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QQ Finance: The Biggest Secret in China’s Real Estate

Tencent (QQ) Finance published an article revealing the "Biggest Secret in China’s Real Estate." It is that the companies that have recently set records for the price of land purchases are actually State-Owned Enterprises (SOEs). They are doing it just to create the illusion that the real estate market is doing well. The following is from the article.

For example, two companies, China Electric Power Construction Group and Guangzhou Fangrong Real Estate  Corporation bid 8.29 billion yuan (U.S. $1.3 billion) to win "A816-0060," a commercial and residential land development project in Longhua district, Shenzhen. The first company is clearly an SOE. After tracing the parent company of Guangzhou Fangrong several levels up, the owner of the second company was found to be China Sinochem, which is also an SOE.

The average purchase price per construction area was 56,781 yuan (U.S. $8,735) per square meter. Excluding general facilities that can’t be sold, it would be over 60,000 yuan per square meter for the sellable construction area. The land is not downtown; it is 12 km (8 miles) away from downtown. Residential buildings in this area currently sell at 50,000 – 75,000 yuan per square meter. It is hard to believe that the developers would be able to make a profit if they bid so high on the price of land.

Then, why would SOEs pay a record high amount to buy land?

The answer is simple. They are just collaborating with the local government to create the illusion that real estate prices will keep going up; they do it to cheat people.

China Times reported this practice back in 2014. "When the market is slow, the local government will ask SOEs to bid a high price for land purchases to create an artificially high market. To the government, the left hand pays the money to the right hand. There is no real gain or loss."

Another trick the government uses is to get a high bidding price but return a substantial amount of money back to the developer later. "Some companies may receive a return of nearly 50 percent of the purchase price. If the land was related to re-developing shantytown, the return might be 80 percent."

Source: Tencent, June 5, 2016