BEIJING LOOSENING RESTRICTIONS ON PROPERTY DEVELOPERS

UNCLAS SECTION 01 OF 05 SHANGHAI 000292

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TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
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E.O. 12958: N/A
TAGS: CH ECON EFIN EINV PGOV SOCI
SUBJECT: BEIJING LOOSENING RESTRICTIONS ON PROPERTY DEVELOPERS

REF: SHANGHAI 291 (FIRST CABLE OF THIS 2-PART SERIES)


1. (SBU) Summary: In recent weeks the Central Government has
shifted from--in the words of one contact--"strangling" the
property sector with regulatory restrictions to encouraging
families to purchase homes. While this is not the direct aid
that many struggling property developers were hoping for, it has
resparked household interest and led to experimentation in
housing policies by local governments. The Central Government's
key theme has been affordable housing for low-income families.
Others in power have used their bully pulpits to criticize
housing costs that remain high, even after double-digit declines
in some cities. For now, most local governments are most
interested in jumpstarting land sales growth and the off-budget
revenue that generates. End summary.


2. (SBU) This is the second of two cables on China's real
estate sector in the first four months of 2009. The cables are
the result of collaboration across the China Mission, with input
and clearances from Beijing, Chengdu, Guangzhou, and Shanghai.
EconOffs in those posts spoke with contacts over a period of
several weeks in March-May 2009. This cable focuses on the
Chinese government response to troubles in the real estate
sector, and reftel focuses on real estate sector
trends--especially among households--and the impact on property
developers and banks.

============================
Government shifting to support for the real estate sector . . .
============================


3. (SBU) Chinese official policy has helped to pull the real
estate sector back from the brink over the past few months,
according to our contacts, even though the assistance did not
come in the form of an industry stimulus plan, as some real
estate players had hoped. According to official media accounts,
the Central Government has focused on the long-term development
of the real estate sector, rather than a short-term bailout. In
light of this, the bulk of the government's actions has not been
in the form of direct aid, but rather in unwinding regulatory
restrictions previously imposed. As a Shanghai-based investment
analyst put it, the Central Government's "strangling" of the
property sector beginning in October 2007 was a mistake, since
the sector makes up one-tenth of China's GDP. Beginning in
October 2008, said the contact, the government has allowed more
regulatory breathing room.


4. (SBU) Measures undertaken by the Central Government include
policies to encourage households to purchase and trade real
estate, such as:
- Reduction of the minimum down payment from 30 percent to 20
percent for first-time homebuyers purchasing property of less
than 90 sq. meters (implemented November 1, 2008).
- Reduction of the minimum mortgage interest rate to 0.7 times
the benchmark mortgage rate (implemented November 1, 2008).
- Reduction of the property deed tax to 1 percent (implemented
November 1, 2008).
- Temporary suspension of the stamp tax and the value-added tax
on land sales (implemented November 1, 2008).
- Temporary suspension of business tax for individuals who sell
"ordinary" housing they have held for two years or more, as
opposed to the previous five-year threshold; reduction of this
tax for sellers of "non-ordinary" housing (decision issued on
December 20, 2008) .


5. (U) Other Central Government measures are targeted at
reducing financing hurdles for property developers, including:
- Reduction of the minimum capital requirement for "ordinary"
housing projects from 35 percent to 20 percent (announced May
27, 2009).
- Possible consideration by the Ministry of Commerce of

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reducing barriers to foreign investment in real estate (cited in
local media June 22, 2009).


6. (SBU) In addition, some of our contacts highlighted official
statements made at the National People's Congress session in
early March. A Shanghai real estate sector contact told EconOff
the industry was encouraged by the unprecedented emphasis that
Premier Wen Jiabao gave to real estate in his work report--an
impressive "560 words," according to our contact--the statement
that "we must adopt even more proactive and effective policy
measures to stabilize market confidence and projections,
stabilize real-estate investments, and promote a stable and
orderly development of the real-estate sector."


7. (SBU) Comment: The Central Government's relatively loose
monetary policy in the first quarter is also affecting housing
purchases. Directly, it is providing banks with ample liquidity
to fund mortgages--in some cases without taking time for proper
credit checks (see reftel). Indirectly, the government's
monetary policy increases the public's inflation expectations,
and some may be seeking real estate assets as a hedge. End
comment.

============================
. . . and opening the door for local government initiatives . . .
============================


8. (SBU) The Central Government has also opened the door for
local governments to issue their own policies in the name of
"stabilizing" the real estate sector, according to a December
17, 2008, statement by Premier Wen following a State Council
meeting. Local policies announced since include:
- In Guangdong, 15 measures, such as allowing developers to
delay their land premium payments for up to two years on parcels
contracted for in 2008.
- In Chongqing, offering tax breaks for housing purchases,
permitting outsiders who buy homes in downtown areas to apply
for an urban Chongqing hukou (right to residence),and reducing
land costs for developers.
- In Chengdu, among measures similar to those cities, raising
the ceiling on loans from RMB200,000 to RMB400,000 and extending
mortgage repayment limits from 20 years to 30 years.
- In Shanghai, among similar measures, a program to create
demand for new housing by accelerating demolition of aging
housing. Vacant apartments are being purchased by state-owned
companies in Pudong to rent at subsidized rates to financial and
high-tech professionals.

============================
. . . but not too far
============================


9. (SBU) As local governments experiment with loosening the
center's restrictive real estate policies, sometimes central
authorities have pushed back. For instance, the Shanghai-based
investment analyst in early April reported that banks in none of
the 40 cities his firm had contacted were enforcing the
regulation that mortgages on second homes required a down
payment of 40 percent. By May, China Banking Regulatory
Commission Chairman Liu Mingkang issued a warning to banks to
comply, which our contact who oversees the Shanghai financial
services sector praised as an improvement in risk control. In
another example, Chongqing in December attempted to implement an
individual income tax deduction for mortgage payments, but the
State Council signaled that the measure was not acceptable. The
Ministry of Housing and Urban-Rural Development later announced
that tax and fiscal policies to support real estate first had to
be cleared with the center.


10. (SBU) Another measure that local governments across China

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have taken--so far without pushback from the center--is to
quietly stop requiring builders to begin development of land
within one year of purchase. According to a Beijing-based real
estate expert, the government is not putting a completion date
on projects, so even if construction does begin within one year,
the developer can postpone completion indefinitely. A Guangzhou
real estate consultant told EconOff that the one-year
requirement has not been formally lifted, but companies are free
to apply for an extension. A Guangzhou-based executive with one
of China's largest real estate companies noted that a property
is considered as being developed as soon as plans are submitted
to the government, which can still be some time prior to the
start of construction on a particular site. Another Guangzhou
real estate executive was even more dismissive of this policy,
"This is China," he said, "There are always ways." He went on
to say that while the rule may be an issue for some foreign
companies, local companies who maintained good relations with
the government seldom have problems. In Chongqing, a real
estate agent said that he knows of no actual application of the
land development deadline rules, noting that local government
does not want to "offend" developers.

============================
Emphasizing affordable housing . . .
============================


11. (SBU) Several of our contacts in the real estate industry
said that neither the central nor the local measures would offer
much direct support to developers, since the emphasis is on
affordable housing for low-income families. Developers had been
hoping for a stimulus to support their bigger projects focused
on the luxury market. A Beijing-based industry expert at the
law firm Jones Day told EconOffs that some of the big developers
believe the government is "forcing" them into the low-cost
housing market, and they are opposed to entering a market with
such a low profit margin. According to another Beijing-based
source, some Chinese development companies are willingly
entering the low-cost housing market to build goodwill with the
government in order to pave the way for more profitable projects
in the future. The principal investor in a South China real
estate group told EconOff that real estate developers are not
enthusiastic about Guangzhou's measures, which set limits on the
maximum size of houses and the percentage of houses that must be
for the mid and low-income market.


12. (SBU) In Shanghai, a local Urban-Rural Construction and
Transportation Committee official told EconOff that Shanghai
Party Secretary Yu Zhengsheng had publicly declared housing
prices should not go higher, and that the industry should focus
on affordable housing. Shanghai has announced a plan to build
20 million sq. meters of affordable housing: in 2008, work
began on 4 million sq. meters, and in 2009 another 4 million
will be started. In addition, Shanghai will launch a new tier
of "affordable commodity housing," which will reach households
that are too wealthy for traditional affordable housing but
cannot afford market-rate housing.


13. (SBU) Other contacts criticized the various local measures
as lacking specific details. Our Chongqing real estate contact
said he "doesn't yet see how it will work," for although an
operational deadline of December 2009 is set for several of the
specific tax breaks and other measures to encourage housing
purchases, other goals and measures have no specific
implementation dates. (Comment: The speed of implementation
for the real estate measures appears much slower than for those
of other industries, such as tax breaks for automobile
purchases. End comment.)

============================
. . . while talking down housing prices

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============================


14. (SBU) A contact at the China Academy of Social Sciences
(CASS) voiced a theme common among government officials that
housing prices remain too high. Our contact there said it is
difficult to forecast housing prices for 2009, but he predicted
that prices might fall 40 percent to 50 percent throughout China
over the next two years. The CASS scholar pointed out that
China has large amounts of empty floor space in urban areas
which will take a long time to consume. In addition, he said
that the income level and income growth of urban residents do
not support housing price increases. The housing price to
income ratio was 8:9 in China at the end of 2008, which is much
higher than the reasonable international standard of 3:5. In
Beijing, people cannot afford to buy homes even with housing
mortgages from the banks, and they are waiting for prices to
fall. His final explanation of further price decreases was a
simple one--housing prices are dictated by land prices in China,
and land prices depend on rent prices. When economic growth
slows, rents decrease, thus causing a decrease in housing
prices.

============================
Local governments eager to start selling land again
============================


15. (SBU) While the slowdown in the China real estate market
was orchestrated by central authorities, one of the biggest
impacts was on local governments, which saw a sharp downturn in
their revenues from land sales. According to E-House data, land
sales throughout China fell 29 percent growth in the first four
months of 2009, year over year, compared with 30 percent growth
in the first three months of 2008. From 101 million sq. meters
of land sold in the first four months of 2008, the same period
this year saw only 73 million sq. meters sold. In this
environment, most localities have begun withholding land from
the market, hoping for prices to rise again.


16. (SBU) Our contacts indicate that local governments may be
finding a shortcut to higher land sales prices. According to a
senior contact at E-House, media reports of bidding wars over
land parcels began to reemerge in April; however, several of the
largest transactions actually appeared to be local state-owned
enterprises that could have been directed to make the purchases.
For instance, in Tianjin April's most expensive land parcel was
sold to the Tianjin Songjiang City Construction Company, in
Shenzhen the most expensive parcel went to Shenzhen City Shangmo
Development Corporation, and in Hangzhou the most expensive
parcel went to Hangzhou Shangcheng District Investment Company.


17. (SBU) Fewer land sales have meant lower local revenues.
For instance, the Chengdu Development and Reform Commission
reports sales down 80 percent in first quarter of 2009 compared
with the same period in 2008. The general manager of a large
local property developer in Chengdu further confirmed to EconOff
that 2009 tax revenues will be down. Chongqing faces a similar
situation, according to a real estate agent contact. The
municipal government has relied heavily on land sales to fund
the demands of infrastructure construction, but with the drop
off in demand--19,000 sq mu sold in 2006, 16,000 sq mu in 2007,
and only 5,000 sq. mu in 2008--Chongqing is turning to new ways
to mitigate the impact on revenues, including bond sales.
(Note: One mu = 0.16 acres. End note.)

============================
Comment
============================


18. (SBU) Chinese leaders are torn between two opposing
interests that are intertwined with the real estate sector. On

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the one hand, real estate is one of the key domestic sectors for
generating internal investment and consumption--especially
important for combating the effects of slowing growth of demand
abroad. In light of this, some could argue a strong real estate
stimulus package is needed. On the other hand, the return to
labor from the high economic growth of recent years has been
lower than the return to capital, leaving workers with incomes
that have fallen behind the increases in housing costs. This
has led some to argue against supporting property developers,
since that would only be putting more profits in their hands.


19. (SBU) For now, Beijing appears to have decided to offer the
bulk of policy support to households, through homebuyer
incentives, while pushing property developers to contribute by
keeping price increases to a minimum and supplying a greater
percentage of affordable housing. However, the center's
unleashing of the real estate sector has the danger of signaling
to local governments that the punch bowl snatched away in
October 2007 is now back on the table. Inflation will be
worsened once expectations of a new housing boom trigger a surge
in real estate investment--which has still not happened (see
reftel)--since this would help drive up the international prices
of upstream commodities such as steel. Households already are
purchasing residences in part as a hedge against inflation, so
the inflation spiral could be self-sustaining.
CAMP