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Real Estate Business of 78 Central-owned Enterprises to be Transferred to Main S

News, page 3, issue 464, April 12, 2010
Translated by Tang Xiangyang
Original article:

Abstract: The forced exit of centrally-controlled SOE from the property market may not curb soaring property prices as assets are likely to simply be transferred to other state-owned players.

Will efforts to force seventy-eight centrally-controlled state-owned enterprises out of the property market, simply result in them being acquired by the other stateowned enterprises that dominate China's real estate industry?

All of the seventy-eight centrally-owned enterprises recently required by the State-owned Asset Supervision and Administration Commission (SASAC) to report their exit strategy from the property market, henceforth referred to as the seventy-eight, have submitted proposals to the central agency outlining how they plan to sell or transfer their real estate businesses.As their exit move approaches, the sixteen remaining state-owned enterprises who are authorized to focus on the property market, henceforth referred to as the sixteen, have showed great interest in acquiring the property business of the seventy-eight.

Determined to Force Retreat

At the end of March, the SASAC ordered all "78 central-owned enterprises whose core business is not property development are to withdraw from the business (the property market) after finishing their current duties."

Though the seventy-eight have now handed in their proposals to exit from property market, they are not acting as quickly as the SASAC had expected. Some of them, including the China Nuclear Industrial Group and China Aerospace Science and Industry Corporation, have listed their stakes in property development subsidiaries for sale on the China Beijing Equity Exchange (CBEX). Yet according to an official with the Beijing Equity Exchange, the listing of their stakes had taken place before they were given the exit order from the SASAC.

Other targeted property subsidiaries of the seventy-eight state-owned enterprises are not taking action.

"We haven't received any notice [from the high-level authorities] and are continuing with our [property] business," stated an employee with the Shanghai Ruizhou Property Development Company under the China Shipbuilding Industry Corporation, a state-owned enterprise whose business is not focused in real estate.

Chengdu Property Co, Ltd, a subsidiary of the Panzhihua Iron and Steel Group, has also stated it has yet to receive any notice to retreat and is continuing to work on a property project.

Despite of the reluctance of the seventy-eight, Li Rongrong, director of the SASAC, still expressed determination to make them exit the property market. "We will keep our promise," he said.

Exit Routes

A source with the SASAC told an EO reporter some of the possible exit methods written in their reports: "They may sell their real estate interests in the open market or transfer their business to other centrally-owned enterprises who are authorized to focus on the property market."

Xue Zhiyong, vice general manager of the Sinohydro Corporation which is one of the sixteen, said Sinohydro was negotiating with state-owned counterparts targeted by the exit order.

Another possible exit method is for the seventy-eight to sell their land management rights to outsiders while maintaining land ownership and still gaining yearly benefits.

Buyers Seeking Access

Though their exit methods are far from clear, the seventy-eight have gained a large amount of attention from the market. The sixteen are especially interested.

"We have seen the property of some enterprises listed in the exit order, but their asking price is too high, so no moves have been made," a high-level executive of Poly Real Estate said.

COFCO Property Investment Co. Ltd, Sinohydro Real Estate and other centrally-owned enterprises have all expressed great interest in buying the properties of SOEs exiting the market.

According to statistics released by the SASAC, at the end of last year, the total assets of the sixteen  amounted to 561.6 billion yuan, accounting for 85 percent of the total property assets owned by state-owned enterprises. Their sales revenue reached 189.9 billion yuan and their net profit, 18.8 billion yuan which is 94 percent of the total net profit of the state-owned enterprise managed property business.

"It's easier for state-owned enterprises to cooperate with their state-owned counterparts. With the same investor (SASAC), they share the same concepts and working procedures on projects," Xue Zhiyong, vice general manager of Sinohydro Corporation said.

Wang Zhigang, director of the macro economy department of the SASAC research center, also said "the easiest way for state-owned enterprises to exit [the market] is to transfer their property business to centrally-owned enterprises, transferring to local state-owned enterprises is their second best option, and their final option is to to transfer their business to privately-owned enterprises."

"If selling their business to private companies, [state-owned enterprises] first have to bear the huge cost of dismissing their employees; if the cooperator is state-owned, they may merely transfer all of the employees to the partner. That is much cheaper," he said.

However, information from the Beijing Equity Exchange, Shanghai Stock Exchange and other public exchange markets shows many private companies have repeatedly expressed interest in buying the property assets of their state-owned counterparts.

What if the Next "Land King" is Still a SOE?

In 2009, many central enterprises made headlines when they bought plots of land for record-breaking prices at government land auctions.

Available data showed that over the course of last year, over ninety "land kings" emerged across the country, basically companies that paid record prices for the rights to develop property in certain area, some 67 percent of these "land king" purchases were made by central enterprises.

It's widely accepted that the SASAC's exit order will help curb the surge in the price of housing in some Chinese cities because state-owned enterprises are leading other property companies in gaining land use rights and becoming "land kings". But as Wen Zhao, a commentator with EO Online, put it, this exit order has nothing to do with curbing housing prices because property is not the major business of state-owned enterprises targeted by the order.

Wen says in an article published on the EO website, though the SASAC requires the seventy-eight enterprises focusing on non-real estate fields to exit from the property market, the SASAC has not required the sixteen state-owned enterprises who are authorized to engage in real estate to exit the market, and has even encouraged them by requiring that they are at least the top three in the property field. Meaning, it's still likely that the property industry will continue to be dominated by state-owned enterprises and housing prices will not be affected by the exit order.

Wen Zhao summed up his argument by stating: "The core of the problem is not whether the state-owned enterprises can or will be "land kings", but what our state-owned enterprises should do. If their main target is to gain profit, why can't they earn a huge profit like other real estate companies? If increasing the value of their enterprise is not their first priority, the real question is how and when they should exit the real estate industry. This is a question we must give serious consideration to."

This article was edited by Rose Scobie


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