Despite the central government’s call last year to reduce the number of state-owned enterprises (SOEs) in the property sector, change has been happening at a snail’s pace.
In an effort to control risks in property credit and curb asset bubbles, the State-owned Assets Supervision and Administration Commission (SASAC) in March 2010 banned 78 SOEs from the property market that do not count real estate as their primary business. The announcement underscored Beijing’s eagerness to consolidate the number of state-backed players in the market, while also benefiting the 16 SOEs permitted to remain in real estate.
But nearly a year later, Shao Ning, the SASAC’s deputy chairman, said at a briefing in February that some of those enterprises will need more time to fully retreat from the sector.
While all 78 firms were required to submit exit plans by April 2010, only 14 had completed withdrawal by the end of the year. Shao explained that certain companies need to finish ongoing projects before they can exit, leaving many wondering why the transition is crawling along.
“No one knows why it’s taking so long,” said Andy Zhang, managing director of Cushman & Wakefield’s China operations. “It should take just six months to divest a single project … It’s not that difficult and ultimately up to the determination of the central government.”
One major reason that state-backed players are dragging their feet is the large profits made in the property business.
Given preferential treatment from state banks, SOEs can afford to bid aggressively for land from local governments – whether for immediate development or land hoarding in hopes of even greater profits later. The decision to streamline SOE involvement in property development came amid several record-breaking land auctions involving government-backed conglomerates.
According to Lou Jianbo, Peking University’s director for real estate law, the move is partly a public relations exercise to show that the government is reining in its wayward state-backed players. The long-term aim is to prohibit SOEs from bidding on land and ramping up prices.
“This is a way of preparing the economy for a soft landing,” Lou said.
However, Michael Cole, East China research director of Colliers International, argues that the slow exit is necessary. Getting rid of assets, after all, requires following strict procedures.
“None of the enterprises are very excited about the exit and they may be dragging their feet. But there are a select number of buyers for specific assets – like shopping malls for example,” said Cole. “Even when buyers are found, they need to do due diligence which lasts for six months. It typically takes nine months to act on this kind of directive.”
Regardless of the speed of exit, Cole believes that Beijing’s directive will only have a limited impact on the real estate market. This is because the 78 banned companies have a relatively small market share, accounting for only 15% of the real estate assets controlled by SOEs in the sector.
Thus, the move is more significant in terms of the government’s broader plan to amalgamate several developers into market leaders. Zhang said Beijing’s decision will result in “more efficient allocation of social resources,” as exiting SOEs will be forced to concentrate on their core businesses.
Similar policies have been introduced in other sectors – including the auto industry – in which the primary objective is to reduce the number of participants and make it more efficient, easier to regulate, less dependent on backing from particular local governments, and less prone to volatile growth patterns.
“This is about stability. By limiting the number of players in the market, the government makes sure that there are fewer people it needs to have a conversation with to ensure things are harmonious,” Cole said.
“They want more emphasis on being able to plan centrally and not just rely on market mechanisms – this is a way of combining the market with state control.”