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B Y C Y RU S MO S H I R I ( WA S H I N G T ON A N D L E E U N I V E R S I T Y ’ 10 )

ASIA:

A key question going forward is the stability of property markets in second and third tier cities.

CHINA & REAL ESTATE C hina’s large migratory flows from rural

areas

into

urban

centers

have

market. 60% of LGFVs are secured with land

been the fundamental drivers of property

or project revenues. Local governments also

price appreciation over the past decade.

rely on land sales for 35% of revenue. In a

Nevertheless,

deep property price decline scenario, local

and

rapid

income

property

growth

prices

retreated global

government’s ability to service loans will be

economic slowdown. The Chinese mobilized

hampered, but local governments still have

massive infrastructure investment on the back

vast land holdings and therefore the ability

of RMB 9.59tn of loan origination in 2009.

to post more collateral to existing loans. Land

The combination of these factors allowed for

collateralized investment fi nancing supported

a property price explosion after the fi nancial

infrastructure

crisis. Local governments, constitutionally

of the global economic downturn, but this

barred from direct borrow-ing or issuance

mechanism is no longer viable.

signifi cantly

in

2008

during

the

of debt, turned to the use of SIV-like Local Government

62

111210 hq.indd 62

The viability a local government finances

is dependent on a robust Chinese property

Financial

Vehicles

(LGFVs)

investment

at

the

bottom

Price to rent and price to income growth, two affordability ratios, have nearly doubled in

to finance the vast majority of urban fixed

fi rst tier cities. Signifi cant corrections of 50%+

asset investment. LGFVs are no longer in the

in those property markets appear imminent

headlines as a result of explicit efforts from

given these metrics. In August 2010 the CBRC

the China Banking Regulatory Commission

has already taken this into account by requiring

(CBRC) and State Council to limit the reckless

banks stress test 60% property price declines.

use of such vehicles. Nevertheless, the scale

A key question going forward is the stability

and structure of the vehicles already in

of property markets in second and third tier

existence are a fundamental weakness in the

cities. The vulnerabilities of these markets will

Chinese fi nancial system and could necessitate

be exposed if global economic growth slows

a bailout on a national scale.

since local governments are fiscally tapped

I N T E R N AT I O N A L B U S I N E S S R E V I E W

FA L L 2 0 1 0

11/27/2010 3:13:23 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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