Property Crisis Forcing Chinese State Companies Into Greater Involvement in Land Auctions

By Jonathan Walker | November 16, 2021
Jonathan loves talking politics, economics and philosophy. He carries unique perspectives on everything making him a rather odd mix of liberal-conservative with a streak of independent Austrian thought.
44 0
A woman bends through a hole in the billboard of the Evergrande Wuhan culture-oriented travel city on October 18, 2021 in Wuhan, Hubei province, China. Evergrande, China's largest property developer, is facing a liquidity crisis with total debts of around $300 billion.
A woman bends through a hole in the billboard of the Evergrande Wuhan culture-oriented travel city on October 18, 2021 in Wuhan, Hubei province, China. Evergrande, China's largest property developer, is facing a liquidity crisis with total debts of around $300 billion. (Image: Getty Images)

The property crisis in communist China is compelling state-owned developers to play a major role at land auctions to rescue financially stressed out local governments. Auctioning land is a major source of revenue for local administrations, making up to a fifth of revenue in some regions. Previously, private companies used to dominate such auctions. But the market has changed drastically over the past few months. 

According to data analyzed by the Financial Times (FT), government developers have bought three-quarters of all residential land sold at auctions held in 22 cities. This is up from 45 percent.

“Local governments are counting on state groups, which have access to cheap credit, to keep land sales from falling off a cliff… Debt-laden private developers are focused on reducing their leverage,” Chai Duo told FT. He’s a professor at the Central University of Finance and Economics in Beijing and a government policy adviser.

But despite the best attempts of state-owned companies, land sale auctions continue to be at less than peak levels since many private players are not betting on the market right now. Before September, only 6.5 percent of land auctions used to fail and were unable to find bidders willing to shell out at least the minimum price. But after September, one-third of the auctions have ended up as failures. 

In September, the value of land sales fell by 11.15 percent from a year earlier. In August, it had declined by 17.5 percent. Private players bought just 120.8 billion yuan ($18.95 billion) worth of land at the current auctions. That’s 80 percent less than the auctions that took place in the March-June period.

“The 31 provinces in (mainland) China are not equally dependent on land revenue… The eastern coastal regions have high land values and low direct debt burdens, so even if there is a certain decline in land revenue, the impact is limited, because they have other relatively strong tax revenue or other incomes to compensate,” Amanda Du, an analyst at Moody’s, told Reuters.

However, Du stated that other regions that are more dependent on land sales will have a tougher time financially. Lu Wenxi, a chief analyst at property agency Centaline, warns that the credit environment in communist China has declined so rapidly since June that real estate developers are finding it difficult to get financing.

Spiraling sales is a major issue for property firms. Without the possibility of robust sales, these companies are less likely to part with their cash reserves to buy land under the current scenario. In September, the sale of properties fell by 20 percent compared to a year back.

“When these hot tier 1 cities see land withdrawals, it means enthusiasm has cooled down tremendously… Unless more policies are eased and credit loosened, the downturn in land and home sales may last a rather long time,” Zhao Xuxiang, a property analyst at Oriental Securities in Shanghai, told SCMP.

In an interview with Bloomberg, Larry Hu, head of China economics at Macquarie Securities Ltd, said that developers are “hoarding cash” to avoid becoming the next Evergrande. “The contagion risk is real,” Hu said.

Evergrande is one of the biggest real estate firms in communist China and a trigger of the ongoing property crisis. Laden with more than $300 billion in debt, the company is now finding it difficult to repay its dues. Following Evergrande, many other real estate developers have also admitted to being in financial distress.