Leaders may huff and puff, but market shows who’s boss
20 March 2010
There couldn’t be a better crash course in China’s power game than what we’ve witnessed in the past two weeks.
On March 5, Premier Wen Jiabao sternly declared in his government report to the country’s top legislature: “We will resolutely curb the precipitous rise of housing prices in some cities and satisfy people’s basic need for housing.”
Minister of Housing and Urban-Rural Development Jiang Weixin put it more bluntly. When asked by the press whether prices could be stabilised, he said: “Yes, [they] can. The premier has already said it has to [work]. How can it not work? … It has to work even if it doesn’t work.”
Almost every provincial leader sang the same tune in the following days. “Beijing will do its best and take the lead in cooling down property prices,” Beijing mayor Guo Jinlong said.
Shanghai party secretary Yu Zhengsheng was no less vocal. “Property prices in Shanghai are too high. We need a series of measures to cool them down … I have told my officers to watch [the TV drama] Wo Ju [Home of Snail] to experience our housing problem,” he said.
Guangdong’s Huang Huahua said: “Property prices in the Pearl River Delta are rising too fast. We must do something to cool it down.”
To this chorus of voices in unison, the meeting ended with Wen reiterating his determination to fight property speculation in front of hundreds of international and domestic reporters.
Yet less than 24 hours later, the Beijing municipal government auctioned three plots of land. The result was anything but a cooling down.
The bidding was joined not just by big property players but also by rare names like the government tobacco manufacturer China Tobacco. The price was a record high. The winners were all state-owned enterprises, including armaments producer China South Industries Group.
You could almost hear the slap in the face.
“So, who calls the shots in the property market, zongli [the premier] or zongjingli [the general manager]?” a celebrity commentator wondered aloud on CCTV.
The heat was on. A day later, another plot was auctioned in Beijing. The rare players disappeared. The price was down almost 40 per cent from the record high. The winner was Poly Group, a central SOE linked to the army.
In less than 24 hours, the State Asset Administration and Supervision Commission (Sasac) announced that the 78 SOEs whose core business is not property would exit the sector in an “orderly” manner after “the completion of their short-term tasks”, ending the drama.
How could this embarrassment happen in an “authoritarian” state, some may ask?
Welcome to China’s corridors of power, where “the backside directs the brain”, as the saying goes.
Imagine yourself as a provincial official. In Beijing, politics is about talking. But back home, politics is about creating jobs, paying staff, building needed or unneeded infrastructure projects and collecting political credits for your future. While the central government pockets most taxes, land sales are what you rely on to get your job done. A buoyant property market pays the bills, including the cost of building public housing. It keeps the debt-ridden provincial investment arm afloat. Regional government is estimated to owe 7.2 trillion yuan (HK$8.18 trillion), largely secured with land. How serious can you be about cooling down?
Now imagine yourself as the head of a central SOE. Throughout your career, you have been trained to use up all available credit. Because you know liquidity is never a matter of the market but of government policy, you grab it when you can. And the more you invest, the bigger your assets and the clout you have.
Here, on top of the piles of cash churned out by your monopolistic business, are billions of yuan in liquidity “forced upon” you by the government as part of the economic stimulus package.
The natural question is not whether you should invest, but where. Not manufacturing, because overcapacity is everywhere. Not commodities and financial services, because these are reserved for the lucky few. Not services because the private entrepreneurs are too good at that. The stock market used to be a good bet, but the SOEs are officially barred.
The property market is the no-brainer. A quick flip can easily generate a double-digit gain. The beauty is, even if interest rates go up and prices go down, it won’t hurt your bottom line or asset size. The accounting rules have no “mark to market” rule on land held for the long term. Neither is there a banker after you to do that. For the moment, you may not have a stellar return on assets to please Sasac. But as long as there is no shrinkage in asset size, a loss of state assets, you are safe. Without any repayment pressure, you can comfortably sit on the land, waiting for another up cycle. Given land scarcity, you know it’s only a matter of time.
And let’s not forget the intangibles. With the government pledging to reduce the numbers of central SOEs in the coming few years, you want a bigger asset size to give you a bigger say in the mergers to come. Land is the quick shot.
In short, you have everything to gain and little to lose. Would you jump on the property wagon? I would.
But what about the political cost of defying state policy? The short answer is, what state policy?
There is no official ban on SOEs from the property market. By the way, Sasac, or shareholders of the central SOEs, have repeatedly told management to maximise their profit.
In fact, right after the embarrassing record land auction, a Sasac official still maintained that there were no legal grounds to bar them from the market. Let’s not forget, Sasac’s job is to grow state assets, not to stabilise housing prices.
Yes, there is the pledge to stabilise property prices in the premier’s report. But each SOE is backed by its own supporters at the top, and the heads of the central SOEs will have little problem getting around the edict.
First, it is only a loosely worded statement of intent. Second, it has yet to be officially handed down and studied under the system. Third, it is a government paper not a party paper. What really matters is the party’s position.
Too much money is involved. Too many people at the top are in it. Only significant political interest can get the party to act on the involvement of SOEs in the property market.
Ironically, the moment did not come until the embarrassing land auction. By threatening the prestige of the government, it turned a social and economic issue into a political one; and the gesture to exit was made.
What do I mean by “gesture”? Well, go back to the Sasac directive. What does “short-term tasks” mean? What is an “orderly” exit? When it comes to playing with words, mainland bureaucrats are the masters.