VZCZCXRO7562
RR RUEHCN RUEHGH
DE RUEHGH #0469/01 3381104
ZNR UUUUU ZZH
R 041104Z DEC 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8397
INFO RUEHBJ/AMEMBASSY BEIJING 3178
RUEHCN/AMCONSUL CHENGDU 2288
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0745
RUEHHK/AMCONSUL HONG KONG 2456
RUEHLO/AMEMBASSY LONDON 0047
RUEHML/AMEMBASSY MANILA 0132
RUEHPS/USMISSION OEDC PARIS FR
RUEHFR/AMEMBASSY PARIS 0021
RUEHUL/AMEMBASSY SEOUL 0607
RUEHSH/AMCONSUL SHENYANG 2279
RUEHIN/AIT TAIPEI 2078
RUEHKO/AMEMBASSY TOKYO 0818
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 9060

UNCLAS SECTION 01 OF 04 SHANGHAI 000469 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
PARIS FOR US/OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: REAL ESTATE TALES FROM A SECOND-TIER CITY: NANJING HOUSING 
BOOM SUPPORTS LOCAL ECONOMY 
 
REF: A. A. Shanghai 444 
     ¶B. B. Shanghai 451 
 
¶1.  (SBU) Summary:  Real estate sales are booming in Jiangsu -- 
as they are in neighboring provinces -- and have become a key 
component of economic growth following the introduction of real 
estate stimulus measures in December 2008.  However, our 
contacts say that the stimulus measures will be difficult for 
the Central Government to calibrate in order to avoid 
overheating in the sector.  Contacts also raised concerns that 
local governments are overly dependent on real estate for 
growth, and are not prioritizing the housing needs of low-income 
households.  End Summary. 
 
========== 
Background 
========== 
 
¶2.  (SBU) EconOff traveled to Nanjing, the capital of Jiangsu 
Province, October 22-23 and November 24-25 to meet with local 
academics, government researchers, and businesspersons to gauge 
local economic conditions.  The contacts presented a picture of 
province-wide economic growth (ref A), while also raising 
serious concerns about the accuracy and consistency of Jiangsu's 
economic data (ref B).  This cable covers Jiangsu's property 
sector, with a particular focus on Nanjing -- which better 
exemplifies the broader trends in East China than Shanghai, 
which has substantially greater exposure to the international 
market. 
 
============================ 
Housing Sales Booming . . . 
============================ 
 
¶3.  (SBU) According to the National Bureau of Statistics, the 
total value of real estate sold in Jiangsu was up 109 percent 
for the year through October, compared with the same period in 
2008, and the value of residential housing sales alone was up 
over 116 percent.  Higher demand is leading to higher prices, 
with the Ministry of Housing and Urban-Rural Development survey 
showing accelerating increases for Jiangsu since December 2008 
-- when the Central Government announced a package of housing 
purchase incentives -- reaching a province-wide average price 
increase of nearly 20 percent year-to-date in October, the most 
recent data available.  The Central Government's real estate 
incentives included greater leniency for second home purchases, 
higher mortgage underwriting by banks, and adjustment of land 
prices by local governments. 
 
 
 
============================================= ======= 
. . . Leading to Concerns the Sector is Overheating 
 
============================================= ======= 
 
¶4.  (SBU) Chen admitted that real estate incentives are a crude 
tool, and that it will be difficult for the Central Government 
to calibrate them to avoid overheating in the sector.  She used 
a body temperature analogy to illustrate:  The sector suddenly 
jumped to a fever level of 39-40 degrees Celsius this past 
spring, Chen said, and she hopes that it will moderate to a more 
normal 37-38 degrees in 2010. 
 
 
 
 
SHANGHAI 00000469  002 OF 004 
 
 
¶5.  (SBU) Chen and Luo Hao, Research Manager of Nanjing 
Centaline Property Consultants, both commented that the Central 
Government will probably be reluctant to hit the property market 
with policy restrictions because of the sector's importance to 
economic growth.  According to Chen Xinghan, chair of the board 
of Nanjing-based property firm Chixia Development and president 
of the Jiangsu Real Estate Association, real estate accounts for 
over 50 percent of final domestic demand nation-wide, making the 
sector, together with government-led infrastructure investment, 
one of China's key economic growth drivers (ref. A).  Moreover, 
Chen commented that there are different economic conditions in 
each of China's provinces, making it problematic for the 
government to try to implement one-size-fits-all policies to 
curtail real estate sector growth. 
 
 
 
¶6.  (SBU) Evidence of overheating in real estate can be seen in 
the widespread mania among firms to profit in the sector.  Luo 
said that Central Government-controlled state-owned enterprises 
(SOEs) and large stock-market-listed companies in Nanjing have 
become the main purchasers of land, speculating as the market 
rises.  (Note:  Most of the record new lending in 2009 has 
flowed to large SOEs, giving them ample liquidity to play the 
real estate market.  End note.)  Chen said that even smaller 
firms without access to extensive bank credit are jumping into 
the market by purchasing finished residences to hold as 
investments. 
 
 
 
¶7.  (SBU) Despite agreement that the authorities will not crack 
down hard on the real estate sector, Chen and Luo disagreed on 
whether last December's real estate stimulus measures would be 
prolonged past their sunset clause this December.  Chen predicts 
that the measures will be phased out on schedule, and that 
restrictions on purchases of second homes will be tightened. 
Luo believes the incentives will be extended, or similar ones 
will be adopted in their place.  As described in ref A, Chen 
believes that in the medium-term, the government will have to 
trim back its reliance on the real estate sector for growth. 
 
 
 
========================================= 
Land is Key to Local Government Finances 
 
========================================= 
 
 
 
¶8.  (SBU) Local officials' control over land is key to local 
finances and economic growth, agree our Nanjing contacts.  The 
local bank lending that supported the binge in infrastructure 
spending this past year rests largely on collateralizing local 
land reserves, say officials in the Jiangsu Development and 
Reform Commission, the Jiangsu Audit Department, and the Jiangsu 
Finance Department.  (Note:  The contacts said that local 
governments looking for loans from local banks also promise fee 
income from the projects, such as road tolls, or -- with the 
approval of the local People's Congress -- promise to set aside 
future tax revenue streams.  End note.)  Land sales brought 
almost RMB33 billion (US$4.8 billion) into local Jiangsu 
government coffers in 2008, according to National Bureau of 
Statistics data, equivalent to 12 percent of total provincial 
 
SHANGHAI 00000469  003 OF 004 
 
 
revenue for the year. 
 
 
 
¶9.  (SBU) Local governments manage the supply of land offered to 
developers as a lever over the local real estate market.  The 
Nanjing Municipal Government, for instance, began expanding the 
supply of land available for development in the second half of 
2009 to encourage property firms to put more housing on the 
market, and thereby help contain price increases, said Luo. 
(Note: Prior to this, local governments were less willing to 
auction off land because real estate developers -- as they 
slowed the pace of their projects in the face of plummeting 
demand -- were already sitting on large land banks and were 
attempting to bid down land prices.  End note.)  Chen, echoing 
this theme, cautioned that it would be a mistake to think that 
the laws of supply and demand hold in China, because the 
government will intervene through land sales and other policies 
to manage the sector. 
 
 
 
===================================== 
Low-Income Housing is Not a Priority 
 
===================================== 
 
 
 
¶10.  (SBU) Nanjing is not meeting its goals for providing homes 
to low-income families, said Luo, and projects that are under 
development are being built in out-of-the-way suburbs.  In the 
end, the government sees low-income housing as a waste of 
resources, said Luo, and is purposely slowing construction 
progress.  The municipality has capped profit margins for 
developers of the projects, discouraging them from 
participation.  Eligible residents are also wary of living in 
areas requiring a long commute and having few services, said Luo. 
 
 
 
========================================= 
Property Tax Not Likely in Coming Months 
 
========================================= 
 
¶10.  (SBU) Our interlocutors doubted that a property tax would 
be implemented in the short term.  (Note:  China currently does 
not impose property tax on homeowners during the period they 
hold the property, although taxes may apply at the time of sale 
and purchase.  A State Administration of Taxation official in 
February 2008 denied rumors that a property tax would be 
implemented in 2009, but Chinese media has recently reported 
renewed discussion among officials on the subject.  End note.) 
Chen and Luo agreed that the National People's Congress is 
unlikely to pass legislation imposing a property tax in the 
coming two years, given pressure from real estate interests 
against it.  Luo added that the tax would be very difficult to 
collect, in any case, as homeowners could easily evade it by 
manipulating property assessments or other factors. 
 
 
 
======= 
Comment 
 
SHANGHAI 00000469  004 OF 004 
 
 
 
======= 
 
¶11.  (SBU) The tight relationship between local governments and 
local property firms stimulates the economy in the short term, 
but also is leading to a run up in housing prices that the 
public perceives as unfairly benefiting the officials and 
developers.  This discontent is reflected in the now-banned TV 
drama series Snail House (Wo Ju, which also has the English name 
Dwelling Narrowness), in which "house slaves" struggle to pay 
surging mortgage costs.  Our contacts confirm some aspects of 
the TV drama's themes, describing local governments as overly 
dependent on land sales for fiscal revenue and on the real 
estate industry for local economic growth.  Low-income housing 
could help alleviate some of the discontent, but clearly local 
governments are not making this a priority.  Jiangsu's current 
housing boom also is contributing to a continuing reliance in 
China on investment to drive economic growth, as facilitated by 
the current easy credit environment. 
CAMP