Town's property booms while China slumps

Rising debt fuels real estate in a mainland town, highlighting local government's fiscal dangers

PUBLISHED : Wednesday, 11 June, 2014, 4:39am
UPDATED : Wednesday, 11 June, 2014, 4:39am

Property prices are booming in an island town of 60,000 people near Shanghai while the market slumps elsewhere. It comes at a cost: swelling borrowing that is threatening local-government finances.

Tang Chunmei, a real estate agent in Chenjia Town, 45 kilometres from the mainland's financial hub, said average prices for flats may rise 35 per cent in seven years. That contrasts with cooling nationwide, as home prices fell 0.3 per cent in May in the first monthly drop since June 2012.

Chenjia's expansion was partly paid for with a 800 million yuan (HK$1 billion) bond sold through a financing unit last year, exceeding the town's 120 million yuan of fiscal revenue, to build cheap homes for farmers as rice fields become tourist attractions.

"We've been so busy we can't even take days off on holidays," said Tang, who now lives and works in a neighbourhood whose name means wealthy and grand, after relocating from a rural house nearby two years ago. "I don't know if I'm concerned about the local-government debt. Life is better than before."

Premier Li Keqiang must balance plans to build 36 million new homes for families like Tang's, as he champions urbanisation to spur economic growth, with steps to rein in local liabilities that have swelled to 17.9 trillion yuan. Debt in counties such as Chongming, which includes the island where Chenjia is located at the mouth of the Yangtze River, soared 77 per cent to the end of June last year from December 2010, outpacing the 62 per cent increase for provinces, according to audit bureau data.

An official at Chenjia's local government financing vehicle, or LGFV, declined to comment on the source of funds for debt repayment. A press official at Chongming County also declined to comment.

"There's a mismatch between local government revenue and resources, which is particularly conspicuous on the county level," said David Cui, China strategist at Bank of America. "There will be problems in the future for many local governments that borrowed heavily without adequate fiscal revenue."

Regional authorities in the world's second-largest economy established more than 10,000 so-called local government financing vehicles, or LGFVs, to fund construction projects after they were barred from directly issuing bonds under a 1994 budget law. Local governments are responsible for 80 per cent of spending, while getting only about 40 per cent of tax revenue, the legacy of a 1994 tax-sharing system, the World Bank said.

Tang said the debt-fuelled development in the town where she grew up has brought benefits. Her family gave up their farmland and house in return for three flats and hukou, the urban household registrations that give access to perks including health care and pensions.

A former housewife, Tang got her job at the real estate company after the move. She now earns as much as 60,000 yuan a year, three times the salary for a factory worker on Chongming Island, she said.

"The apartment is cleaner without all those agricultural tools," said Tang, standing in her house, on which she spent 120,000 yuan decorating.

Farmers who became urban dwellers can put the flats on sale three years after the ownership certificate is issued. Most buyers are Shanghai residents, Tang said.

On the south side of town, wealthy people from Shanghai are buying villas along the coast as investments or holiday homes, according to Zhu Ana, a saleswoman at Boee Real Estate, a Zhejiang-based developer. The company built Tuscan-style villas priced up to 16 million yuan in the area, which also has a five-star hotel, the Hyatt Regency.

Second-hand housing prices in Chongming Island have climbed more than those in Shanghai every month this year, increasing 19.8 per cent in May compared with 15.8 per cent in the financial hub, according to data compiled by Anjuke, a Shanghai-based property-listings website.

By contrast, home prices nationwide dropped 0.3 per cent from April, according to SouFun Holdings, the mainland's biggest real estate website owner.