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### Viewing cable 06GUANGZHOU18102, New Property Measures Should Have Little Immediate

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06GUANGZHOU18102 | 2006-06-21 08:37 | 2011-08-23 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Consulate Guangzhou

`

    VZCZCXRO5795
    PP RUEHCN RUEHGH
    DE RUEHGZ #8102/01 1720837
    ZNR UUUUU ZZH
    P 210837Z JUN 06
    FM AMCONSUL GUANGZHOU
    TO RUEHC/SECSTATE WASHDC PRIORITY 1441
    INFO RUEHOO/CHINA POSTS COLLECTIVE
    RUCPDOC/USDOC WASHDC
    RUEAIIA/CIA WASHDC
    RUEKJCS/DIA WASHDC
    RHHMUNA/HQ USPACOM HONOLULU HI

` `

    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

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