January 27, 2010
LASTweek, the blockbuster Avatar was pulled from China’s cinemas aftertopping the box office for three weeks. It was getting too popular.
The movie had struck a chord with viewers all too familiar withresidents being forced out of their homes by unscrupulous developers incahoots with corrupt officials. Skyrocketing housing prices in Chinahave led to much unhappiness.
But yanking a film is the easy part. To manage the inflated realestate prices in China is far trickier. The government must deal withthe nub of the problem: the incestuous relationship between propertydevelopers and officials who exploit the government’s monopoly overland supply.
In some cases, the relationship is as sleazy as the affairs that abeautiful Qingdao real estate tycoon had with three top officials –Qingdao mayor Du Shicheng, former finance minister Jin Renqing andstate-owned oil giant Sinopec’s former chairman Chen Tonghai – toclinch lucrative land deals at below-market prices. Hauled in byinvestigators last year, the mistress ratted on the three officials.
But most times, the collusion between developers and officials isnot so easy to stamp out as it is embedded in the land reserve system.Local governments have the power to determine how much land can beacquired forcibly from residents or how much reserve land can bereleased and sold to private developers in a competitive bidding system.
Chinese developers tend to hold the land they buy until it rises invalue before they build. But as Beijing itself has acknowledged overthe past two years, many developers are actually hoarding land to limitsupply of housing, thus driving up prices of existing property andcreating panic among home-buyers.
According to Beijing-based Soho China’s chairman Pan Shiyi, aboutone-third of developers reap most of their profits from holding ontoland until it rises in value before selling the land for a profit orbuilding properties that they can then sell for a much higher price.
Until this year, the authorities also closed one eye to developerswho had long flouted the rule of paying a 20 per cent fee on thetransaction price of land left idle for more than one year.
Beijing knows only too well that housing woes – cited by the Chineseas one of their top ’sources of pressure’ this year in a recentnationwide poll – present a key threat to social stability. It isfinally getting tough on this longstanding problem of land hoarding.
This year, with some 10,000ha of land approved by the government forreal estate development still unused, Beijing said it will enforce the20 per cent rule. Land plots left idle for more than two years willalso be reclaimed by the government, it declared earlier this month.
Local analysts have called this a big step in reining in China’srunaway housing prices, which shot up in December by 7.8 per centacross the country – its most frenetic pace in 18 months.
But this affects only the private developers. For officials in localgovernments – the other partner in the collusion that keeps propertyprices high – the incentive to collude with developers is not affected.
After all, they rely heavily on revenues derived from real estate.Local governments reap about 40 per cent of their total revenue fromthe sale of land and property development taxes, some local economistsestimate.
For example, for Hangzhou’s local governments, income from landsales may even be twice their tax revenues last year, reported 21stCentury Business Herald.
Beijing has tried to control how local officials sell land with anew rule requiring them to apply annually to the central government forland allocation with a proposal on land use. Once approved, the localofficials distribute the land for different purposes, such as housing,commercial and industrial uses.
But there are loopholes. Local officials can claim that the land ismeant for, say, a business park or public sports centre, but auctionthe land off for a package deal with a lucrative residential component.
As prominent Chinese economist Zhou Tianyong pointed out, the onlyway to cut the costs of building affordable homes for ordinary Chineseis to ‘cut out the root of the problem’ – the government’s lucrativeland monopoly.
One way is to liberalise the land supply market, he said. Allowindividuals or groups of land owners to sell the land themselves ratherthan surrendering it to local officials. This may close the loopholefor unscrupulous officials to forcibly evict residents.
But this would mean an overhaul of China’s property rights laws, which could take years.
And the coffers of local governments, already burdened with a bigbill for last year’s stimulus measures to spur an economic recovery,would also be hit if land sales cease to be a major source of income.
So Beijing would also have to look at ways to help local governmentsfurther diversify their funding, using more instruments like bonds. Butcan the masses of Chinese saddled by housing woes wait this long for asolution?
Not that long, if Avatar’s popularity and its depiction of anuprising that booted out the powers-that-be is any indication. TheChinese government knows that it has to act – fast.
Source : Straits Times – 27 Jan 2010
