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08SHENYANG16 2008-01-25 03:30:00 CONFIDENTIAL Consulate Shenyang
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DE RUEHSH #0016/01 0250330
P 250330Z JAN 08
					  C O N F I D E N T I A L SHENYANG 000016 



E.O. 12958: DECL: 01/25/2018

Classified By: Consul General Stephen Wickman reasons 1.4 (b and d).

1. (U) Summary. Similar to the early days of the boom in
other parts of China, housing developers in Northeast China
raise cash chiefly through high-return, advance purchase
agreements without recourse to the banking system and are
thus immune from tighter credit controls. The current glut
of cash, moreover, coupled with recent instability in equity
markets, seems to be driving this type of investment to even
higher levels, with no real end in sight. In this relatively
land rich area, housing developments are quickly consuming
what was previously agricultural land, and sometimes in
direct violation of local regulations. Prices continue to
rise, especially in Dalian and Shenyang, while trends in the
U.S. market are prompting growing numbers of U.S.-resident
Chinese to invest here as well. End Summary.

Advanced Sales Built on High Expected Rates of Return



2. (U) The headlines in Shenyang this week trumpeted the
first slowdown in housing price increases (6.1 percent
year-on-year) in five years, but developers tell us the
market is still hot. Housing developers throughout Northeast
China, moreover, say they have little, if any, problem in
financing new projects despite efforts to restrict lending
elsewhere in the country. Neither rising interest rates nor
higher liquidity requirements placed on lending institutions
have much impact since most developers do not require bank
loans. While some developers may use loans to finance
initial start-up costs (e.g., land purchase, permitting,
design) most form syndicates to finance even the initial
outlays. The planned units are sold well prior to the start
of construction, frequently with an agreement that the
developer will repurchase the unit on completion at a
prearranged price. The initial &sale8 is generally priced
at slightly more than half of the current market average, per
square meter, making residential real estate largely a cash
market with high, built-in expected rates of return. Local
experts report that less than forty percent of residential
real estate in the region is encumbered by any type of a

3. (U) According to Liu Jun, General Manager of Hongda
Development, ninety percent of residential developments
self-finance via advanced sales. He said the current
turbulence in global finance and equity markets is actually
making things easier, noting that as people become more
frightened of equity markets, housing becomes a more
attractive alternative. For example, Mr. Liu told Econoff,
that he did not yet have any drawings for one planned
development that is already thirty-percent sold. Mr. Liu
explained there was no need for even an artist's conception
when selling at what buyers perceived to be &below-market8

4. (C) Developers in the Northeast, Mr. Liu went on to say,
are politically well-connected and able to negotiate the
permit process smoothly, despite recently announced central
government restrictions to curb the destruction of farmland
and impose even tighter environmental controls. According to
Liu, the central government's desire to develop the Northeast
trumps such environmental concerns. And where local
officials resist, Liu said, an appropriate "gratuity"
invariably solve the problem.

Booms in Shenyang, Dalian, Harbin and Beyond


5. (SBU) Our contacts report that residential sales in
Shenyang's Hunnan zone, just south of the city, remain brisk,
and the average price per square meter within the zone has
risen to nearly RMB 7000(USD ????), about 75 percent higher
than the overall city average. Most projects have completely
sold out the units scheduled for completion over the next two
years. The sell-back price for the completed units nets
nearly a forty percent annualized return on investment to the
original purchasers. Foreign investors, especially from
South Korea, are very active in the market. Our contacts in
Harbin, the capital of Heilongjiang Province, prices are
lower, but the overall pattern is the same as in Shenyang,
with Russian investors leading the way.

6. (U) Huaxin Development Company, a Singapore-based
developer having major interests in Shenyang, expects booming
sales and rentals due to huge jumps in projected employment,
especially in Shenyang's southern areas. Foxconn's projected
employment of 50,000 people at its new plant, GE's continued
expansion, and the coming move of commercial aircraft

production south of the river are fueling market optimism.
Huaxin, in a joint venture with Oakwood, plans to construct a
new service-apartment development complex in the area, right
down the street from a similar home-grown complex, part of a
chain that has been mushrooming in second-tier cities all
over China. Sujiatun district, also to the south and near
the current international school, is seeing robust growth as
construction of a new, high-speed road accessing Shenyang's
airport and aviation zone, moves rapidly forward.
Lufthansa's recent start of direct flights to Shenyang is
adding to enthusiasm about areas near the airport.

7. (U) Roughly four hours south of Shenyang by car,
Dalian,s longer-running boom has spread up the peninsula to
the Dalian Development Zone and Changxing Island, two of
former Liaoning Party Secretary and new Politburo Standing
Committee Member Li Keqiang,s five &points8 for
development. Prices in Dalian are the highest overall for
Northeast China, with the average price per square meter
nearing RMB 10,000. Changxing Island values jumped to an
average of RMB 3000, an increase of RMB 1200 over prices just
six months ago.

8.(U) Changxing Island, which until one year ago was totally
agricultural, is developing especially rapidly. Both wind
and nuclear power stations are being installed, and the newly
constructed Changxing Harbor has begun operation. South
Korea's STS Shipbuilding has its new plant in operation and
will float its first vessel from the facility in late 2008.
The local government put up the initial money for residential
developers in order to provide housing for displaced farmers,
but many are opting to sell their new homes and seek
opportunity in Dalian proper.

9. (U) Another interesting trend is a jump in investments by
overseas Chinese, especially those from the United States.
Since the U.S. market has soured, many U.S.-resident Chinese
are opting to move their money into the Northeast China real
estate market. One investor, for example, told us that
rising real estate prices, coupled with the renminbi's
appreciation against the dollar, make China real estate an
ideal target. She went on to say that, because she is still
a Chinese citizen, she is not troubled by Chinese currency
regulations designed to keep foreign investors from
"flipping" houses to make a quick profit. Confiding that it
is easier and cheaper to convert dollars to renminbi through
the black market than a bank, she claimed to have brought
in the purchase price for her investment property (about USD
40,000) in her handbag.

Comment: No Bubble or Protests...Yet.


10. (C) Although the picture in the market for hotel and
office space is less clear, residential real estate in
Northeast China seems to be a boom market that is impervious
to monetary controls and, so far at least, is avoiding a
bubble. Investors in the housing market have plenty of cash
) much of it from outside the region - to bid up prices and
spur construction. With the region,s relatively low
population density and rapid job growth, the trend should
continue for the near term, possibly fueling corruption and
conflict with ousted residents or marginalized farmers. To
date, however, the only visible signs of the conflicts are in
the form of graffiti scrawled on walls slated for demolition.
Most farmers and urban residents appear to be satisfied with
their compensation for moving and their new homes, although
they grumble about the even higher profits of the developers
and officials, whom they assume to be in league and corrupt.