From Overseas Press

State-owned groups fuel China's real estate boom

(chinadaily.com.cn)
Updated: 2010-08-02 17:13

China's state-owned giant groups of oil, chemical, military, telecom and highway businesses are "bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses," according to an article in the New York Times on Monday.

The article said these companies can easily get loans from state-owned banks, which "worked at cross-purposes with the central government's efforts to keep China's real estate boom from becoming a debt-driven speculative bubble."

It took Beijing as an example to show that "82 percent of land auctions this year have been won by big state-owned companies outbidding private developers—up from 59 percent in 2008." They also received encouragement from the local government to borrow from state-owned banks aggressively.

According to the article, much of state banks' record loans of $1.4 trillion last year were "diverted into the property market through off-balance-sheet maneuvers, leading to the record land bids and soaring property prices." It is "adding to concerns that some of China's biggest state-owned banks may be sitting on enormous unreported debt." And the "soaring prices of new apartment has threatens to undermine the central government's goal of affordable housing for the rising middle class."

The Chinese government is "grappling with a complex set of incentives that drive state-run companies to speculate in the property market with the aid of local governments," said the article.

The article quoted Rosealea Yao, an analyst at Dragonomics, a research consultant in Beijing as saying that an increasing number of municipalities have "formed local investment vehicles that borrow heavily from state-owned banks to pay to relocate residents and build infrastructure around big plots of land they intend to sell at auction" since "local governments cannot directly borrow from banks or issue bonds for real estate development."

She said that "those off-balance-sheet debts are essentially bets on rising land prices, which could become big liabilities if land prices were to decline sharply or the auction market were to dry up." And "this is why local governments are so enthusiastic about infrastructure. They borrow to build something that raises the value of the land they want to sell at auction."