VZCZCXRO8932
RR RUEHCN RUEHGH
DE RUEHGH #0105/01 0631028
ZNR UUUUU ZZH
R 041028Z MAR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7698
INFO RUEHBJ/AMEMBASSY BEIJING 2572
RUEHCN/AMCONSUL CHENGDU 1794
RUEHGZ/AMCONSUL GUANGZHOU 0250
RUEHHK/AMCONSUL HONG KONG 1961
RUEHUL/AMEMBASSY SEOUL 0392
RUEHGH/AMCONSUL SHANGHAI 8332
RUEHSH/AMCONSUL SHENYANG 1785
RUEHIN/AIT TAIPEI 1582
RUEHKO/AMEMBASSY TOKYO 0567
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 SHANGHAI 000105 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, DAS DAVIES 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
STATE PASS CFTC FOR OIA/GORLICK 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN PGOV
SUBJECT: (SBU) YANGTZE RIVER DELTA PROPERTY DEVELOPERS FEELING THE 
DOWNTURN 
 
REF: A. A. Shanghai 078 
     ¶B. B. 08 Shanghai 558 
 
¶1.  (SBU) Summary.  Prospective home buyers in the Yangtze River 
Delta are holding off on home purchases for now, preferring to 
wait on the sidelines in anticipation that home prices will 
continue to fall, according to a wide range of Consulate 
contacts Econoff spoke with in recent weeks.  Banks, sensing 
developers' increasingly fragile finances, are becoming more 
cautious about lending to the real estate sector.  Nonetheless, 
developers, buoyed by hopes that the market will quickly 
rebound, are loath to lower their prices, and instead are taking 
ad hoc cost-cutting measures.  Ultimately, property developers 
assume that local governments will provide support for the 
sector if the crunch becomes too severe.   End summary. 
 
¶2.  (U) This is a third in a series of reports on the real 
estate market in East China. 
 
============================ 
Real Estate Demand Slumping Across the Yangtze River Delta 
============================ 
 
¶3.  (SBU) Prospective home buyers in the Yangtze River Delta are 
holding off on home purchases for now, preferring to wait on the 
sidelines in anticipation that home prices will continue to 
fall.  Lin Fu, Chairman of the Board, Bank of Nanjing, said on 
January 21 that consumers have trained themselves to "make 
purchases when prices are rising, not when they are falling" 
(mai3zhang3 bu4mai3 die1).  Real estate trading volume hit a low 
in October, according to the contacts, as confirmed by 
transaction data collected by Soufun and available through CEIC. 
 Shanghai, for instance, peaked at above 3 million square meters 
of property sold in September 2007, but registered less than 1 
million in October 2008; Hangzhou (downtown) peaked at almost 
700,000 square meters in June 2007, and reached only 150,000 
square meters in October 2008. 
 
¶4.  (SBU) The shortfall in demand, in theory, should be leading 
to price declines that bring the market back into equilibrium. 
However, developers, buoyed by hopes that the market will 
quickly rebound, are loath to lower their prices, according to 
our interlocutors.  In addition, contacts say that developers 
are being warned by local governments not to cut selling prices, 
since this can lead to discontent among recent buyers who paid 
the higher price (ref. B).  Therefore, indexes of nominal prices 
show only marginal housing price declines:  Soufun.com's China 
Real Estate Index (ref. A) shows drops of only 1 to 3 percent in 
recent months for major cities in the Shanghai consular 
district. 
 
============================ 
Falling Land Prices are Impacting Government Revenues 
============================ 
 
¶5.  (SBU) Land prices, on the other hand, have been impacted. 
For instance, Nanjing was planning to sell 9 million square 
meters of land in 2008, but in the end property developers 
bought 5 million, said Chen Xinghai, who is chairwoman of Xixia 
Construction Company, one of Nanjing's top three property 
developers, and who also leads the local property developers' 
association.  According to figures from Centaline, one of 
China's leading mid-tier property agencies, the auction failure 
rate in 2008 reached 30 percent in Shanghai, 50 percent in 
Hangzhou, and 60 percent in Nanjing.  (Note: The Nanjing figure 
varies from that provided by Xixia's Chen.  End note.)  For 
instance, land prices in Shanghai have fallen from over RMB3,000 
per square meter at their peak in 2004, to under RMB2,000 per 
square meter in 2008, according to figures compiled by Centaline 
and DBS Vickers. 
 
¶6.  (SBU) The slow down in land sales--and to a lesser extent, 
the slowdown in transaction taxes on real estate--will lead to 
 
SHANGHAI 00000105  002 OF 004 
 
 
lower government revenues, our interlocutors said.  Xixia's Chen 
said that Nanjing obtained off-budget revenues of RMB10 billion 
(approximately US$ 1.5 billion) from land sales in 2008; the 
corporate banking chief of Bank of China, Jiangsu Branch, said 
this represents a fall 20 percent from the 2007 level.  In 
addition, on-budget taxes from real estate amounted to 30 
percent to 40 percent of Nanjing's fiscal income, said Chen.  In 
Ningbo, much of local government income comes from land sales, 
claimed Soufun Ningbo General Manager You Yangbin and Ningbo 
Haipu Real Estate Agency General Manager Wang Xiaoyun. 
 
============================ 
Real Estate Financing Sources are Getting Scarcer 
============================ 
 
¶8.  (SBU) Some property developers may start to experience 
liquidity problems as banks and other finance sources become 
less generous, while revenue inflows from purchases stall. 
Xixia's Chen said that banks are only willing to lend to the top 
100 enterprises now, and since Xixia is the third-largest 
property developer in Nanjing, it faces fewer problems.  An 
associate director of Prax Capital, a Shanghai-based private 
equity firm with a real estate fund, said that small developers 
seem to have fewer troubles, as they have less capital needs and 
can rely on local governments. However, said our interlocutor, 
medium-size developers may have greater difficulties funding 
themselves as the industry moves toward consolidation; among the 
large property developers, those who were not able to list 
before the stock market downturn now will be unable to raise 
equity, and therefore have the most fragile finances. 
 
¶9. (SBU) A project director of Centaline Ningbo said that in the 
Ningbo market, local property developers work together to 
overcome liquidity problems.  If one is short capital, the 
others will extend the needed financing.  However, this network 
is not open to the national property developers that have 
entered the Ningbo market, said Zhang, such as Greentown.  He 
laughed when recalling how these national operators were 
sometimes frozen out of the market, as when a company 
representative from nationally known Vanke once asked how a 
local property developer was selling many units in one building, 
while buyers passed over Vanke's building next door. 
 
¶10.  (SBU) A Nanjing bank typifies the wariness that emerges in 
conversations with East China bankers about the real estate 
sector.  Sheng Hong, Assistant Executive President, Nanjing 
Branch, China Everbright Bank, described how three years ago 
Everbright's head office in Beijing had instructed all branches 
that home mortgages were to be treated cautiously, with mortgage 
lending going forward only after approval from Beijing.  Of 
particular concern, said Sheng, are "fake mortgages" (xu1jia3 
dai4kuan3) in which the property developer will get friends and 
relatives to take out mortgages on units in the developer's 
projects so the developer can use the revenue as operating 
capital, with the developer promising to repay the fake 
mortgages once sales to actual purchasers begins.  In addition, 
Everbright has an internal rule that banks must move to 
foreclose on developers who have not sold completed apartments 
within four months. 
 
============================ 
Property Developers Affected by Land Bank, Corporate Structure 
============================ 
 
¶11.  (SBU) A key variable for property developers' ability to 
wait out current market conditions is when they purchased the 
land they are building on.  As Nanjing urban studies professor 
Zhang Hongyan explained, real estate prices may be lower than 
their peak, but they are still higher than the cost of land and 
materials, since housing costs have risen so rapidly in recent 
years, so property developers are not necessarily directly 
impacted.  However, as the Centaline Ningbo's project manager 
 
SHANGHAI 00000105  003 OF 004 
 
 
explains, projects on land purchased in Ningbo in the early 
2000's will remain profitable, but those built on land purchased 
when land prices peaked in 2007 will have difficulties.  Ni 
Biao, real estate company office manager of Youngor, one of 
Ningbo's leading property developers, confirmed this, saying 
that a only a 10 percent drop in property prices would 
substantially impact projects on land purchased in the past 
three years, while projects on land purchased before that could 
absorb a 20 percent drop in property prices. 
 
¶12.  (SBU) A company like Youngor may face other difficulties 
raised by its corporate structure.  Pressure to maintain 
companies' property sales prices, and therefore the 
profitability of the real estate unit, are higher as the slowing 
internal and external markets hits the companies' core apparel 
business, implied Youngor's Ni.  Real estate typically makes up 
40 percent of the profits for the Youngor Group, said Ni, but in 
2008 Youngor met only around 70 percent of its sales targets. 
 
============================ 
Local Governments Assumed to Offer Bail Outs 
============================ 
 
¶13.  (SBU) Contacts in the real estate industry were unanimous 
in assuming that the local governments would provide support for 
the sector if the crunch on property developers becomes too 
severe.  "The authorities won't wait for the real estate 
industry to die," Xixia's Chen bluntly stated.  Youngor's Ni 
said that the government would step in because of the industry's 
leading role in sustaining a variety of upstream and downstream 
sectors.  Ni commented that Hangzhou in December 2008 already 
launched a "large-scale rescue" of the local real estate sector, 
since the property investment bubble and subsequent downturn 
were more severe there than in Ningbo. 
 
¶14.  (SBU) Governments could offer supports in a variety of 
ways, said our interlocutors.  Banks will be encouraged to roll 
over loans, agreed Youngor's Ni and Zhan Rongsheng, a top 
researcher with the Ningbo Development and Reform Commission--Ni 
said that the government would want to forestall social 
instability that could originate in a real estate collapse.  The 
Bank of China manager said that his bank already was 
anticipating rolling over much of the 30 percent of their 
lending book that is in the real estate sector.  The local 
government will also offer flexibility on the deadline by which 
property developers have to begin construction on land they have 
purchased, said Ni and Ningbo Centaline's project manager. 
Xixia's Chen cited the high-speed rail network planned to link 
Nanjing, Hangzhou, and Shanghai as potentially supporting 
commuters who wish to buy homes in Suzhou and work in Shanghai. 
 
¶15.  (SBU) Interlocutors stated that a drop of 30 percent 
overall in the real estate market would trigger a government 
bailout in a given locality.  Yang Xiaoping, Director of the 
China Banking Regulatory Commission (CBRC), Zhejiang Office, 
told Econoff that since most buyers put 30 percent down on their 
mortgages, banks could sustain a drop in market value of that 
scale;  Sheng Cheng, vice director of the China Real Estate 
Index System, based in Shanghai, independently suggested a 
similar scenario.  However, the view was not unanimous:  the 
Bank of China manager said that Nanjing performed a stress test 
this past fall at the behest of the CBRC head office, and that 
only two or three banks would be significantly impacted by a 30 
percent fall in the local real estate market. 
 
============================ 
Property Developers Experimenting with Stop Gaps 
============================ 
 
¶16.  (SBU) Property developers are taking other steps to 
increase sales or hoard cash during the downturn, said our 
contacts.  Vanke, for instance, was willing in early in 2008 to 
 
SHANGHAI 00000105  004 OF 004 
 
 
begin cutting prices on unsold units in its developments, 
despite the wrath of previous customers (ref. B).  Youngor's Ni 
said that the company may reduce prices by 10 percent.  In 
addition, Vanke and Youngor--the latter having properties in 
relatively large second-tier cities such as Suzhou and Hangzhou, 
as well as third-tier cities such as Zhejiang's Taizhou and 
Shaoxing--are cutting the quality of fixtures and adding in 
extras such as garages or storage space to make price cuts less 
transparent, said Ningbo Centaline's project manager and Soufun 
Ningbo's You. 
 
¶17.  (SBU) Property developers are also delaying projects. 
Youngor is putting off 100,000 square meters of construction 
originally planned for 2009, amounting to one-third of its 2008 
construction, said Ni.  Xixia's Chen said that her company was 
dropping half of its planned construction this year, and that 
Vanke was decreasing its rate of units constructed by 30 
percent. 
 
============================ 
Comment 
============================ 
 
¶18.  (SBU) Property developers in East China are concerned 
Beijing is signaling that the real estate market should fall 
further to make housing more affordable.  One example our 
interlocutors cite is the Chinese Academy of Social Sciences 
Blue Book on the China economy, released in December 2008, which 
said that real estate prices would continue to fall.  A second 
is the rejection of the property sector as one of the ten 
sectors given national support plans by the State Council, a 
decision made final in the last week of February 2009. 
However, in East China these suggestions are falling on deaf 
ears.  Property developers are generally confident they can gain 
the support of local governments should the downturn continue. 
Given the impact of the sector on local finances, the developers 
will have a solid opportunity to make their case. 
CAMP