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Chinese land auction error undermines Xis’ inequality crusade

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Updates on Chinese Business and Finance

China’s largest cities have suspended land auctions after new central government rules failed to curb prices, in a setback for President Xi Jinping’s campaign to reduce social inequality.

The rules were introduced as part of Xi’s efforts to promote “common prosperity” by suppressing the high real estate costs borne by middle-class families, and were aimed at reducing demand and out of control housing prices. But they had the opposite effect, driving up searing real estate costs.

Regulations set by the Ministry of Natural Resources in February stipulated that 22 cities, including Beijing and Shanghai, are expected to sell more land this year than what was sold on average between 2016 and 2020. Municipalities are expected to unload land in three large-scale auctions. in 2021.

Authorities believed that the cities ‘previous practice of holding dozens of auctions had only whetted developers’ appetites. Real estate developers who hadn’t been in one auction could put their eyes back on the next, officials argued, leading to a cascade of high winning bids and ultimately higher apartment prices.

Ren Yi, an influential Chinese blogger who uses the pseudonym Chairman Rabbit, noted that the government was increasingly concerned about “the wider socio-economic impacts of high house prices.”

Reducing the process to three auctions, the ministry said in an internal memo seen by the Financial Times, would create the impression of a “plentiful supply” at every auction and allow the overheated municipal real estate market to “return to normal. “. The change would also force developers to struggle to raise funds to purchase multiple plots, the memo added.

But it didn’t work out as expected, and auctions scheduled for July and August were suspended. Government advisers have warned that developers’ behavior will not change unless the annual real estate supply increases.

“The resource is still scarce,” said a person who advises the Natural Resources Department and asked not to be named. “The developers will be competing for each available plot.

“The authorities were too idealistic. They did not expect market forces to go against their will.

In the 22 cities subject to the land sales overhaul, the average transaction price rose to 9,591 Rmb ($ 1,485) per square meter in the first half, an increase of 38.3% over the year previous, according to statistics from the local housing office. .

The first mass auctions took place from April to June. In Chongqing, the country’s largest city in terms of population, a subsidiary of China Merchants Group, the bank, paid 130% above the asking price for land in the city center. The record premium paid in the city the previous year was 49 percent.

A China Merchants executive, who asked not to be identified, said the group was prepared to pay a high premium because “we are in a race to consume money to build up our land reserves.”

Some cities began to impose an upper limit on the offers, which were determined by lottery because many developers were willing to pay the highest price allowed.

In April, bids for a plot of land in downtown Guangzhou were capped at 50% above the asking price. To increase their chances of winning, the big developers have created many shell companies to give them extra tickets for the draw. About 300 entities participated in the auction, but they only represented around 30 developers.

Local public enterprises also participated. “There is no way to win the auction without a dozen – or more – shell companies joining the race,” said an executive from Yuexiu Enterprises, a leading developer controlled by the municipal government. from Guangzhou.

At an internal meeting last month, the natural resources ministry attempted to curb the proliferation of shell companies by stipulating that each must provide proof of funding, according to a meeting report consulted by the FT. He also asked local governments to set their bid limits at 15 percent above the asking price.

The ministry adviser was however skeptical about the effectiveness of the latest measures. As local governments derive most of their tax revenue from the sale of land, they may be tempted to simply increase the asking prices.

“There are too many stakes,” he said. “The central government cannot be expected to control everything.

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