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(China Daily)
Updated: 2010-03-23 07:51
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State-owned enterprises (SOEs) are obsessed with real estate because they earn huge profits from the sector. But if the real estate balloon bursts it will cause irreparable damage to the national economy, says an article in the Economic Observer. Excerpts:
More than 70 percent of 134 SOEs earn nearly a third of their revenue from the real estate market. This, combined with their poor adjustments to changing market situations, would land them in big trouble if the property market balloon bursts. An example of the SOEs' adjustments is their floating loss of 11.4 billion yuan on an investment of 125 billion yuan in financial derivatives.
SOEs have the unique advantage of evading risks behind government policies, and they can shift their losses to the national treasury. But if they, as the mainstay of China's economy, set aside a huge part of the resources from their core business to drive up housing prices, then they are seeking to make profit from borrowed prosperity. In other words, they are preparing to commit suicide. As Harvard economist Michael Jensen has said in his free cash flow hypothesis, most SOEs actually reinvest their dividends from the housing market to buy new land. If this continues, we could soon see the pillars of the national economy change into financial derivative investors.
Their addiction to real estate can be cured only if their access to State funding is made difficult.
(China Daily 03/23/2010 page9)
