Giant state-owned companies across China are bidding up prices on land parcels for big real estate developments unrelated to their key businesses.
For instance, state-owned company Anhui Salt Industry Corp, which has 11,000 employees and access to government salt mines, is developing Platinum Bay, a complex of luxury high-rises, on a land parcel it acquired in a local government land auction.
“These are the ones that have the money to buy the land,” said Deng Yongheng of the National University of Singapore (NUS), “because in China, it’s the government that controls the money supply and the spending.”
By pushing up property prices, state-owned companies are working at cross-purposes with the effort of the central government to keep the country’s property boom from turning into a debt-fuelled speculative bubble, similar to the one that ruined Western financial markets in 2008.
Based on land records, big state-owned companies have won 82 percent of land auctions in Beijing in 2010, up from 59 percent in 2008.
Land prices in the city had also increased by approximately 750 percent since 2003, of which half came in the previous two years, according to a recent study by the National Bureau of Economic Research in Cambridge, Massachusetts. There has also been an increase in housing prices, which doubled in several cities over the previous few years.
The study pegged a large portion of the increase to state-owned companies that have “paid 27 percent more than other bidders for an otherwise equivalent piece of land”. Critics said the central government propelled the land frenzy by pushing the US$586-billion economic stimulus package in 2009 and urging state-owned banks to lend more aggressively.
With the surge in new apartment prices, the trend may also undermine the central government’s goal of low-priced housing for the middle class.
Local governments are also being accused of demolishing old neighbourhoods and unfairly paying residents. A recent survey conducted by a state-run newspaper showed that over 80 percent of respondents said the local government was a “major driving force” behind the booming property prices.
Private developers have been disappointed by these events as they have dominated the Chinese property market for over a decade. However, they are now feeling squeezed out of a game that favours companies with state-backed funding.
“It’s a little like a son who borrows money from his mother,” said Yang Shaofeng, head of the Conworld Real Estate Agency in Beijing.
State-owned banks made a record US$1.4 trillion in loans last year, almost double the previous year. Analysts believe much of the money was diverted into the real estate market through off-balance-sheet manoeuvres, which lead to skyrocketing property prices and record land bids.
This belief adds to concerns that some of the biggest state-owned banks in China may be sitting on huge unreported debt.
Beijing is currently attempting to control credit without slowing the country’s growing economy. Regulators are also trying to prevent state banks from using manoeuvres to furtively lend money to aggressive state-owned companies.
The city also seeks to restrict state firms with little or no expertise in real estate. In March, the State Assets Supervision and Administration Commission ordered 78 state companies to drop their property divisions.
However, analysts said the government will find it difficult to stop hundreds of state companies and their subsidiaries from participating in the real estate industry.
Over 90 of the 125 state companies directly controlled by Beijing still have real estate divisions, while provincial and local governments control several additional developers, say experts.