China real estate comments

Yes, China understands it’s unlimited ability to support demand through deficit spending that includes funding through state owned banks.

The limits are their tolerance of inflation.

The question remains whether they can deliver a soft landing, rather than a hard landing, in their efforts to dampen inflation.

While theory says it’s possible, I’ve never seen it.

Other analysts say there are far more leveraged purchases of real estate than recognized in the official statistics.

To fight the effects of the global downturn, Chinese state-owned banks, on government orders, loaned about $3 trillion, mostly to giant state-owned enterprises. The money was reported to have largely financed infrastructure projects, such as China’s ambitious high-speed railway network.

But many of the loans wound up financing real-estate purchases instead, said Deng Yongheng, director of the Institute of Real Estate Studies at the National University of Singapore.

Prices at auctions for residential land in eight major cities doubled in 2009, largely because of highly leveraged purchases by state-owned companies, he and three co-authors calculate. In March 2010, state-owned companies bid up the price of one piece of Beijing land to 10 times the asking price, according to one analyst.

The magnitude of the leveraged purchases is hard to gauge.

One indication: Shortly after the Beijing land sale, the Chinese agency that oversees state-owned companies, ordered 78 firms–whose charters had nothing to do with real estate–to cease buying and selling property. Nearly a year later, in Feb. 2011, state-owned Xinhua news agency reported that just 14 firms had left the business and another 20 were expected to get out later in the year.

A spokesman for the agency said that the firms needed time to finish their projects, but added that there isn’t any prohibition against companies owned by provinces or municipalities to continue to invest in real estate.