10 Billion Square Feet of Land Hoarded for Speculation in China

December 14, 2007 Updated: December 14, 2007

On November 20, 2007, Beijing Normal University's Financial Research Center completed the “Assessment Report on Real-estate Funding and Land Hoarding for Speculation in China.” The report revealed that land hoarded by Chinese real estate developers has reached 10 billion square feet, as 25 percent of the Chinese banking system's investments in the real estate market were set aside for land hoarding. By the end of 2006, this amount had reached nearly 2.4 trillion yuan (US$ 324 billion), which has become a time bomb in the banking system.

On December 5, 2007, First Financial Daily reported that Zhong Wei, its lead author and director of the Financial Research Center of Beijing Normal University, said that it would be highly risky and very dangerous for the real estate and banking industries if China continues to stick to current trends of policy making and the market supply and demand situation.

Land Hoarded Can Be Developed For Four Years

After calculating the margin between lands purchased and lands developed, the report predicted that by the end of 2007, the land hoarded by real estate developers through legal channels might reach 8 billion square feet, and if illegal channels are included, it would be around 10 billion square feet. Between 2002 and 2006, Shandong, Jiangsu, Zhejiang, and Sichuan were the provinces where most of the hoarded land was situated. This accounted for approximately 35% percent of the entire hoarded land in China within the past five years. Zhong Wei said, “The land currently hoarded by real-estate developers might be enough for development for three or four years, which is a complete developmental cycle.” The report further pointed out that China's National Land Reserve Center has also hoarded a huge amount of land, and the land selected for sale has not yet been released to the market completely. The recent skyrocketing of housing prices in some cities might have much to do with local governments' failure to completely release hoarded land over the past three consecutive years.

Annual Cost Of Capital Is As High As $25 Billion

The report added that since such a huge amount of land is hoarded, the cost of capital the developers have to cover each year is between 180 billion to 200 billion yuan (US $27 billion), exceeding the entire industry's current profit level. As estimated, the funds accumulated from the hoarded land were about 2.4 trillion yuan (US $324.1 billion) as of the end of 2006. That amount is almost on par with the annual sales volume of housing products, while the cost of capital on the hoarded land is more than the total annual profits of the real-estate industry, indicating the plummeting stability of the overall financial situation of real-estate enterprises.

According to the report, the capital from banking system's credit loans might amount in upwards of 1.3 trillion yuan (US $178.3 billion). In other words, almost one out of every four dollars flowed from the banking system into the real estate industry due to the hoarding of land. Zhong Wei said, “If we compare the capital of the hoarded lands with indicators such as real estate enterprises' net assets and net earnings, it is very clear that credit loans on such land are at stake.”

Governmental Policies Not Able to Stop Land Hoarding

“The Regulations Governing Land Reserve and Management” adopted by the Ministry of Land and Resources, the Ministry of Finance and the People's Bank of China stipulates that land reserve organizations shall go ahead with necessary early period development, especially reserved land legally expropriated from the private sector. However, after the promulgation of the Regulations, the market has remained apathetic to these initiatives.

Neither the “City Real Estate Management Law” issued in 1994 nor the “Regulations Governing the Handling of Idle Land” issued in 1999 has succeeded in cracking down on land hoarding, as there is still a big gap between reality and ideals.

For one thing, the cost of breaking the law is much smaller than the illegal earnings. Secondly, law enforcement agencies' lenient enforcement, incompetence and corruption have contributed to the failure in penalizing the developers and recalling the idle land. In addition, a lack of a clear definition of “developers' land hoarding” has led to the scenario that developers are taking advantage of this loophole by proceeding with such a practice. These are the main reasons for failure of government's policies.

Li Jinhua, a researcher at the Quantity Economics and Technoecomomics Research Institute, Chinese Academy of Social Sciences (CASS), said that the proceeds of land transferring has become the main source of local governments' revenue, and that the local governments' focus has shifted from developing businesses to undertaking urbanization to increase property values and real-estate prices.