Minxin Pei: China’s Greedy ‘Communists’

For the Diplomat, Minxin Pei looks at the causes and effects of China’s real estate bubble:

But before looking at who will pay when the bubble eventually bursts, it’s worth figuring out first who benefits from China’s ‘irrationally exuberant’ property sector.

It’s tempting to point fingers at individual speculators. But while individual speculators certainly share some of the blame for the froth in the housing sector, they are not the primary drivers of sky-high housing prices.

There are two principal culprits here. First, local governments are perhaps the most important contributors to the housing bubble. As the real estate sector (land prices and taxes) generates more than 40 percent of the fiscal revenues of local governments, they’ve been intentionally driving up land prices to reap additional proceeds and use inflated land under their control as collateral against bank loans. Despite Beijing’s pledge to increase the amount of low-cost housing, local governments are dead set against such a policy because building low-cost housing means lower land sale prices and lower real estate transaction taxes for them.

The other culprit is state-owned enterprises. Many of them want to make a killing in the lucrative property market. With access to almost unlimited no-cost credit from the state-controlled banking system, these behemoths have abused their financial clout and plunged headlong into the real estate market, snapping up high-priced land and investing in high-end residential housing units that now sit empty across the country.

August 16, 2010 6:42 PM
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Categories: Economy, Politics