September 11,2009

Cash Rich SOEs Pushing Real Estate Bubble Ever Higher

By CSC staff, Shanghai

On September 10, the title of "Land King" was renewed again in Shanghai. The Changfeng lands 6B and 7C were purchased by China Overseas Land and Investment (COLI) at 7.006 billion yuan, with an average floor price of 22,409.3 yuan/m², a 129% premium rate.


COLI is Hong Kong-listed and the subsidiary of China State Construction Engineering Corporation (CSCEC), a state-owned enterprise (SOE) that listed on the Shanghai Stock Exchange on July 29.


Another SOE, Shenzhen Overseas Chinese Town Holding Corporation (OCT), purchased residential land at 530 million yuan in Jiangangshan, Baoan district, in Shenzhen. The floor price was 18,900 yuan/m² breaking the Shenzhen record and becoming the new "Land King" there.


Prime Minister Wen Jiabao and his lieutenants keep saying that China will not exit from loose monetary policy and expansionary fiscal policy soon, and developers see more room to raise prices of both land and housing.


Since May, real estate enterprises with central enterprise background, and even non real estate firms, have begun to enclose lands, resulting in big changes in the land market. The increasing land prices are leading to skyrocketing housing prices and attracting official attention.


The National Audit Office data shows that 25 central ministries are involved in real estate violations, worth billions of yuan. Among them, unlisted assets of 51.6917 million yuan from the Ministry of Foreign Affairs have gone into purchasing real estate. The Ministry of Agriculture has developed commercial housing, acting beyond its authority, and has submitted false reports on housing subsidies. In 2008, a real estate rental service center under the Ministry of Finance took in rental income of 5.3193 million yuan. The Ministry of Public Security has approved construction projects worth 422 million yuan, utterly exceeding its authority. Other data show that among 136 central enterprises under the State-owned Assets Supervision Administration Commission, about 70% of the companies are involved in real estate, among which 16 firms are primarily based in the property industry, including Poly, Sino-Ocean, and China Resources, while more than 80 outside firms have business in real estate. Among the top ten highest priced land purchases in major cities in the first half of this year, 60% were gobbled up by SOEs.

The appearance of "Land Kings" is closely related to the financial crisis. The greatest beneficiaries of the government's loose monetary and stimulus policies have been SOEs, while small and medium firms still have difficulties picking up a yuan. Many large real estate firms have obtained capital through their SOE connection rather than profits from the market. With that advantage, they can drive private enterprises out of the market by pushing up land prices to insane levels.


These moves by SOEs are related to production surpluses in most industries. Since investment in plants and equipment now may incur losses, many companies choose to hoard land and purchase houses with the vast sums they have been allowed to borrow. This is causing extreme ructions in the market. The government relaxed credit to stimulate the property market out of last year's low valley, but that has permitted "Land Kings" to emerge in first-tier cities, on top of which markets in the third and fourth-tier cities have not rebounded, increasing distortion to the market caused by  macroeconomic policies.

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