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RR RUEHCN RUEHGH
DE RUEHGH #0292/01 1821059
ZNR UUUUU ZZH
R 011059Z JUL 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8095
INFO RUEHBJ/AMEMBASSY BEIJING 2926
RUEHCN/AMCONSUL CHENGDU 2097
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0554
RUEHHK/AMCONSUL HONG KONG 2265
RUEHML/AMEMBASSY MANILA 0081
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHUL/AMEMBASSY SEOUL 0492
RUEHGH/AMCONSUL SHANGHAI 8742
RUEHSH/AMCONSUL SHENYANG 2088
RUEHGP/AMEMBASSY SINGAPORE 0279
RUEHIN/AIT TAIPEI 1883
RUEHKO/AMEMBASSY TOKYO 0701

UNCLAS SECTION 01 OF 05 SHANGHAI 000292 
 
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, SHRIER 
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 EINV PGOV SOCI
SUBJECT: BEIJING LOOSENING RESTRICTIONS ON PROPERTY DEVELOPERS 
 
REF: SHANGHAI 291 (FIRST CABLE OF THIS 2-PART SERIES) 
 
¶1.  (SBU) Summary:  In recent weeks the Central Government has 
shifted from--in the words of one contact--"strangling" the 
property sector with regulatory restrictions to encouraging 
families to purchase homes.  While this is not the direct aid 
that many struggling property developers were hoping for, it has 
resparked household interest and led to experimentation in 
housing policies by local governments.  The Central Government's 
key theme has been affordable housing for low-income families. 
Others in power have used their bully pulpits to criticize 
housing costs that remain high, even after double-digit declines 
in some cities.  For now, most local governments are most 
interested in jumpstarting land sales growth and the off-budget 
revenue that generates.  End summary. 
 
¶2.  (SBU) This is the second of two cables on China's real 
estate sector in the first four months of 2009.  The cables are 
the result of collaboration across the China Mission, with input 
and clearances from Beijing, Chengdu, Guangzhou, and Shanghai. 
EconOffs in those posts spoke with contacts over a period of 
several weeks in March-May 2009.  This cable focuses on the 
Chinese government response to troubles in the real estate 
sector, and reftel focuses on real estate sector 
trends--especially among households--and the impact on property 
developers and banks. 
 
============================ 
Government shifting to support for the real estate sector . . . 
============================ 
 
¶3.  (SBU) Chinese official policy has helped to pull the real 
estate sector back from the brink over the past few months, 
according to our contacts, even though the assistance did not 
come in the form of an industry stimulus plan, as some real 
estate players had hoped.  According to official media accounts, 
the Central Government has focused on the long-term development 
of the real estate sector, rather than a short-term bailout.  In 
light of this, the bulk of the government's actions has not been 
in the form of direct aid, but rather in unwinding regulatory 
restrictions previously imposed.  As a Shanghai-based investment 
analyst put it, the Central Government's "strangling" of the 
property sector beginning in October 2007 was a mistake, since 
the sector makes up one-tenth of China's GDP.  Beginning in 
October 2008, said the contact, the government has allowed more 
regulatory breathing room. 
 
¶4.  (SBU) Measures undertaken by the Central Government include 
policies to encourage households to purchase and trade real 
estate, such as: 
- Reduction of the minimum down payment from 30 percent to 20 
percent for first-time homebuyers purchasing property of less 
than 90 sq. meters (implemented November 1, 2008). 
 - Reduction of the minimum mortgage interest rate to 0.7 times 
the benchmark mortgage rate (implemented November 1, 2008). 
 - Reduction of the property deed tax to 1 percent (implemented 
November 1, 2008). 
 - Temporary suspension of the stamp tax and the value-added tax 
on land sales (implemented November 1, 2008). 
 - Temporary suspension of business tax for individuals who sell 
"ordinary" housing they have held for two years or more, as 
opposed to the previous five-year threshold; reduction of this 
tax for sellers of "non-ordinary" housing (decision issued on 
December 20, 2008) . 
 
¶5.  (U) Other Central Government measures are targeted at 
reducing financing hurdles for property developers, including: 
 - Reduction of the minimum capital requirement for "ordinary" 
housing projects from 35 percent to 20 percent (announced May 
27, 2009). 
 - Possible consideration by the Ministry of Commerce of 
 
SHANGHAI 00000292  002 OF 005 
 
 
reducing barriers to foreign investment in real estate (cited in 
local media June 22, 2009). 
 
¶6.  (SBU) In addition, some of our contacts highlighted official 
statements made at the National People's Congress session in 
early March. A Shanghai real estate sector contact told EconOff 
the industry was encouraged by the unprecedented emphasis that 
Premier Wen Jiabao gave to real estate in his work report--an 
impressive "560 words," according to our contact--the statement 
that "we must adopt even more proactive and effective policy 
measures to stabilize market confidence and projections, 
stabilize real-estate investments, and promote a stable and 
orderly development of the real-estate sector." 
 
¶7.  (SBU) Comment:  The Central Government's relatively loose 
monetary policy in the first quarter is also affecting housing 
purchases.  Directly, it is providing banks with ample liquidity 
to fund mortgages--in some cases without taking time for proper 
credit checks (see reftel).  Indirectly, the government's 
monetary policy increases the public's inflation expectations, 
and some may be seeking real estate assets as a hedge.  End 
comment. 
 
============================ 
. . . and opening the door for local government initiatives . . . 
============================ 
 
¶8.  (SBU) The Central Government has also opened the door for 
local governments to issue their own policies in the name of 
"stabilizing" the real estate sector, according to a December 
17, 2008, statement by Premier Wen following a State Council 
meeting.  Local policies announced since include: 
 - In Guangdong, 15 measures, such as allowing developers to 
delay their land premium payments for up to two years on parcels 
contracted for in 2008. 
 - In Chongqing, offering tax breaks for housing purchases, 
permitting outsiders who buy homes in downtown areas to apply 
for an urban Chongqing hukou (right to residence), and reducing 
land costs for developers. 
 - In Chengdu, among measures similar to those cities, raising 
the ceiling on loans from RMB200,000 to RMB400,000 and extending 
mortgage repayment limits from 20 years to 30 years. 
 - In Shanghai, among similar measures, a program to create 
demand for new housing by accelerating demolition of aging 
housing.  Vacant apartments are being purchased by state-owned 
companies in Pudong to rent at subsidized rates to financial and 
high-tech professionals. 
 
============================ 
. . . but not too far 
============================ 
 
¶9.  (SBU) As local governments experiment with loosening the 
center's restrictive real estate policies, sometimes central 
authorities have pushed back.  For instance, the Shanghai-based 
investment analyst in early April reported that banks in none of 
the 40 cities his firm had contacted were enforcing the 
regulation that mortgages on second homes required a down 
payment of 40 percent.  By May, China Banking Regulatory 
Commission Chairman Liu Mingkang issued a warning to banks to 
comply, which our contact who oversees the Shanghai financial 
services sector praised as an improvement in risk control.  In 
another example, Chongqing in December attempted to implement an 
individual income tax deduction for mortgage payments, but the 
State Council signaled that the measure was not acceptable.  The 
Ministry of Housing and Urban-Rural Development later announced 
that tax and fiscal policies to support real estate first had to 
be cleared with the center. 
 
¶10.  (SBU) Another measure that local governments across China 
 
SHANGHAI 00000292  003 OF 005 
 
 
have taken--so far without pushback from the center--is to 
quietly stop requiring builders to begin development of land 
within one year of purchase.  According to a Beijing-based real 
estate expert, the government is not putting a completion date 
on projects, so even if construction does begin within one year, 
the developer can postpone completion indefinitely.  A Guangzhou 
real estate consultant told EconOff that the one-year 
requirement has not been formally lifted, but companies are free 
to apply for an extension.  A Guangzhou-based executive with one 
of China's largest real estate companies noted that a property 
is considered as being developed as soon as plans are submitted 
to the government, which can still be some time prior to the 
start of construction on a particular site.  Another Guangzhou 
real estate executive was even more dismissive of this policy, 
"This is China," he said, "There are always ways."  He went on 
to say that while the rule may be an issue for some foreign 
companies, local companies who maintained good relations with 
the government seldom have problems.  In Chongqing, a real 
estate agent said that he knows of no actual application of the 
land development deadline rules, noting that local government 
does not want to "offend" developers. 
 
============================ 
Emphasizing affordable housing . . . 
============================ 
 
¶11.  (SBU) Several of our contacts in the real estate industry 
said that neither the central nor the local measures would offer 
much direct support to developers, since the emphasis is on 
affordable housing for low-income families.  Developers had been 
hoping for a stimulus to support their bigger projects focused 
on the luxury market.  A Beijing-based industry expert at the 
law firm Jones Day told EconOffs that some of the big developers 
believe the government is "forcing" them into the low-cost 
housing market, and they are opposed to entering a market with 
such a low profit margin.  According to another Beijing-based 
source, some Chinese development companies are willingly 
entering the low-cost housing market to build goodwill with the 
government in order to pave the way for more profitable projects 
in the future.  The principal investor in a South China real 
estate group told EconOff that real estate developers are not 
enthusiastic about Guangzhou's measures, which set limits on the 
maximum size of houses and the percentage of houses that must be 
for the mid and low-income market. 
 
¶12.  (SBU) In Shanghai, a local Urban-Rural Construction and 
Transportation Committee official told EconOff that Shanghai 
Party Secretary Yu Zhengsheng had publicly declared housing 
prices should not go higher, and that the industry should focus 
on affordable housing.  Shanghai has announced a plan to build 
20 million sq. meters of affordable housing:  in 2008, work 
began on 4 million sq. meters, and in 2009 another 4 million 
will be started.  In addition, Shanghai will launch a new tier 
of "affordable commodity housing," which will reach households 
that are too wealthy for traditional affordable housing but 
cannot afford market-rate housing. 
 
¶13.  (SBU) Other contacts criticized the various local measures 
as lacking specific details.  Our Chongqing real estate contact 
said he "doesn't yet see how it will work," for although an 
operational deadline of December 2009 is set for several of the 
specific tax breaks and other measures to encourage housing 
purchases, other goals and measures have no specific 
implementation dates.  (Comment:  The speed of implementation 
for the real estate measures appears much slower than for those 
of other industries, such as tax breaks for automobile 
purchases.  End comment.) 
 
============================ 
. . . while talking down housing prices 
 
SHANGHAI 00000292  004 OF 005 
 
 
============================ 
 
¶14.  (SBU) A contact at the China Academy of Social Sciences 
(CASS) voiced a theme common among government officials that 
housing prices remain too high.  Our contact there said it is 
difficult to forecast housing prices for 2009, but he predicted 
that prices might fall 40 percent to 50 percent throughout China 
over the next two years.  The CASS scholar pointed out that 
China has large amounts of empty floor space in urban areas 
which will take a long time to consume.  In addition, he said 
that the income level and income growth of urban residents do 
not support housing price increases.  The housing price to 
income ratio was 8:9 in China at the end of 2008, which is much 
higher than the reasonable international standard of 3:5.  In 
Beijing, people cannot afford to buy homes even with housing 
mortgages from the banks, and they are waiting for prices to 
fall.  His final explanation of further price decreases was a 
simple one--housing prices are dictated by land prices in China, 
and land prices depend on rent prices. When economic growth 
slows, rents decrease, thus causing a decrease in housing 
prices. 
 
============================ 
Local governments eager to start selling land again 
============================ 
 
¶15.  (SBU) While the slowdown in the China real estate market 
was orchestrated by central authorities, one of the biggest 
impacts was on local governments, which saw a sharp downturn in 
their revenues from land sales.  According to E-House data, land 
sales throughout China fell 29 percent growth in the first four 
months of 2009, year over year, compared with 30 percent growth 
in the first three months of 2008.  From 101 million sq. meters 
of land sold in the first four months of 2008, the same period 
this year saw only 73 million sq. meters sold.  In this 
environment, most localities have begun withholding land from 
the market, hoping for prices to rise again. 
 
¶16.  (SBU) Our contacts indicate that local governments may be 
finding a shortcut to higher land sales prices.  According to a 
senior contact at E-House, media reports of bidding wars over 
land parcels began to reemerge in April; however, several of the 
largest transactions actually appeared to be local state-owned 
enterprises that could have been directed to make the purchases. 
 For instance, in Tianjin April's most expensive land parcel was 
sold to the Tianjin Songjiang City Construction Company, in 
Shenzhen the most expensive parcel went to Shenzhen City Shangmo 
Development Corporation, and in Hangzhou the most expensive 
parcel went to Hangzhou Shangcheng District Investment Company. 
 
¶17.  (SBU) Fewer land sales have meant lower local revenues. 
For instance, the Chengdu Development and Reform Commission 
reports sales down 80 percent in first quarter of 2009 compared 
with the same period in 2008.  The general manager of a large 
local property developer in Chengdu further confirmed to EconOff 
that 2009 tax revenues will be down.  Chongqing faces a similar 
situation, according to a real estate agent contact.  The 
municipal government has relied heavily on land sales to fund 
the demands of infrastructure construction, but with the drop 
off in demand--19,000 sq mu sold in 2006, 16,000 sq mu in 2007, 
and only 5,000 sq. mu in 2008--Chongqing is turning to new ways 
to mitigate the impact on revenues, including bond sales. 
(Note:  One mu = 0.16 acres.  End note.) 
 
============================ 
Comment 
============================ 
 
¶18.  (SBU) Chinese leaders are torn between two opposing 
interests that are intertwined with the real estate sector.  On 
 
SHANGHAI 00000292  005 OF 005 
 
 
the one hand, real estate is one of the key domestic sectors for 
generating internal investment and consumption--especially 
important for combating the effects of slowing growth of demand 
abroad.  In light of this, some could argue a strong real estate 
stimulus package is needed.  On the other hand, the return to 
labor from the high economic growth of recent years has been 
lower than the return to capital, leaving workers with incomes 
that have fallen behind the increases in housing costs.  This 
has led some to argue against supporting property developers, 
since that would only be putting more profits in their hands. 
 
¶19.  (SBU) For now, Beijing appears to have decided to offer the 
bulk of policy support to households, through homebuyer 
incentives, while pushing property developers to contribute by 
keeping price increases to a minimum and supplying a greater 
percentage of affordable housing.  However, the center's 
unleashing of the real estate sector has the danger of signaling 
to local governments that the punch bowl snatched away in 
October 2007 is now back on the table.  Inflation will be 
worsened once expectations of a new housing boom trigger a surge 
in real estate investment--which has still not happened (see 
reftel)--since this would help drive up the international prices 
of upstream commodities such as steel.  Households already are 
purchasing residences in part as a hedge against inflation, so 
the inflation spiral could be self-sustaining. 
CAMP