Housing Bubble and Political Troubles: The Case of Real Estate Companies in China’s Anti-corruption Campaign
Just days before the scheduled visit of Philippine Foreign Secretary Alan Peter Cayetano to Beijing on 28–29 June 2017, China’s anti-corruption watchdog announced on 23 June that it had begun corruption investigations into Huang Rulun (黄如论), a Chinese real estate developer who is known to have close ties with Manila. In addition, Huang had been removed from his position in the Fujian province political consultative conference, a provincial advisory body a week earlier.
Huang, widely recognized as having a central role in the thawing of ties between Manila and Beijing, has donated generously to building treatment centers for those caught up in President Rodrigo Duterte’s deathly war on narcotics. Domestically, Huang heads the privately held Century Golden Resources Group, one of China’s top three real estate developers.
While the probe into Huang has cast doubts over a revived Sino-Philippine relationship, it is also widely believed to be reflective of the vulnerability of the real estate sector in China’s ongoing anti-corruption campaign, one that works in tandem with President Xi Jinping’s policy of suppressing rising property prices.
In China, business and political connections are closely intertwined. Take the real estate sector for example. While it contributes up to 35% of local fiscal revenue, the sector relies very heavily on bank loans from local and state governments to fuel its expansion binge. At the same time, competition over government land tenders have been increasingly challenging due to proliferation of domestic and foreign players, and limited number of plots of land for sale. Unsurprisingly, players in the real estate sector are mostly well connected individuals who have amassed deeply entrenched personal and commercial networks. In a political climate of anti-corruption campaign, some of these connections are worthy of close examination and monitoring.
Political Connections
Huang, for instance, is believed to have a good relationship with Jia Qinglin, a senior leader of the Communist Party of China and a close associate to former Chinese President Jiang Zemin. In addition, Huang was allegedly connected to Bai Enpei, former Party Secretary of Yunnan province from 2001 to 2011. It was reported that Bai used his power to give plots of Yunnan’s scenic land to developers in exchange for expensive gifts. Bai was subsequently investigated and charged for corruption in 2016.
In light of China’s anti-corruption campaign, Huang’s connection to Bai was probably a risk factor for any individuals or companies with business interests in the company. The recent investigation into Huang and his removal from the provincial advisory body further highlight the need of in-depth due diligence prior to any business venture.
Another case in point is Xu Rongmao (许荣茂, also known as Hui Wing Mau in Cantonese), the founder and chairman of Shimao Group, one of China’s largest property development and investment companies. Similar to Huang, Xu has wide political connections. He is an acquaintance with Chen Guangyi, governor of Gansu Province and member of 12th Central Committee of the Communist Party of China, as well as Jia Qinglin. Xu himself is a member of the 12th National Committee of the Chinese People’s Political Consultative Conference (CPPCC), China’s national advisory body. He also served as Senior Advisor of Carrie Lam’s campaign office during her election bid to become Chief Executive of Hong Kong. Lam was elected as the city’s first female Chief Executive in March 2017.
Xu’s extensive network is a clear manifestation of the Chinese business concept of “guanxi” — or “relationships”. Have the right “guanxi”, a wide network of mutually beneficial connections, is often key to securing business deals. At the same time, “guanxi” could potentially amplify the risks of political exposure, rendering business ventures with Chinese counterparts more susceptible to state policy change and campaigns.
Why Real Estate? Why Now?
China’s rocketing property price made international headlines last year and fueled fears of a housing bubble in the world’s second largest economy. According to Reuters, as of October 2016, property prices in Tier 1 Chinese cities such as Shenzhen, Shanghai and Beijing rose 34.1%, 32.7% and 27.8% year-on-year respectively.
Of all factors behind the ever-rising housing prices, corruption is one of the major problems. When real estate developers bribe government officials to get a piece of land for development or to get a housing project approved, they do not take the money out from their own pockets. Instead, property developers raise housing prices so that the costs are passed on to consumers. A crackdown on corruption practices in the real estate sector, together with government policy limiting house ownership, would work in tandem to suppress rising property prices.
Rampant corruption also contributes to the relatively low quality of real estate projects as developers use inferior materials in order to cut costs. Over the past few years, news of China’s deadly residential and industrial buildings accidents were frequently reported at home and abroad, bringing much embarrassment to the central government. Corruption in the real estate sector, one that is pervasive and very visible to public eye, becomes the more likely candidate to be stamped out in Xi’s anti-corruption campaign.
The Datarama platform includes profiles of businessmen and interactive mapping tools about their extended corporate and personal networks to provide in-depth due diligence for various sectors in emerging markets in Asia. Visit www.datarama.com to find out how our platform can help with your business ventures.
Written by Datarama analyst Li Ling.
