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DE RUEHSH #0016/01 0250330
ZNY CCCCC ZZH
P 250330Z JAN 08
FM AMCONSUL SHENYANG
TO RUEHC/SECSTATE WASHDC PRIORITY 8341
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY 0222
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY 0793
RHEHAAA/NSC WASHDC PRIORITY

C O N F I D E N T I A L SHENYANG 000016 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 01/25/2018 
TAGS: ECON EFIN ETRD ELAB PGOV CH
SUBJECT: CASH FINANCING MAINTAINS HOUSING BOOM IN NORTHEAST 
CHINA 
 
Classified By: Consul General Stephen Wickman reasons 1.4 (b and d). 
 
¶1. (U)  Summary.  Similar to the early days of the boom in 
other parts of China, housing developers in Northeast China 
raise cash  chiefly through high-return, advance purchase 
agreements  without recourse to the banking system and are 
thus immune from tighter credit controls.  The current glut 
of cash, moreover, coupled with recent instability in equity 
markets, seems to be driving this type of investment to even 
higher levels, with no real end in sight.  In this relatively 
land rich area, housing developments  are quickly consuming 
what was previously agricultural land, and sometimes in 
direct violation of local regulations.   Prices continue to 
rise, especially in Dalian and Shenyang, while trends in the 
U.S. market are prompting growing numbers of U.S.-resident 
Chinese to invest here as well.  End Summary. 
 
Advanced Sales Built on High Expected Rates of Return 
--------------------------------------------- -------- 
 
¶2. (U)  The headlines in Shenyang this week trumpeted the 
first slowdown in housing price increases (6.1 percent 
year-on-year) in five years, but developers tell us the 
market is still hot.  Housing developers throughout Northeast 
China, moreover, say they have little, if any, problem in 
financing new  projects despite efforts to restrict lending 
elsewhere in the country.  Neither rising interest rates nor 
higher liquidity requirements placed on lending institutions 
have much impact since most developers do not require  bank 
loans.  While some developers may use  loans to finance 
initial start-up costs (e.g., land purchase, permitting, 
design) most form syndicates to finance even the initial 
outlays.  The planned units are sold well prior to the start 
of construction, frequently with an agreement that the 
developer will repurchase the unit on completion at a 
prearranged price.  The initial &sale8 is generally priced 
at slightly more than half of the current market average, per 
square meter, making residential real estate largely a cash 
market with high, built-in expected rates of return.  Local 
experts report that less than forty percent of residential 
real estate in the region is encumbered by any type of a 
mortgage. 
 
¶3. (U)  According to Liu Jun, General Manager of Hongda 
Development, ninety percent of residential developments 
self-finance via advanced sales.  He said the current 
turbulence in global finance and equity markets is actually 
making things easier, noting that as people become more 
frightened of equity markets, housing becomes a more 
attractive alternative.  For example, Mr. Liu told Econoff, 
that he did not yet have any drawings for one planned 
development that is already thirty-percent sold.  Mr. Liu 
explained there was no need for even an artist's conception 
when selling at what buyers perceived to be &below-market8 
prices. 
 
¶4. (C)   Developers in the Northeast, Mr. Liu went on to say, 
are politically well-connected and able to negotiate the 
permit process smoothly, despite recently announced central 
government restrictions to curb the destruction of farmland 
and impose even tighter environmental controls.  According to 
Liu, the central government's desire to develop the Northeast 
trumps such environmental concerns.  And where local 
officials resist, Liu said, an appropriate "gratuity" 
invariably solve the problem. 
 
Booms in Shenyang, Dalian, Harbin and Beyond 
-------------------------------------------- 
 
¶5. (SBU)  Our contacts report that residential sales in 
Shenyang's Hunnan zone, just south of the city, remain brisk, 
and the average price per square meter within the zone has 
risen to nearly RMB 7000(USD ????), about 75 percent higher 
than the overall city average.  Most projects have completely 
sold out the units scheduled for completion over the next two 
years.  The sell-back price for the completed units nets 
nearly a forty percent annualized return on investment to the 
original purchasers.  Foreign investors, especially from 
South Korea, are very active in the market.  Our contacts in 
Harbin, the capital of Heilongjiang Province, prices are 
lower, but the overall pattern is the same as in Shenyang, 
with Russian investors leading the way. 
 
¶6. (U)  Huaxin Development Company, a Singapore-based 
developer having major interests in Shenyang, expects booming 
sales and rentals due to huge jumps in projected employment, 
especially in Shenyang's southern areas.  Foxconn's projected 
employment of 50,000 people at its new plant, GE's continued 
expansion, and the coming move of commercial aircraft 
 
 
production south of the river are fueling market optimism. 
Huaxin, in a joint venture with Oakwood, plans to construct a 
new service-apartment development complex in the area, right 
down the street from a similar home-grown complex, part of a 
chain that has been mushrooming in second-tier cities all 
over China.  Sujiatun district, also to the south and near 
the current international school, is seeing robust growth as 
construction of a new, high-speed road accessing Shenyang's 
airport and aviation zone, moves rapidly forward. 
Lufthansa's recent start of direct flights to Shenyang is 
adding to enthusiasm about areas near the airport. 
 
¶7. (U)  Roughly four hours south of Shenyang by car, 
Dalian,s longer-running boom has spread up the peninsula to 
the Dalian Development Zone and Changxing Island, two of 
former Liaoning Party Secretary and new Politburo Standing 
Committee Member Li Keqiang,s five &points8 for 
development.  Prices in Dalian are the highest overall for 
Northeast China, with the average price per square meter 
nearing RMB 10,000.  Changxing Island values jumped to an 
average of RMB 3000, an increase of RMB 1200 over prices just 
six months ago. 
 
8.(U)  Changxing Island, which until one year ago was totally 
agricultural, is developing especially rapidly.  Both wind 
and nuclear power stations are being installed, and the newly 
constructed Changxing Harbor has begun operation.  South 
Korea's STS Shipbuilding has its new plant in operation and 
will float its first vessel from the facility in late 2008. 
The local government put up the initial money for residential 
developers in order to provide housing for displaced farmers, 
but many are opting to sell their new homes and seek 
opportunity in Dalian proper. 
 
¶9. (U)  Another interesting trend is a jump in investments by 
overseas Chinese, especially those from the United States. 
Since the U.S. market has soured, many U.S.-resident Chinese 
are opting to move their money into the Northeast China real 
estate market.  One investor, for example, told us that 
rising real estate prices, coupled with the renminbi's 
appreciation against the dollar, make China real estate an 
ideal target.  She went on to say that, because she is still 
a Chinese citizen, she is not troubled by Chinese currency 
regulations designed to keep foreign investors from 
"flipping" houses to make a quick profit.  Confiding that it 
is easier and cheaper to convert dollars to renminbi through 
the black market than  a bank, she  claimed to have brought 
in the purchase price for her investment property (about USD 
40,000) in her handbag. 
 
Comment:  No Bubble or Protests...Yet. 
-------------------------------------- 
 
¶10. (C)  Although the picture in the market for hotel and 
office space is less clear, residential real estate in 
Northeast China seems to be a boom market that is impervious 
to monetary controls and, so far at least, is avoiding a 
bubble.  Investors in the housing market have plenty of cash 
) much of it from outside the region - to bid up prices and 
spur construction.  With the region,s relatively low 
population density and rapid job growth, the trend should 
continue for the near term, possibly fueling corruption and 
conflict with ousted residents or marginalized farmers.  To 
date, however, the only visible signs of the conflicts are in 
the form of graffiti scrawled on walls slated for demolition. 
 Most farmers and urban residents appear to be satisfied with 
their compensation for moving and their new homes, although 
they grumble about the even higher profits of the developers 
and officials, whom they assume to be in league and corrupt. 
 
WICKMAN