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Cablegate: Real Estate Tales From a Second-Tier City: Nanjing Housing

VZCZCXRO7562
RR RUEHCN RUEHGH
DE RUEHGH #0469/01 3381104
ZNR UUUUU ZZH
R 041104Z DEC 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8397
INFO RUEHBJ/AMEMBASSY BEIJING 3178
RUEHCN/AMCONSUL CHENGDU 2288
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0745
RUEHHK/AMCONSUL HONG KONG 2456
RUEHLO/AMEMBASSY LONDON 0047
RUEHML/AMEMBASSY MANILA 0132
RUEHPS/USMISSION OEDC PARIS FR
RUEHFR/AMEMBASSY PARIS 0021
RUEHUL/AMEMBASSY SEOUL 0607
RUEHSH/AMCONSUL SHENYANG 2279
RUEHIN/AIT TAIPEI 2078
RUEHKO/AMEMBASSY TOKYO 0818
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 9060

UNCLAS SECTION 01 OF 04 SHANGHAI 000469

SENSITIVE
SIPDIS

DEPT FOR EAP/CM
NSC FOR MEDEIROS, SHRIER
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
TREASURY FOR IMFP -- SOBEL/CUSHMAN
STATE PASS CEA FOR BLOCK
STATE PASS CFTC FOR OIA/GORLICK
MANILA FOR ADB USED
PARIS FOR US/OECD

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: REAL ESTATE TALES FROM A SECOND-TIER CITY: NANJING HOUSING
BOOM SUPPORTS LOCAL ECONOMY

REF: A. A. Shanghai 444
B. B. Shanghai 451

1. (SBU) Summary: Real estate sales are booming in Jiangsu --
as they are in neighboring provinces -- and have become a key
component of economic growth following the introduction of real
estate stimulus measures in December 2008. However, our
contacts say that the stimulus measures will be difficult for
the Central Government to calibrate in order to avoid
overheating in the sector. Contacts also raised concerns that
local governments are overly dependent on real estate for
growth, and are not prioritizing the housing needs of low-income
households. End Summary.

==========
Background
==========

2. (SBU) EconOff traveled to Nanjing, the capital of Jiangsu
Province, October 22-23 and November 24-25 to meet with local
academics, government researchers, and businesspersons to gauge
local economic conditions. The contacts presented a picture of
province-wide economic growth (ref A), while also raising
serious concerns about the accuracy and consistency of Jiangsu's
economic data (ref B). This cable covers Jiangsu's property
sector, with a particular focus on Nanjing -- which better
exemplifies the broader trends in East China than Shanghai,
which has substantially greater exposure to the international
market.

============================
Housing Sales Booming . . .
============================

3. (SBU) According to the National Bureau of Statistics, the
total value of real estate sold in Jiangsu was up 109 percent
for the year through October, compared with the same period in
2008, and the value of residential housing sales alone was up
over 116 percent. Higher demand is leading to higher prices,
with the Ministry of Housing and Urban-Rural Development survey
showing accelerating increases for Jiangsu since December 2008
-- when the Central Government announced a package of housing
purchase incentives -- reaching a province-wide average price
increase of nearly 20 percent year-to-date in October, the most
recent data available. The Central Government's real estate
incentives included greater leniency for second home purchases,
higher mortgage underwriting by banks, and adjustment of land
prices by local governments.

============================================= =======
. . . Leading to Concerns the Sector is Overheating

============================================= =======

4. (SBU) Chen admitted that real estate incentives are a crude
tool, and that it will be difficult for the Central Government
to calibrate them to avoid overheating in the sector. She used
a body temperature analogy to illustrate: The sector suddenly
jumped to a fever level of 39-40 degrees Celsius this past
spring, Chen said, and she hopes that it will moderate to a more
normal 37-38 degrees in 2010.


SHANGHAI 00000469 002 OF 004


5. (SBU) Chen and Luo Hao, Research Manager of Nanjing
Centaline Property Consultants, both commented that the Central
Government will probably be reluctant to hit the property market
with policy restrictions because of the sector's importance to
economic growth. According to Chen Xinghan, chair of the board
of Nanjing-based property firm Chixia Development and president
of the Jiangsu Real Estate Association, real estate accounts for
over 50 percent of final domestic demand nation-wide, making the
sector, together with government-led infrastructure investment,
one of China's key economic growth drivers (ref. A). Moreover,
Chen commented that there are different economic conditions in
each of China's provinces, making it problematic for the
government to try to implement one-size-fits-all policies to
curtail real estate sector growth.

6. (SBU) Evidence of overheating in real estate can be seen in
the widespread mania among firms to profit in the sector. Luo
said that Central Government-controlled state-owned enterprises
(SOEs) and large stock-market-listed companies in Nanjing have
become the main purchasers of land, speculating as the market
rises. (Note: Most of the record new lending in 2009 has
flowed to large SOEs, giving them ample liquidity to play the
real estate market. End note.) Chen said that even smaller
firms without access to extensive bank credit are jumping into
the market by purchasing finished residences to hold as
investments.

7. (SBU) Despite agreement that the authorities will not crack
down hard on the real estate sector, Chen and Luo disagreed on
whether last December's real estate stimulus measures would be
prolonged past their sunset clause this December. Chen predicts
that the measures will be phased out on schedule, and that
restrictions on purchases of second homes will be tightened.
Luo believes the incentives will be extended, or similar ones
will be adopted in their place. As described in ref A, Chen
believes that in the medium-term, the government will have to
trim back its reliance on the real estate sector for growth.

=========================================
Land is Key to Local Government Finances

=========================================

8. (SBU) Local officials' control over land is key to local
finances and economic growth, agree our Nanjing contacts. The
local bank lending that supported the binge in infrastructure
spending this past year rests largely on collateralizing local
land reserves, say officials in the Jiangsu Development and
Reform Commission, the Jiangsu Audit Department, and the Jiangsu
Finance Department. (Note: The contacts said that local
governments looking for loans from local banks also promise fee
income from the projects, such as road tolls, or -- with the
approval of the local People's Congress -- promise to set aside
future tax revenue streams. End note.) Land sales brought
almost RMB33 billion (US$4.8 billion) into local Jiangsu
government coffers in 2008, according to National Bureau of
Statistics data, equivalent to 12 percent of total provincial

SHANGHAI 00000469 003 OF 004


revenue for the year.

9. (SBU) Local governments manage the supply of land offered to
developers as a lever over the local real estate market. The
Nanjing Municipal Government, for instance, began expanding the
supply of land available for development in the second half of
2009 to encourage property firms to put more housing on the
market, and thereby help contain price increases, said Luo.
(Note: Prior to this, local governments were less willing to
auction off land because real estate developers -- as they
slowed the pace of their projects in the face of plummeting
demand -- were already sitting on large land banks and were
attempting to bid down land prices. End note.) Chen, echoing
this theme, cautioned that it would be a mistake to think that
the laws of supply and demand hold in China, because the
government will intervene through land sales and other policies
to manage the sector.

=====================================
Low-Income Housing is Not a Priority

=====================================

10. (SBU) Nanjing is not meeting its goals for providing homes
to low-income families, said Luo, and projects that are under
development are being built in out-of-the-way suburbs. In the
end, the government sees low-income housing as a waste of
resources, said Luo, and is purposely slowing construction
progress. The municipality has capped profit margins for
developers of the projects, discouraging them from
participation. Eligible residents are also wary of living in
areas requiring a long commute and having few services, said Luo.

=========================================
Property Tax Not Likely in Coming Months

=========================================

10. (SBU) Our interlocutors doubted that a property tax would
be implemented in the short term. (Note: China currently does
not impose property tax on homeowners during the period they
hold the property, although taxes may apply at the time of sale
and purchase. A State Administration of Taxation official in
February 2008 denied rumors that a property tax would be
implemented in 2009, but Chinese media has recently reported
renewed discussion among officials on the subject. End note.)
Chen and Luo agreed that the National People's Congress is
unlikely to pass legislation imposing a property tax in the
coming two years, given pressure from real estate interests
against it. Luo added that the tax would be very difficult to
collect, in any case, as homeowners could easily evade it by
manipulating property assessments or other factors.

=======
Comment

SHANGHAI 00000469 004 OF 004

=======

11. (SBU) The tight relationship between local governments and
local property firms stimulates the economy in the short term,
but also is leading to a run up in housing prices that the
public perceives as unfairly benefiting the officials and
developers. This discontent is reflected in the now-banned TV
drama series Snail House (Wo Ju, which also has the English name
Dwelling Narrowness), in which "house slaves" struggle to pay
surging mortgage costs. Our contacts confirm some aspects of
the TV drama's themes, describing local governments as overly
dependent on land sales for fiscal revenue and on the real
estate industry for local economic growth. Low-income housing
could help alleviate some of the discontent, but clearly local
governments are not making this a priority. Jiangsu's current
housing boom also is contributing to a continuing reliance in
China on investment to drive economic growth, as facilitated by
the current easy credit environment.
CAMP

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