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As if to embarrass Chinese Premier Wen Jiabao who just promised to bring
housing prices down in a March 5 National People's Congress session,
Beijing’s residential land-price record was broken twice within six
hours on March 15, each by state-owned enterprises (SOEs).
Three days later the State-Owned Assets Supervision and Administration
Commission, a State Council agency, announced that 78 SOEs will be
banned from making further investments in real estate. According to the
commission, 94 out of 127 SOEs have been investing in residential real
estate development while only 16 SOEs’ primary business is related to
real estate. The other 78 SOEs, the commission said, will be required to
cease investing in real estate upon the completion of their current
real estate projects. No agenda was provided.
The ban seems to reflect the central government’s decision to curb the
soaring price of housing, as the SOEs have played a major role in
pumping up land prices in the past few years. However, experts have
criticized such measures as superficial and ineffective.
Ren Zhiqiang, president of Huayuan Corp., one of China’s largest real
estate developers, said in a recent interview with Economic Information
Daily that the 78 banned SOEs have no significant influence in the real
estate sector. “The other 16 are the real dominating force,” Ren said.
“Ruling out a few SOEs will not solve the major problem and will not
stop SOEs from paying sky-high prices for land.”
Ren’s remarks were echoed by Pan Shiyi, founder and chairman of Soho
China, Beijing’s largest real estate developer. Pan said it is very
difficult to ban businesses from purchasing land through administrative
measures. Some non-real estate focused SOEs have formed joint ventures,
and that makes it more difficult to control their investment behaviors,
Pan said.
In recent years SOEs have been aggressively dominating China’s real
estate sector. Since 2009, most records in residential housing prices
have been set by SOEs. Private developers are more and more frequently
shut out of the auctions by the high-price offerings of SOEs. The
majority of the non-real estate sector SOEs, such as weapon and tobacco
manufacturers, have also joined the game.
Analysts have attributed the SOEs’ active involvement in real estate
development to three main factors: easy access to financial resources,
pressure for high revenues in their own companies, and unparalleled
profit levels in the real estate sector.
China’s financial policy has given SOEs many privileges. Compared to
other companies, SOEs can easily obtain more loans and cheaper loans. In
the past few years a large portion of loans have flown to the real
estate market.
Chinese economist Jiang Yong explained this phenomenon. “Now China’s
domestic demand is weak, and the micro-level business environment is
harsh. Under such circumstances, it is less risky and more profitable to
invest in a fictitious economy—like the stock market or real
estate—than in the real economy.”
On the other hand, with the exception of a few monopolies, the SOEs have
been struggling to break even. In 2009, the top 40 out of 128 SOEs
contributed to 95 percent of the total SOE revenue, while the top 10
contributed more than 75 percent of the revenue. The top SOEs consist
mainly of monopolies. Therefore, most SOEs need the steep profits from
the real estate market to make their financial numbers look pretty. For
example, the China State Construction Engineering Corp. obtains over 40
percent of its revenue from real estate development, though real estate
is not its official primary business, according to an analysis by
economist Ma Guangyuan.
Moreover, SOEs have little concern over investment risks because any
loss will be covered by the nation’s tax money.
If the Chinese government does not directly address the root causes of
the SOEs’ over-investment in real estate and only uses symbolic actions
to gesture their willingness to reform, the problem of soaring housing
prices will only get worse and lead to more serious problems.
Experts have warned that such an abnormal economic phenomenon will
render the country’s economy vulnerable. As real estate market expert
Prof. Wang Azhong pointed out, four potential crises are associated with
the high price of real estate: the chain effect in the real estate
market that will further boost land prices; a new wave of housing price
increases; an over-concentration of capital in the real estate sector;
and the social instability caused by unaffordable housing prices.
Read the
original Chinese article. |
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