China's State-owned property developers have been blamed for the soaring property prices in Beijing and Shanghai, after they bought land in these cities at record high prices. Industry analysts are now worried that the buying frenzy would extend into second tier cities also, where the average income levels are much lower.
Land sales and property taxes account for a substantial portion of local government revenues and it is only reasonable that government is keen on pump priming the property market.
Land sales enriched the government coffers by nearly 200 million yuan per day between the second half of May and the first half of July, according to a report by China Business News on Wednesday.
Poly Real Estate Group Co, a big State-owned property developer, was crowned the new "land king" in Suzhou, a neighboring city of Shanghai, in Wednesday's land auction.
"Land King" is a newly coined word in Chinese to mock real estate developers who pay the highest price to buy a piece of land in a certain geographic area. It became the new buzzword when Fangxing Property, a subsidiary of State-owned Sinochem Group, acquired a chunk of land in Beijing on June 30 for 4.06 billion yuan, the highest land transfer price ever in the capital city's public auction.
However, analysts have warned that this kind of revenue growth is unhealthy and not sustainable.
State-owned enterprises borrow from the State-owned banks and give the money to the local government at land auctions. "The money circulates within the big government pocket. Tomorrow's non-performing loans, if prices collapse, are just today's fiscal revenue," Xie Guozhong, board member, Rosetta Stone Advisors, said in his blog.
Some economists feel that much of the country's massive 4-trillion-yuan stimulus package and record lending in the first half have not been spent for real economic activities and have created asset bubbles.
"How far the bubble would go depends on the government's liquidity policy. The current bubble wave is very much driven by the government as it encourages banks to lend at low interbank interest rates," said Xie, adding that the bubble will be pricked when the dollar recovers, possibly in 2012.
According to Carlby Xie, senior manager of research and consulting at Colliers International (Beijing), the property sector is unlikely to see a big correction like that of last year. "The overall credit controls are much better than before," said Xie.
Private property developers too are not happy with the developments. Ren Zhiqiang, head of a realty firm said his company finds it difficult to match up with the cash-flush State-owned realty developers.
"The State-owned companies can borrow at a low interest rate of 3 percent, while private firms have to pay a much higher rate of 5 to 6 percent," Ren said.
Hu Yuanyuan contributed to the story