REAL ESTATE TALES FROM A SECOND-TIER CITY: NANJING HOUSING

UNCLAS SECTION 01 OF 04 SHANGHAI 000469 SENSITIVE SIPDIS DEPT FOR EAP/CM NSC FOR MEDEIROS, SHRIER STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP TREASURY FOR IMFP -- SOBEL/CUSHMAN STATE PASS CEA FOR BLOCK STATE PASS CFTC FOR OIA/GORLICK MANILA FOR ADB USED PARIS FOR US/OECD E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV CH SUBJECT: REAL ESTATE TALES FROM A SECOND-TIER CITY: NANJING HOUSING BOOM SUPPORTS LOCAL ECONOMY REF: A. A. Shanghai 444 ¶B. B. Shanghai 451 ¶1. (SBU) Summary: Real estate sales are booming in Jiangsu -- as they are in neighboring provinces -- and have become a key component of economic growth following the introduction of real estate stimulus measures in December 2008. However, our contacts say that the stimulus measures will be difficult for the Central Government to calibrate in order to avoid overheating in the sector. Contacts also raised concerns that local governments are overly dependent on real estate for growth, and are not prioritizing the housing needs of low-income households. End Summary. ========== Background ========== ¶2. (SBU) EconOff traveled to Nanjing, the capital of Jiangsu Province, October 22-23 and November 24-25 to meet with local academics, government researchers, and businesspersons to gauge local economic conditions. The contacts presented a picture of province-wide economic growth (ref A),while also raising serious concerns about the accuracy and consistency of Jiangsu's economic data (ref B). This cable covers Jiangsu's property sector, with a particular focus on Nanjing -- which better exemplifies the broader trends in East China than Shanghai, which has substantially greater exposure to the international market. ============================ Housing Sales Booming . . . ============================ ¶3. (SBU) According to the National Bureau of Statistics, the total value of real estate sold in Jiangsu was up 109 percent for the year through October, compared with the same period in 2008, and the value of residential housing sales alone was up over 116 percent. Higher demand is leading to higher prices, with the Ministry of Housing and Urban-Rural Development survey showing accelerating increases for Jiangsu since December 2008 -- when the Central Government announced a package of housing purchase incentives -- reaching a province-wide average price increase of nearly 20 percent year-to-date in October, the most recent data available. The Central Government's real estate incentives included greater leniency for second home purchases, higher mortgage underwriting by banks, and adjustment of land prices by local governments. ============================================= ======= . . . Leading to Concerns the Sector is Overheating ============================================= ======= ¶4. (SBU) Chen admitted that real estate incentives are a crude tool, and that it will be difficult for the Central Government to calibrate them to avoid overheating in the sector. She used a body temperature analogy to illustrate: The sector suddenly jumped to a fever level of 39-40 degrees Celsius this past spring, Chen said, and she hopes that it will moderate to a more normal 37-38 degrees in 2010. SHANGHAI 00000469 002 OF 004 ¶5. (SBU) Chen and Luo Hao, Research Manager of Nanjing Centaline Property Consultants, both commented that the Central Government will probably be reluctant to hit the property market with policy restrictions because of the sector's importance to economic growth. According to Chen Xinghan, chair of the board of Nanjing-based property firm Chixia Development and president of the Jiangsu Real Estate Association, real estate accounts for over 50 percent of final domestic demand nation-wide, making the sector, together with government-led infrastructure investment, one of China's key economic growth drivers (ref. A). Moreover, Chen commented that there are different economic conditions in each of China's provinces, making it problematic for the government to try to implement one-size-fits-all policies to curtail real estate sector growth. ¶6. (SBU) Evidence of overheating in real estate can be seen in the widespread mania among firms to profit in the sector. Luo said that Central Government-controlled state-owned enterprises (SOEs) and large stock-market-listed companies in Nanjing have become the main purchasers of land, speculating as the market rises. (Note: Most of the record new lending in 2009 has flowed to large SOEs, giving them ample liquidity to play the real estate market. End note.) Chen said that even smaller firms without access to extensive bank credit are jumping into the market by purchasing finished residences to hold as investments. ¶7. (SBU) Despite agreement that the authorities will not crack down hard on the real estate sector, Chen and Luo disagreed on whether last December's real estate stimulus measures would be prolonged past their sunset clause this December. Chen predicts that the measures will be phased out on schedule, and that restrictions on purchases of second homes will be tightened. Luo believes the incentives will be extended, or similar ones will be adopted in their place. As described in ref A, Chen believes that in the medium-term, the government will have to trim back its reliance on the real estate sector for growth. ========================================= Land is Key to Local Government Finances ========================================= ¶8. (SBU) Local officials' control over land is key to local finances and economic growth, agree our Nanjing contacts. The local bank lending that supported the binge in infrastructure spending this past year rests largely on collateralizing local land reserves, say officials in the Jiangsu Development and Reform Commission, the Jiangsu Audit Department, and the Jiangsu Finance Department. (Note: The contacts said that local governments looking for loans from local banks also promise fee income from the projects, such as road tolls, or -- with the approval of the local People's Congress -- promise to set aside future tax revenue streams. End note.) Land sales brought almost RMB33 billion (US$4.8 billion) into local Jiangsu government coffers in 2008, according to National Bureau of Statistics data, equivalent to 12 percent of total provincial SHANGHAI 00000469 003 OF 004 revenue for the year. ¶9. (SBU) Local governments manage the supply of land offered to developers as a lever over the local real estate market. The Nanjing Municipal Government, for instance, began expanding the supply of land available for development in the second half of 2009 to encourage property firms to put more housing on the market, and thereby help contain price increases, said Luo. (Note: Prior to this, local governments were less willing to auction off land because real estate developers -- as they slowed the pace of their projects in the face of plummeting demand -- were already sitting on large land banks and were attempting to bid down land prices. End note.) Chen, echoing this theme, cautioned that it would be a mistake to think that the laws of supply and demand hold in China, because the government will intervene through land sales and other policies to manage the sector. ===================================== Low-Income Housing is Not a Priority ===================================== ¶10. (SBU) Nanjing is not meeting its goals for providing homes to low-income families, said Luo, and projects that are under development are being built in out-of-the-way suburbs. In the end, the government sees low-income housing as a waste of resources, said Luo, and is purposely slowing construction progress. The municipality has capped profit margins for developers of the projects, discouraging them from participation. Eligible residents are also wary of living in areas requiring a long commute and having few services, said Luo. ========================================= Property Tax Not Likely in Coming Months ========================================= ¶10. (SBU) Our interlocutors doubted that a property tax would be implemented in the short term. (Note: China currently does not impose property tax on homeowners during the period they hold the property, although taxes may apply at the time of sale and purchase. A State Administration of Taxation official in February 2008 denied rumors that a property tax would be implemented in 2009, but Chinese media has recently reported renewed discussion among officials on the subject. End note.) Chen and Luo agreed that the National People's Congress is unlikely to pass legislation imposing a property tax in the coming two years, given pressure from real estate interests against it. Luo added that the tax would be very difficult to collect, in any case, as homeowners could easily evade it by manipulating property assessments or other factors. ======= Comment SHANGHAI 00000469 004 OF 004 ======= ¶11. (SBU) The tight relationship between local governments and local property firms stimulates the economy in the short term, but also is leading to a run up in housing prices that the public perceives as unfairly benefiting the officials and developers. This discontent is reflected in the now-banned TV drama series Snail House (Wo Ju, which also has the English name Dwelling Narrowness),in which "house slaves" struggle to pay surging mortgage costs. Our contacts confirm some aspects of the TV drama's themes, describing local governments as overly dependent on land sales for fiscal revenue and on the real estate industry for local economic growth. Low-income housing could help alleviate some of the discontent, but clearly local governments are not making this a priority. Jiangsu's current housing boom also is contributing to a continuing reliance in China on investment to drive economic growth, as facilitated by the current easy credit environment. CAMP