China Week in Review

Top News of the Week

Real Estate Market under Spotlight last Week

One day after the closing of China's annual national people's congress, during which delegates and officials pledged to contain housing price increases, three land auctions pushed land prices to new records in the capital city of Beijing. Rough estimates reveal that the successful bidder in one auction has committed to paying a record CNY 29,000 per square metre for the land. The land price is just slightly lower than the average price of existing apartments in the same neighbourhood, which is outside the city centre. Another auction, meanwhile, stunned developers, policy-makers and consumers with the winning bid amounting to CNY 5.2 billion, the highest ever paid for a plot of land in Beijing.

Aside from record prices, the status of the winning bidders also caught everyone's attention; all are subsidiaries of major State-owned enterprises (SOE) that are sitting on cash piles and have easy access to bank loans. Chasing attractive returns, these SOEs, many of which don't count real estate as their core business, have been increasingly active in land auctions since 2009, often bidding prices to levels perceived "irrational" by private-sector developers.

The SOEs’ recent successful bids clearly prompted the government to act quickly and announced the consolidation of real estate business among SOEs later in the week. A total of 78 such enterprises, whose primary businesses are unrelated to real estate development, are put on the restriction list. They will not be allowed to participate in future land purchases and will have to exit the real estate business after existing projects are completed over the next couple of years.

It remains to be seen how much this action can help cool down the current real estate frenzy though. Statistics showed that SOEs’ land purchase accounted for 59% of land transactions in Beijing in 2009 and 62% so far in 2010. But the restriction list covers only a small number of such developers that accounted for less than 1% of last-year’s purchase by SOEs.

Market Recap

Although concerns about the real estate bubbles deepened last week with land auction prices breaking new records in Beijing, the stock indices were pushed up by investor optimism in the logistics and agriculture sectors, as well as in stocks that benefit from government policies to accelerate the convergence of telecom, internet and broadcasting networks. The market was also lifted by regulatory approval of the first batch of six brokers to carry out pilot projects in stock futures, margin and short trading. The Shanghai Composite Index increased 1.8% to 3,068 points, while the Shenzhen Composite Index rose 1.5% to 12,353.

Macro and Industry Updates

Central Bank Survey Found High Prices May Depress Consumer Desire to Spend

A record 51% of the survey respondents in 50 large and mid-size Chinese cities said current retail prices are unacceptable, the highest since the survey started in 1999. Meanwhile, 70% of those surveyed said housing prices are beyond their reach. Consumers are increasingly reluctant to spend, with only 15% of people in the survey saying they will spend more on products and services in the coming months. Nearly 44% of the survey participant said they will save more, while the other 41% will likely invest more in stocks and bonds.

Export-Heavy Guangdong Province to Raise Minimum Wage by 21% in May

The prosperous coastal province that boasts a large number of labour-intensive exporters this week said it will raise minimum wage and hourly pay by an average of 21.1% starting in May. After the raise, the minimum wage and hourly pay in Guangdong will be higher than those in Beijing and Jiangsu Province, but still be lower than those in Shanghai and in Zhejiang Province, another exporting hub in the labour-hungry Yangtze River Delta.

The Guangdong government expects the wage increases to help relief the labour shortage problems that are on the rise in the export sector this year, but some point to the lack of proper housing, healthcare and education support as the main reason behind migrant workers' hesitation to leave their hometown in search of work.

Chinalco and CNOOC Tapping Resources in Africa and South America

Chinese mining giant Chinalco last week agreed to pay $1.35 billion for 47% of a joint venture with Rio Tinto to develop an iron ore project in the western African country of Guinea. CNOOC, China's largest offshore oil explorer, also announced that it will pay $3.1 billion for 50% of a joint venture with Bridas Corp in Argentina.

Sportswear Firm Li Ning Surpassed Adidas in China Sales

Li Ning reported 2009 sales of CNY 8.4 billion, up 25.4% from 2008, while Adidas, previously the second largest sports firm in the Chinese market, sold an estimate CNY 7 billion of sports shoes and clothing in China in 2009, down by 16% year over year. Nike is believed to remain the top sportswear provider in China in terms of revenue.

Contributions from Lun Lu, Iris Tan and Zhao Hu.