Mereja

Author: Bill Bishop

  • Here’s The Big Picture Behind China’s New Housing Bubble Crackdown

    (This guest post comes courtesy of the author’s blog)

    China continues to introduce new measures to cool off the property market. An integral part of the rollout is a very comprehensive propaganda campaign. Each day since the announcement news outlets carry several stories about new regulations, falling prices, dangers of speculation, concerned government officials, progress on allocating affordable housing etc. The Chinese government understands quite clearly that skillful propaganda can play an important role in changing psychologies and expectations.

     

    The most striking article I have seen is Xie Yuhang’s (谢昱航) April 29 commentary in the very influential China Youth Daily (中国青年报), the official newspaper of the Communist Youth League of China. The commentary was reproduced on major Chinese news sites. ChinaGeeks has provided an excellent translation, which I will excerpt here, and which you can view in its entirety on their site.

    In the commentary, entitled “To Solve The Populace’s Housing Difficulties We Must Root Out Self-Enrichment By The Powerful”, the author attacks corruption as the root cause of the failure to provide enough affordable, subsidized housing. And without a massive increase in the supply of affordable, subsidized housing, the government will not succeed in cooling down housing-related tensions that now threaten social stability.

    Key excerpts from the China Youth Daily commentary include:

    Although the welfare housing system has been ordered stopped, the covert housing welfare that exists for government employees1 has not stopped, and has become its own system. Some central government offices in Beijing not only have ample financial resources for housing welfare, but their prices are not even twenty percent of the market prices. And not only can local officials get a share of ownership in existing houses/property, but they even build new houses in the name of renovation and housing reform… 

    Housing is meant to be a one of the basic necessities of life, but at present it has become a very common problem. If the people want to realize their dream of having housing, they must count on the government to move. If government employees could feel the pain caused by these housing problems, that would give them the impetus to do something. But housing welfare for government employees is widespread, and it allows them to distance themselves from the housing market. Whether housing prices are high or low has little effect on their housing, so we must take useful steps to get them to do something. We can’t rely on their senses of responsibility or their consciences.

    If the law has banned it, but civic organs are doing it openly, then that is public corruption! This kind of corruption not only destroys the government’s incentive to regulate the housing market, it gives government employees a vested interest in the continued rising of housing prices. Because government employees can get houses easily, the value and profit potential of their property increases as the amount of property they have goes up.

    The existence of corruption impedes national efforts to safeguard the housing [market]2. Commercial prices are so high they’re untouchable, so a lot of people have placed their hopes in [the government] safeguarding the housing [market]. And while it’s popular right now to talk about protecting the housing market, this hasn’t really helped the common people much either, and the reason is again corruption. As commercial prices rise, the profit potential for those in power through rent-seeking rises. There has been a mass of construction in the past few years, which should bring housing prices down, but for the corrupt officials who’ve been bought by businessmen and control interests in the housing market, what reason is there to bother with “safeguarding housing”3. Money is owed on “safeguarded housing” all over, and in addition to the connections with the GDP and land finance, corrupt officials are also partly to blame.

    “Safeguarded houses” are going up and down, but they aren’t being built for the common people who can’t afford a place to live, and many of them are being used to feather the nests of the corrupt power-holders. Recently, the media has been reporting on the Xinzhou situation in which its first housing price control program was cut apart and the housing sold for profit. The government there used the only pricing control program for the benefit of local cadres, so there was a lot of impetus for officials to build, and the officials were actively mobilizing people and capital. Most of the officials cutting apart this cake already had houses, and since fixed-price houses could be resold for massive profits, the cadres made a lot of money. “Safeguarded housing” isn’t a special case, low-income housing and fixed-price housing have also been taken over by government officials, so it’s clear to see who “safeguarded housing” is really “safeguarding”…

    If the interest of the poor were really being taken into account, then the government’s limited funds should have been used to construct as many inexpensive houses as possible, so that poor people could afford them. This would be in the interest of a large number of people; how many people become consumers as a result of the sale of extremely high-priced commercial property? This is quite obviously using poor people’s money to help commercial developers […] It keeps prices high, prevents more people from being able to afford “safeguarded housing”, and influences the commercial housing market.

    Because of corruption, government property market control policies have been built on stilts, they cannot be long-lasting. Every time a new policy is announced, a new way to counter it is also discovered. Because these countermeasures always prevail, [we know] there is corruption. Hoarding [property] is a frequently-used trick by developers, but if they weren’t being instigated by government departments, how could they be so brazenly unscrupulous? “The highest fine for commercial property hoarding is 10,000 RMB” is the masterpiece of some local government department. Recently the central government touted the so-called “most severe” new housing oversight, but the policy hadn’t been out for long when the media began reporting that some banks were offering “unsecured mortgage loans” “fifty-day exemptions on the [required] waiting period” and other methods of consumer credit that become housing loans. Regulatory policy will also be subject to interference by corrupt officials, from those who speak out in favor of high housing prices to those who will stop at nothing to prevent the lowering of housing prices, so one can clearly see the kind of impact corruption has on regulatory policy.

    (You can read the entire translation at ChinaGeeks, and if you are interested in things China I highly recommend you bookmark and/or put ChinaGeeks in your RSS feedreader. It is a terrifically useful site)

    This is probably about as clear a public warning you will ever see that local officials need to seriously tackle the affordable housing problem, and that a corruption crackdown is likely coming. Some officials need to become examples for the government to show that it cares about the masses and this time it really is serious about building affordable housing. The questions about a corruption crackdown are most likely not if but when, where, who, what level and how many? This a sensitive time politically, as I recently discussed in What Are The Politics of China’s New Real Estate Measures?

    The central government has staked a huge amount of credibility on cooling the real estate market and resolving housing difficulties for the masses. Skeptics will rightly say that Beijing has tried this before, several times, and never successfully reined in the web of interests and corruption that distort China’s real estate market. This time I think will be different, as the central government likely believes that housing related issues are the biggest threat to social stability in China.

    I also recommend reading two articles in the latest issue of Caixin’s Century Weekly. Hu Shuli has an excellent editorial discussing what many believe are the longer-term changes needed to structurally reform China’s housing market–Property Bubble Relief and Long-Term Resolve. The cover story–Sprawling Beijing Tries a Softer Urbanization–is an excellent look at the challenges of urbanization and two experiments in Beijing that are attempting to resolve the tensions and inequity stemming from forced demolitions and relocations.

    Read more market commentary at Sinocism.com >

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  • Why China’s “Document Number 10” Will Cause A Brutal Monday In Stocks And Real Estate

    Shanghai(This guest post previously appeared at the author’s blog)

    Phoenix News is reporting that China’s State Council has issued a new circular outlining new policies and regulations designed to cool off the property markets (State Council Document Number 10).

    Of all the rules discussed in the “Document Number 10″, the one that may have the biggest short-term impact is that non-residents of a city can no longer obtain mortgages to buy property in that city unless they can prove that they have paid taxes in that city for at least one year. At a minimum this may slow down the Wenzhou buying cliques, though to really stop them the government would need to crack down hard on the underground banking system.

    This is very smart, and likely more effective than a property tax. We may still see a property tax at some point, but I am skeptical such a tax will get past the “research” stage anytime soon. There are too many complications around a property tax, including but not limited to the complexities of the technical implementation; asset disclosures that would be required of all the officials who own property that they could never afford on their salaries; objections from powerful interest groups, and resistance from already burdened middle class homeowners.

    “Document Number 10″ also outlines measures to increase the housing supply and build more affordable housing, all things you would expect from a Socialist government. As I wrote yesterday about Wen Jiabao’s essay reminiscing about Hu Yaobang: “Harkening back to Hu Yaobang may be a signal that more substantive and muscular policies are coming that will lead China to act a bit more like a Socialist country.” Perhaps they are all related.

    I have reprinted below a comment I made last December (before I started this blog) to China Goes Wrong Way on Property Taxes. I questioned the efficacy of a possible property tax and suggested other policies to rein in housing. At least two–limits on foreign buying and SOE participation in the real estate market–have been enacted. The full comment:

    I think that a property tax would certainly not encourage more real estate speculation, and would have some (at least to “socialists”) appealing potential wealth redistribution effects, but I don’t think an annual property tax would have a material impact on the growing real estate bubble here, for the following reasons:

    1. Owners in China already pay property management fees on those vacant properties, at an annual rate of somewhere between 0.1 and 0.5% what they paid. So they are already bearing annual, cash carrying costs for these vacant properties, and an additional 0.5-1.0% in property tax (the numbers I have heard bandied about but I am not sure anyone knows what the likely number really might be) is unlikely to be meaningful to many of the owners;

    2. My assumption is that most of the places that are vacant, with no real attempts to rent them, were either purchased in cash and/or the owner is rich enough that they can handle an incremental 25-75k rmb a year in property taxes, on top of the property management fees they are already paying. It would be helpful if you have any data on the composition of ownership, from net worth to mortgage size to percentage that paid in cash; I have not been able to find that data, but based on my personal experiences in Beijing a property tax for most of the owners of these vacant properties would be a nuisance but not much more;

    3. The Chinese I know in Beijing and Shanghai with multiple properties bought them either because they had too much cash and no good place to invest it other than real estate, they assume that even if prices are high now in 10 years in world class cities like Beijing and Shanghai they will be even higher, and/or they are buying as an inflation hedge. I think Chinese people culturally have been conditioned to see real estate as an inflation hedge and a savings vehicle, much more so than in the US (our houses were seen as consumption vehicles for the most part);

    4. I think that reintroducing limits on buying by foreigners, especially Hong Kongers, could have a meaningful impact on at least the high end of the market. There has been a Hong Kong buying frenzy in Beijing (and I assume Shanghai) fueled by cheap and easy money in Hong Kong (thanks to the peg and the Fed) and real concern about a dollar collapse and inflation, coupled with the fact that Beijing and Shanghai still look pretty cheap compared to Hong Kong. One anecdote, the Beijing Four Seasons residences (soon to open next to the Lufthansa Center) were only sold in Hong Kong. Day 1 they were priced at 70,000 RMB/sq m; demand was so high that in a matter of days the price was raised to 100k, and they are now all sold out. They were never marketed in China, other than to insiders (friends of the developer could buy for 35,000 RMB sq m in May). Curbing this kind of speculation from overseas, much of trying to play a long RMB/ short USD (you can get very cheap USD mortgages in HK and through Bank of East Asia in Beijing) as well as hedging against inflation and playing the long term geopolitical and urbanization trends, would probably much more popular than a property tax, and for good reason. So long as the currency is not convertible, there is an argument to be made that if you are not a PRC citizen and you want to buy a property in the PRC you should have to live in it;

    5. Whatever effect a property tax might have on speculation, I think it would be at the margins at best and would not address the core, structural factors that have been driving price appreciation. In this interview posted today on 21st Century Herald with economist Lang Xianping he points out that the real causes of the growing real estate are extremely loose monetary policy/excess liquidity, overcapacity and structural problems that lead to misallocation of capital with massive corporate/SOE participation in real estate and equity markets using borrowed money [how many of these vacant apartments may actually be owned by companies? How many SOEs are bidding on urban with basically free government money?]

    6. I have had several Beijing friends who have started buying the US. They don’t see the property tax as a reason not to buy, they just see it as one of the costs associated with the transaction and factor for it accordingly.

    And of course, The US has had property taxes for years and they did nothing to prevent one of the greatest housing bubbles in history.

    Regardless, expect Monday to be a brutal day for real estate-related stocks in the Chinese and Hong Kong Stock markets.

    Please tell me what you think in the comments.

    Read more Chinese economic comment at Sinocism.com >

    Join the conversation about this story »

  • Do You Have What It Takes to Do Business in China?

    China has historically been a tough market for foreigners, and it’s getting even tougher when it comes to doing business on the Internet, as local firms increase their dominance and the Chinese government asserts more control. Most U.S. Internet firms in the People’s Republic have either offloaded their operations to Chinese companies through joint ventures or so-called “strategic partnerships” — or, like Google, pulled out entirely. The truth is that outsiders are unlikely to succeed, and in the process of trying, liable to waste valuable resources.

    But it’s easy to see why companies take on the challenge. As I describe in an article for GigaOM Pro today (sub req’d), the market indicators are, indeed, mouthwatering. With 400 million Internet users and hundreds of millions more using the mobile web, the market is potentially huge. Revenue from online games and virtual goods alone totaled $3.6 to 3.8 billion in 2009, and is projected to grow 25-30 percent in 2010.

    Numbers like that lead many firms to leap headlong into what looks like virgin territory — but they tend to underestimate the challenges. For anyone serious about expanding into China, here are three tips to consider before investing time and energy there.

    1. Invest in Experience — The highest priority is to line up advisers with experience in China, from venture investors to lawyers to accountants to, in some instances, market-entry firms. It’s critical to understand the competitive, regulatory, and legal topography of any given industry and sector. If you can’t afford to do the proper market-entry work and due diligence, then you probably can’t afford to operate in China.

    2. Prepare for Regulatory Complexity — On a revenue basis, operating in the PRC tends to consume a vastly disproportionate amount of management bandwidth. One reason for this managerial overhead is the government’s penchant for regulating media and communications. Several government bodies share jurisdiction over the Internet, making licensing and permitting a time-consuming and frustrating process. U.S. laws also present hurdles. Public or soon-to-be-public companies need to undergo rigorous Sarbanes-Oxley disclosure requirements as well as increased risk exposure under the Foreign Corrupt Practices Act.

    3. Expect Copycats — Chinese developers and engineers are skilled, fast, plentiful and much cheaper than their U.S. counterparts. Imitation in China is more than flattery; it’s expected. However, China does have laws that protect patents and intellectual property — but only if you apply to the relevant government agencies and, in most cases, do it before you’ve entered the market or even engaged in discussions with potential partners.

    Foreign firms willing to play by China’s rules have had some success, especially in online gaming, and as I discuss at GigaOM Pro there are strategies that can yield positive results for both companies and investors. But it’s also worth remembering that the U.S. is still the largest Internet market by revenue and will remain so in the foreseeable future. It’s also probably the easiest place to build a business.

    Disclosure: The author is an angel investor in Stocktwits, which is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True.

    Photo courtesy of Flickr user Wolfgang Staudt