Zhejiang Xingrun Real Estate Co. doesn't have enough cash torepay creditors that include more than 15 banks, with ChinaConstruction Bank Corp. (CCB) holding more than 1 billion yuan ofits debt, according to the officials, who asked not to be namedbecause they weren't authorized to discuss the matter. Thecompany's majority shareholder and his son, its legalrepresentative, have been detained and face charges of illegalfundraising, the officials said.

The collapse of the company, based in the eastern town ofFenghua, adds to concern of strains in the nation's real estatesector and comes less than two weeks after the first bond defaultby a Chinese company. Shanghai Chaori Solar Energy Science &Technology Co.'s inability to repay its debt may become China's own“Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securitiesfirm was rescued in 2008, Bank of America Corp. said March 5.

Zhejiang Xingrun's collapse was reported earlier today by theChinese-language National Business Daily, which cited anunidentified government official for the news. The report blamedthe failure on mismanagement and high costs of private lending,according to the newspaper.

The city of Ningbo has jurisdiction over the town of Fenghua,which is the birthplace of former Chinese nationalist leader ChiangKai-Shek. Fenghua is in discussions with the banks and Ningbo onhow to repay the debt, the people said. They said Zhejiang Xingrunhas assets worth 3 billion yuan.

Two calls to the chairman's office and financial department atZhejiang Xingrun weren't answered today. A woman who answered thephone at the Fenghua government's news office who declined to giveher name confirmed that the company cannot pay its debt. ABeijing-based press officer at CCB said the bank asked for moreinformation from its local branch about the report and hasn't heardback.

Property Curbs

“We think the default of the developer will alert the banks onescalating risk from developers amid the liquidity tightening,”said Johnson Hu, a Hong Kong-based property analyst at CIMB-GKSecurities Research. “We maintain our view that banks may revisitloan policy on property and may take a stricter stance on propertydevelopment loans, particularly for small developers.”

The property market in smaller Chinese cities faces “true risksof a sharp correction” due to oversupply, and investors may haveunderestimated the risk, Nomura Holdings Inc. economists said in aMarch 14 report.

Property shares slid to a 16-month low in February afterIndustrial Bank Co. suspended mezzanine financing for developers,adding to concerns that smaller developers may default on theirborrowings amid the government's property curbs and an economicslowdown.

New home prices in Ningbo rose 7.1 percent in January from ayear earlier, according to the National Bureau of Statistics. Thecity in February recorded the 10th lowest yield on residentialinvestments in the past year among 116 Chinese cities, withnegative 1.1 percent, according to a March 13 report by ZhongjinStandard Data Research Ltd., a Hong Kong-based data provider.

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