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SOEs property play

(China Daily)
Updated: 2009-07-28 11:49

The craze of State-owned enterprises (SOEs) snapping up land at exorbitant prices in recent weeks is a cause for concern.

Besides long-time property players such as Greenland Group and Poly Real Estate, other gigantic SOEs such as Sinochem and China Electronics Corp have emerged as top bidders in recent land auctions in major Chinese cities. This is fueling a real estate bubble after the stagnation in the property market since the global financial crisis broke out in late 2007.

Private companies, which won most of the titles in 2007 for "land king" - the top bidder in high-profiled land auction - now feel they are no competitors for SOEs. As a result, they have to change strategy and focus on second- or third-tier cities.

Property market analysts observe that the aggressive SOE bids are driven by huge cash injections from the government's 4-trillion-yuan ($586 billion) stimulus package and the nearly 7 trillion yuan of new bank lending in January to June 2009, both of which benefit primarily SOEs.

Related readings:  Beijing's commercial property woes  Developers buy prime land at hefty rates to ride boom  Mainland real estate market back on growth track  Urban home buyers wait for property market to stabilize

While the money from neither the stimulus package nor new bank lending was meant to go to the land market, many SOEs have ignored government policies and treat the funds as stakes to play in the property market. They have used the money to cash in on what they see as a lucrative property market. However, they may not have considered the high risks involved.

Of the 27 land plots winning the "land king" title in 2007 in major Chinese cities, 24 remain idle and undeveloped because current housing market prices would not make their projects profitable. Yet the record prices paid by SOEs these days have given them hope as housing prices jumped in cities such as Guangzhou and Shanghai.

The growing property market bubble caused by these SOEs has triggered widespread concern for the safety of the taxpayers' money - this should be borne in mind by the SOEs before entering any land auction.

Risks aside, the increasing number of SOEs as land kings sends a dangerous signal to the market that housing prices will continue to rise.

High housing prices have long been a matter of grave public concern, and this concern is further heightened by the speculative moves of the SOEs.

Though private property developers have long been accused of driving up housing prices, much of the blame now goes to the government and the SOEs.

The assertion of the All China Federation of Industry & Commerce a few months ago that government land price constitutes more than half of the cost for property developers has the public pointing fingers at the government. Instead of addressing the concern, sources from the Ministry of Housing and Urban Rural Development merely dispute the figure and say that land price is only 23 percent of the cost.

The only positive sign is that the central government is taking serious notice of this new bubble - to which the SOEs are also contributing - including at some meetings of the State Council. The SOEs should be cautioned against the use of their funds for this highly speculative role in the property market.