« Careerism | Main | Gov. Jerry Brown. As great as Hernando Cortes ? »

China real estate: leveraged speculation

Until recently, local governments would sell this land to developers for very little upfront. A firm could buy land worth 5 billion yuan with just 500m yuan ($75.9m) in working capital, says Jinsong Du of Credit Suisse. Even better, the developer could then offer that land as collateral for a loan of, say, 2.5 billion yuan from a bank. And instead of ploughing those borrowed billions into developing the site, they could use it to buy more land. Developers were not too worried about generating cash flow, because in a pinch they assumed they could always sell the land at a profit or flog as-yet-unbuilt flats to eager buyers on the back of blueprints alone.

The viability of this model depends on ever-growing demand, which often comes from speculative investors looking for a chance of quick capital gains. Some are wealthy private individuals; many are enterprises that have been diverting money from capital investment, hoping for juicier returns from property.


TrackBack URL for this entry:

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)