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UNCLAS SECTION 01 OF 03 GUANGZHOU 018102 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: EINV ETRD ECON SOCI CH
 
SUBJECT: New Property Measures Should Have Little Immediate 
Effect on South China 
 
REF: A) Guangzhou 17422 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY.  NOT FOR RELEASE OUTSIDE U.S. 
GOVERNMENT CHANNELS.  NOT FOR INTERNET PUBLICATION. 
 
¶1. (SBU) Summary: The Central Government recently announced 
six new measures to guide property development and the real 
estate market.  The government hopes that measures on 
transparency, capital gains tax and increased low-income 
housing development will help slow down rising property 
prices.  Thus far the laws have had only a slight effect in 
Guangdong province, which has some one of China's most 
expensive real estate zones.  Guangdong property consultants 
are not advising any changes in their development strategies 
and believe the law might create more damage than benefit 
because of mismanagement at the local level.  End summary. 
 
 
Background on the National Measures 
----------------------------------- 
 
¶2.  (U) Housing prices throughout China have been rising 
rapidly in the past few years.  In April, the National 
Development and Reform Commission reported property prices 
in 70 of China's largest cities rose an average of 5.6 
percent year-on-year in March.  Prices in several cities 
rose more than 10 percent.  For example, in the first 
quarter of last year, Beijing and Shanghai prices rose by 
8.2 percent 5.4 percent respectively.  In South China, 
Guangzhou prices rose by 10.73 percent while Shenzhen rose 
by 16.3 percent, the second highest in China.  The average 
urban resident has to spend 13 years of salary to acquire a 
flat of only 70 square meters, double the international 
average of six to seven years.  Some Chinese refer to the 
concept of "fangnu" or mortgage slave to those who spend 
more than 50 percent of their income on mortgage (economists 
say spending 33 percent of a salary on mortgage is typically 
the maximum allowed by banks).  Zou Tao, a Shenzhen-based 
activist for property law improvement, captured national 
attention and the support of many middle-class Chinese when 
he wrote an open letter on the internet petitioning for a 
three-year property boycott throughout China (see ref A). 
 
Economics of the Market in Guangdong 
------------------------------------ 
 
¶3.  (SBU) Local analysts point to several reasons for the 
rapid rise in real estate prices in Guangdong, some of which 
mirror national trends.  A shortage of land, particularly in 
downtown areas, has led to an increase in land prices.  On 
the outskirts of cities such as Guangzhou and Shenzhen, 
where factories abut farms, land prices are increasing as 
well.  Rising land and real estate prices have led to an 
increase in the number of speculators.  Without active or 
open capital markets such as stocks and bonds, these 
speculators see real estate as the most profitable form of 
investment.  In addition, developers are devoting a larger 
proportion of their projects to luxury apartments, because 
the additional space and amenities can fetch profits far 
beyond the costs.  Finally, the effect of China's rising GDP 
on prices has been exaggerated in Guangdong, where GDP rose 
12.5 percent in 2005 -- faster than the national average of 
9.8 percent. 
 
 
The Bubble: About to Burst or Just a Slow Leak? 
--------------------------------------------- 
 
¶4.  (SBU) Many real estate consultants agree that, although 
current prices do not reflect it, the market is structurally 
oversupplied with housing.  According to economic theory, 
individuals tend to buy increasingly more expensive 
property, immediately move into it, and create supply for 
less expensive housing.  The problem in Guangdong Province 
is that the market is full of "chaofangren", or house 
hoarders, who buy valuable property and hold the land 
waiting for the price to rise.  Therefore the secondary 
market has no growth and prices remain high.  To worsen the 
situation, some speculators have bought property with bank 
loans, on which they have difficult even paying back the 
interest.  These people are called "jia gao wu shi" (high 
price, no possession).  Given the oversupply of housing, 
 
GUANGZHOU 00018102  002 OF 003 
 
 
real estate consultants predict that in the long-term, 
housing prices should fall in Guangdong.  When this drop 
happens, many of these land speculators could go bankrupt. 
A similar situation occurred in Guangdong Province after the 
1997-1998 Asian financial crisis.  Guangzhou today still has 
many unfinished apartment complexes and shopping centers 
that were never completed because a burst in the market 
bubble undermined construction cash flows. 
 
Government Response: National and Provincial 
-------------------------------------------- 
 
¶5.  (U) On May 17, in the likely wake of the rising prices, 
simmering public discontent and fears of a real estate 
bubble, Premier Wen Jiabao and the State Council unveiled 
six broad measures.  The six measures, which focus on the 
residential sector, include requirements that at least 70 
percent of all new apartments be of no more than 90 square 
meters, properties sold within five years of purchase will 
be subject to a capital gains tax, and developers finance 35 
percent of a project themselves and begin building within 
two years.  In addition, local authorities must disclose 
information on housing development. 
 
¶6.  (SBU) Guangzhou Prefecture has already begun seeking to 
implement some of State Council's measures.  On May 24, the 
Nanfang Daily reported on seven measures adopted by the 
Guangdong Housing Association to improve the housing 
situation.  The measures included increasing the supply of 
land for residential apartments and encouraging the 
construction of small (less than 100 square meters) 
apartments through the use of financial tools such as 
interest rates and taxes.  The major Guangdong Housing 
authorities (the Land and Resources Bureau, Housing 
Administration Bureau and the Housing Association) recently 
held a closed-door meeting with real estate companies and 
housing agencies.  They reportedly plan to issue new housing 
policies by the end of June.  On May 30, Guangdong 
Province's Department of Construction announced a 12 percent 
year-on-year increase in the amount of land available in the 
province for commercial development. 
 
Property Experts Show Little Concern 
------------------------------------ 
 
¶7.  (SBU) Violet Chen, a Guangdong property consultant for 
U.S. investors in China, said she is not greatly concerned 
about the policies.  Although the government is providing 
incentives for low-income housing development, Chen is not 
advising her clients to build such projects.  Medium to 
large-sized (50-100 employees) Chinese real estate firms, 
however, have fewer options.  Chen says they face three 
options:  either switch out of the residential sector; live 
with low profit margins; or layoff workers.  In the next 
three years she expects a big price drop, especially in 
residential apartments.  Chen says, when the South China 
market declines, "it drops hard."  Chen predicts a drop of 
between 20-40 percent.  In fact, on May 9, the Director 
General of the Guangdong Land and Resources Department 
affirmed that in three years the housing prices will 
certainly be more "rational". 
 
¶8.  (SBU) He Shihong, managing director of Evergreen 
consultants, a Guangzhou based real-estate consultancy firm 
with projects throughout China, was also not overly 
concerned about the laws.  Mr. He advises his clients to not 
change any investment plans immediately.  He described how a 
previous stamp tax law on property transactions was also 
supposed to change the market, but was never implemented. 
The current law does not state how long it will be 
implemented either. 
 
Avoiding the Law 
---------------- 
 
¶9.  (SBU) Both Chen and He described how investors could 
possibly avoid some of the new property laws.  For example, 
in terms of the capital gains taxes, Chen said "most people 
do not pay attention to the taxes."   Typically buyers 
prefer not to list property as high as they actually paid 
for it.  Some developers are hedging their bets, however, by 
buying before the deadline.  Evergreen consultants mentioned 
that many new property deals have come in the past few days 
 
GUANGZHOU 00018102  003 OF 003 
 
 
in order to avoid any new tax implications. 
 
Comment:  More Harm than Good? 
------------------------------ 
 
¶10.  (SBU) The new property measures are obviously a part of 
Hu Jintao's agenda for a "harmonious society".  Hu is 
concerned with the instability stemming from a large income 
gap between rich and poor and the inability for even middle- 
class Chinese to afford housing in coastal cities.  In a 
country with such rapid growth and limited investment 
channels, however, a rise in property prices is almost 
inevitable.  The question is whether property law reform is 
the proper tool to resolve the problem.  South China has 
already begun to slightly feel the effects of the new 
regulations.  Guangzhou's Land, Resources and Housing 
Management Bureau said the average cost of housing in the 
city fell 2.49 percent per square meter in May.  In 
Shenzhen, however, the price continues to rise.  Analysts 
believe that it is difficult to assume the drop in the 
Guangzhou price is solely related to the new measures. 
 
¶11.  (SBU) In general, real estate consultants are very 
critical of the efficacy of the new laws in the long term. 
Despite the efforts on the national level, the consultants 
believe better management is needed on the local level.  In 
terms of low-incoming housing, many developers do not want 
to take on such projects because the profits are so slim -- 
approximately three percent.  Many of the residents who are 
eligible to live in the housing are so poor they cannot make 
payments on time.  Even if low-incoming housing is 
developed, there will be long waiting times and 
inconsistencies in distribution.  Additionally, low-income 
measurements are based on "average social incomes".  This 
figure differs greatly between rural and urban areas. 
Finally, the plan to allow more transparency of projects 
could also backfire.  The measures essentially call for 
opening up city plans to the public.  This will mean 
developers can easily learn about location for future 
develop programs and buy up the land accordingly. 
 
DONG