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 )
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
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
deep property price decline scenario, local
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
crisis. Local governments, constitutionally
of the global economic downturn, but this
barred from direct borrow-ing or issuance
mechanism is no longer viable.
of debt, turned to the use of SIV-like Local Government
111210 hq.indd 62
The viability a local government ﬁnances
is dependent on a robust Chinese property
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
Fall edition of the IBR magazine at the Wharton School.