China orders state owned companies to exit property market

In a bid to cool its red hot property market, China has just banned 78 state owned companies (SOEs) from the property market. These are SOEs owned by the national government and have their mandates in other industries. These companies are set up to pursuit industrial policies that China deems its strategic interest. However, due to the lucrative profit from property development, high level political connection, and easy access to low interest bank loans, they have strayed from their core businesses and are seen as one of the culprits to runaway property prices. Together, they accounted for 5% of 2009 property sales by value.

Contrary to popular perception, it’s not that easy to execute government policy in China. Although it’s in China’s best interest to cool its property market and many policy directives no doubt have been issued, there are only limited results so far. Many parties have their own interests at heart and routinely ignored orders from Beijing, until the big hammer comes that is. Imagine Washington banning GM from finance and health care. That’s an SOE too.

Does that mean the property market will cool down? Well, perhaps. The number one driver of the market is actually Chinese local government, many of which depends on land sales for revenue, and lining the pockets of the cadres. Unless China figures out a way to  rein in their activities, I doubt the market will become rational any time soon.