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Chinese State-Owned Firms Fueling Real Estate Boom

The Anhui Salt Industry Corporation is a state-owned company that has 11,000 employees, access to government salt mines and a Communist Party boss.

Chinese workers work at the compound of a residential apartment for foreigners in Beijing Tuesday, Dec. 27, 2005. China said its economy is much bigger and less export-dependent than previously reported, issuing new data that analysts say may ease fears its roaring growth is unsustainable, and encourage even more foreign investment. (AP Photo/Ng Han Guan)
Ng Han Guan
Chinese workers work at the compound of a residential apartment for foreigners in Beijing Tuesday, Dec. 27, 2005. China said its economy is much bigger and less export-dependent than previously reported, issuing new data that analysts say may ease fears its roaring growth is unsustainable, and encourage even more foreign investment. (AP Photo/Ng Han Guan)

Now it has swaggered into a new line of business: real estate.

The company is developing a complex of luxury high-rises here called Platinum Bay on a parcel it acquired last year by outbidding two other developers to win a local government land auction.

Anhui Salt is hardly alone among big state-owned companies. The China Railway Group is developing residential complexes in Beijing after winning the auction for a huge piece of land there.

Likewise, the China Ordnance Group, a state-led military manufacturer best known for amphibious assault weapons, paid $260 million for Beijing property where it plans to build luxury residences and retail outlets.

And in one of China’s biggest land deals yet, the state-run shipbuilder Sino Ocean paid $1.3 billion last December and March to buy two giant tracts from Beijing’s municipal government to develop residential communities.

All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses.

“These are the ones that have the money to buy the land,” says Prof. Deng Yongheng at the National University in Singapore. “Because in China, it’s the government that controls the money supply and the spending.”

By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble — like the one that devastated Western financial markets when it burst two years ago.

Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008.

A recent study published by the National Bureau of Economic Research in Cambridge, Mass., found that land prices in Beijing had jumped by about 750 percent since 2003, and that half of that gain came in the last two years. Housing prices have also skyrocketed, doubling in many cities over the last few years.

The report pegged a big part of the increase to state-owned enterprises that have “paid 27 percent more than other bidders for an otherwise equivalent piece of land.”

Critics say the central government in Beijing unwittingly propelled the land frenzy by pushing a huge $586 billion economic stimulus package last year and encouraging state-owned banks to lend more aggressively.

And as the prices of new apartments soar — in Shanghai, for instance, they often exceed $200,000, while the average disposable income is about $4,000 a year — the trend also threatens to undermine the central government’s goal of affordable housing for the rising middle class.

In some cases, local governments — which earned over $230 billion from land auctions in 2009 — are also being accused of demolishing old neighborhoods and unfairly compensating residents. In a recent poll conducted by China Youth Daily, a state-run newspaper, more than 80 percent of the respondents said local governments were a “major driving force” behind the skyrocketing property prices.

All of this is happening to the chagrin of private developers that dominated China’s property market for more than a decade but are now feeling squeezed out of a game that favors developers with state-backed financing.

“It’s a little like a son who borrows money from his mother,” says Yang Shaofeng, head of the Conworld Real Estate Agency in Beijing.

Last year, state banks made a record $1.4 trillion in loans, nearly twice as much as the year before. Analysts say they believe much of that money was diverted into the property market through off-balance-sheet maneuvers, leading to the record land bids and soaring property prices. That belief is adding to concerns that some of China’s biggest state-owned banks may be sitting on enormous unreported debt.

Beijing is now struggling to rein in credit without slowing the nation’s roaring economy. And regulators are trying to stop state banks from using clever maneuvers to secretly lend money to overly aggressive state-owned developers.

Beijing also wants to restrain state companies that have little or no expertise in real estate. Last March, the State Assets Supervision and Administration Commission — one of the national government’s most powerful bodies — ordered 78 state-owned companies to shed their real estate divisions.

But analysts say the government will have difficulty stopping hundreds of state-owned companies and their various subsidiaries from participating in what has become one of the country’s hottest industries. Experts say that more than 90 of the 125 state-owned companies directly under Beijing’s control still have property divisions. And local and provincial governments control many additional developers.

The national 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.

Rosealea Yao, an analyst at Dragonomics, a research consultant in Beijing, says a growing 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. (In China, local governments cannot directly borrow from banks or issue bonds for real estate development.)

Those off-balance-sheet debts are essentially bets on rising land prices, she says, which could become big liabilities if land prices were to decline sharply or the auction market were to dry up.

“This is why local governments are so enthusiastic about infrastructure,” Ms. Yao says. “They borrow to build something that raises the value of the land they want to sell at auction.”

Here in Wuhu, a sleepy industrial town about 70 miles west of Nanjing, Anhui Salt is breaking ground on its high-rise project in the center of town — next to a hotel operated by Anhui Conch Holdings.

The land was put up for auction in May 2009, and there were just three bidders — another of which was also a state-owned company. Anhui Salt, which also boasts of operating a steel trading arm, a financing vehicle and even two Honda dealerships, says it is eager to expand beyond industrial products and table salt.

“Platinum Bay is Anhui Salt Industry’s first luxury project and targets the very rich, the very elite class of Wuhu,” said Su Chuanbo, marketing manager.

Asked why Anhui Salt wants to be a developer, Mr. Su said the central government had encouraged state companies to be more profitable, and that real estate was incredibly lucrative.

And so the government, he added, is actually behind its push into real estate.

“Even though many central government-controlled state companies are banned from the real estate sector,” Mr. Su said, “local state-owned companies like Anhui Salt can still develop its projects within reasonable bounds. The situation is the same all over China.”

- Bao Beibei and Chen Xiaoduan contributed research.

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