For the past few weeks, mainland media have been thick with stories about the record prices being paid at government land auctions. Report after report has detailed how plots of building land have sold for twice or even three times their reserve prices. In some cases, vacant residential plots in prize locations have sold for more money per square metre than the asking price of completed flats in nearby blocks, pushing neighbourhood property prices higher and prompting commentators to announce the full recovery of the real estate market. Alas, things are seldom that simple. As an investigation into land auction fixing by senior business executives and officials in Chongqing should remind us, the current record land prices are an aberration. Endemic corruption in the mainland's real estate sector means the default 'business-as-usual' setting at government land auctions results not in inflated prices but in land sold at a fraction of prevailing market prices. The reasons behind the recent departure from normal conditions and surge in prices are not hard to identify. As the first chart below shows, between August last year and March this year, the area of land sold at government auctions dropped steeply as a combination of falling revenue and tighter bank credit ate into developers' funding. Things began to change in the second quarter of this year. State-owned companies flush with cash from generous bank lending rushed to convert their liquidity into hard assets, bidding eagerly for the limited plots of land being sold at auction and driving prices sharply higher (see the second chart). Prices are unlikely to remain elevated for long, however. Encouraged by improving economic conditions, local governments facing heavy bills for their stimulus spending and traditionally dependent on land auctions for up to 30 per cent of their revenue are likely to step up the number and pace of sales. As they do, experience suggests corruption will set in again, weighing on prices and eroding revenue. Although mainland authorities outlawed negotiated land sales in favour of auctions in 2002, the two-tier structure of the auction system appears almost designed to encourage corrupt deals. Highly desirable plots of land are usually sold through standard ascending auctions, which are announced in advance and tend to involve a number of developers bidding openly and competitively. But they are in the minority. Between 2003 and 2007, most land sales - about 70 per cent - were conducted according to an alternative and far less transparent two-step process, in which an open auction is only triggered if two or more developers submit bids in the closed initial stage. That seldom happens. The majority of auctions involve just one anonymous bidder, who is generally assumed to be in cahoots with bent local officials. Other potential bidders are scared away, and the plots up for auction get knocked down at their reserve price. The cost of this corruption is enormous. According to research by Cai Hongbin and Zhang Qinghua of Peking University's Guanghua School of Management, between 2003 and 2007, land auctioned under the two-step process typically sold for 25 per cent less than it would have done under the more transparent standard auction procedure. The net cost to local governments was an estimated 300 billion yuan (HK$340 billion) in lost revenue, or about 20 per cent of local government's net income from land sales over the five-year period. What's more, corruption in land auctions is remarkably persistent, setting in again rapidly after crackdowns such as the one we are seeing at the moment in Chongqing. That implies that the current high average prices paid at auctions will not last, as conditions revert to normal and dodgy deals begin once again to weigh on the market.