Where is China’s property market heading? Land sales are notching up one record one after another in some Chinese cities. Not surprisingly most of the developers have rung in impressive half-yearly earnings numbers. But beneath the impressive numbers lies a different story, especially when one factors in the views of less glamorous players in the sector like contractors. George is one of them. “We are paying more to win projects,” the veteran industry player said. No, you are not reading some typos. Contrary to the general practise under which a developer will pay a contractor to undertake the work, it is the contractors who have to pay. And that comes as no surprise in China’s real estate jungle where the hungry developers will squeeze each and every drop of fat from the partners for survival. This is how the system works. Say an apartment building costs 1 billion yuan to build. George will provide the developer 300 million yuan as “facilitation money” at an interest rate of about 4 per cent to win the job. The latter will then give George 80 million yuan for the services rendered. China property investment cools in May George, however, does not have any shareholding in the project, whatsoever to cover his back. Neither is he assured that the facilitation money would not end up in the stock market. All George can do is pray and hope that the apartments sell well and he gets his money back with interest plus the construction costs. Despite the risk, there has been no dearth of interested players. As George puts it, it has been getting worse. His state-owned rivals are now offering “facilitation money” of up to 50 or even 60 per cent of the construction cost. Some are even pitching in with zero interest, while others are promising to help in eventual sales . “New projects are extremely rare these days,” George said. Policy uncertainties have made developers cautious while the receivables have made contractors selective. “Everyone is fighting for a few projects.” Much of that cautiousness also has to do with the reality. After the “rush for interim results” in June, areas of property sold in major cities of the country recorded a 5.98 per cent drop in July. The obvious question that comes to the mind is why are developers willing to pay record amounts to own a piece of land, or as some suggest pay more for the flour (land) than the bread (flat). But then the land parcels are not really meant to be the flour for the bread. A good case is China Cinda Asset Mangement, which has invested more than 61 billion yuan in property during the past 12 months. China property price rise sparks fears of more curbs Among its acquisitions was a piece of land in suburban Beijing that was so expensive that will break-even only if the property prices are four times higher. But Cinda has piles of liquidity to splash about. Its debt to equity ratio rose by a third to 368 per cent in 2015 and it paid just a quarter of the loan rate of its private rivals. For Cinda property seemed the best bet. After all, the real economy was not going anywhere and the stock market was twisting and turning. On the other hand, property investments promised huge returns and was more self-fulfilling in nature. The record-breaking land prices support the property market and therefore the repayment of the multi-billion yuan of loans via shadow banking that Cinda and other state firms are loaded with. So overpayment seemed perfectly okay. The same benefit applies to private developers albeit in a different way. In the jungle, the private players survive not with prudence, but aggressiveness. A record land bid pushes up reputation and revaluation. When you are borrowing $9 with a $10 asset, you will get $1.1 loan and the asset gets marked up to $11. Bankers don’t ask any questions. So new cash flow can either make or break in a capital market where one yuan can be multiplied manifold. None of these considerations have anything to do with the price of the bread. In short, the hype has nothing to do with the reality. No wonder amidst the bullish comments to press and analysts, the chairman of a mid-size listed developer said in a staff meeting: “Don’t be blinded by the headlines. Spend every minute on improving cash flows.” How true it is in the case of China’s property market.