Chinese land auction mistake undermines Xi’s crusade of inequality

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Chinese business and finance updates

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

The rules were introduced as part of Xi’s efforts to promote “shared prosperity” by containing high real estate costs for middle-class families, and were intended to reduce demand and skyrocketing house prices. But they had the opposite effect, driving up scorching real estate costs.

An ordinance issued by the Land Ministry in February called for 22 cities, including Beijing and Shanghai, to sell more land this year than the average sold between 2016 and 2020. The municipalities would have to unload the land in three large auctions in 2021.

Authorities believed that the cities ‘previous practice of holding dozens of auctions only whetted developers’ appetites. Property developers who missed one auction could target the next one, officials argued, leading to a cascade of high bids and ultimately higher home prices.

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

Reducing the process to three auctions, the ministry said in an internal memo in the Financial Times, would create the impression of “abundant supply” at each auction and allow the overheated municipal real estate market to “return to normal”. The shift would also result in developers struggling to raise cash to purchase multiple packages, the memo added.

But things did not go as expected and the auctions planned for July and August were suspended. Government advisers warned that property developers’ behavior would not change unless annual property supply increased.

“The resource is still scarce,” said a person advising the ministry of natural resources and asking not to be named. “The developers will compete for every available piece of land.

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

In the 22 cities subject to the revision of land sales, the average transaction price rose to Rmb 9,591 (USD 1,485) per m² in the first half of the year, an increase of 38.3 percent over the previous year, according to statistics from the local housing authority.

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

A China Merchants executive, who refused to be identified, said the group is willing to pay a hefty premium because “we are in a race to build our land reserves in a money-burning race.”

Some cities began to set a cap on bids that were set by lottery because so many developers were willing to pay the highest allowed price.

In April bids for a property in downtown Guangzhou were capped at 50 percent above the asking price. To increase their chances of winning, major developers have set up numerous mailbox companies to give them extra tickets for the drawing. About 300 companies participated in the auction, but they only represented about 30 developers.

Government-owned companies also took part. “There is no way to win the auction without a dozen – or more – mailbox companies taking part in the race,” said a senior executive at Yuexiu Enterprises, a leading developer controlled by the Guangzhou city government.

At an internal meeting last month, the Natural Resources Ministry attempted to curb the proliferation of letterbox companies by requiring each and every one of them to provide proof of funding, according to minutes of meetings viewed by the FT. It also directed local governments to set their bid limits at 15 percent above the bid price.

However, the ministry’s advisor was skeptical as to whether the latest measures would have any effect. Since local governments get most of their tax revenue from land sales, they may be tempted to simply raise asking prices.

“There is too much at stake,” he said. “The central government cannot expect to control everything.”

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