In recent years, urban construction investment companies (known as “chengtou”) in various parts of China have been acquiring land on a large scale but developing very little, attracting attention. Experts say that originally, these companies acquired land to stabilize the real estate market for local governments and address land finance issues. However, due to factors such as economic downturns and lack of market demand, these lands have become a hot potato.
According to a report by “China First Finance” on July 27, in the past three years, urban construction investment companies have shown minimal progress in starting construction or development on the lands they acquired, with nearly 330 million square meters remaining undeveloped. Optimistically estimated, only 15% of the acquired lands are expected to be developed in the future.
Chengtou companies, short for urban construction investment companies, originated in 1991 and serve as investment and financing platforms for major city governments in China. Many of these companies are not profitable and fall under the category of state-owned enterprises or wholly state-owned companies, achieving profitability through government subsidies.
Data from China Index Institute shows that in 2022, among the top 100 land acquisition companies by area, there were 71 local chengtou companies, more than triple the number compared to the same period in 2021. According to analysis by CKI, in 2022, chengtou companies accounted for over half of the total land sold nationwide.
Data also reveals that from 2021 to May 2024, out of the land transactions in 30 key first and second-tier cities, 46% of residential land was acquired by chengtou companies (including joint ventures), with land acquisition accounting for a high 33% of the total. In terms of land acquisition area or amount, chengtou companies are the dominant type.
With China’s economy facing a downturn in recent years, particularly in the real estate sector, the enthusiasm for land acquisition by private enterprises has significantly declined. State-owned enterprises have notably increased land acquisition. Despite being burdened by massive debts, chengtou platforms have started replacing large property developers in land acquisition, a trend that has raised concerns.
Assistant Professor Sun Guoxiang from the Department of International Affairs and Business at South China University expressed that over the past three years, chengtou companies have acquired vast amounts of land amidst significant fluctuations in China’s real estate market.
He believes that initially, these chengtou companies acquired land based on policy guidance and government directives to provide a safety net under the real estate bubble, stabilize the land market, and primarily build land reserves. However, it appears that there is a major reason now, stemming from authorities imposing restrictions on the real estate sector, especially following Xi Jinping’s 2020 directive that “houses are for living, not for speculation.” Under the so-called “three red lines” policy constraints, private enterprises have faced financing difficulties and struggled to acquire land for development, while chengtou companies, relying on local governments and enjoying more lenient financing conditions, secured a large amount of land.
Regarding the recent trend of chengtou companies acquiring land but showing minimal development, CKI points out that their “low development capabilities” are a weakness.
Sun Guoxiang remarked that originally, these chengtou companies were supposed to gradually advance infrastructure and urban development projects after acquiring land, which does not seem to be happening now. It appears to be solely an effort by local governments to alleviate fiscal pressures through land transfer revenues. Furthermore, the government hoped that by holding onto these lands, it could stabilize the market. However, it seems these objectives have not been achieved.
Professor Xie Tian from the Darla Moore School of Business at the University of South Carolina mentioned that the accumulated lands by chengtou companies cannot be developed and sold, leaving them idle.
Xie Tian explained that the government currently believes that holding onto these lands still has some value on paper. “To maintain their value, otherwise, if their assets are not properly valued each year, they could go bankrupt.”
The proportion of chengtou debts within local debts has always been a topic of concern. It is believed that the greater debt risk for the Communist Party lies in the implicit debts of local governments, mainly including chengtou debts, which are not accurately reflected in official financial data.
According to data from the Ministry of Finance of China, as of the end of December 2023, the outstanding balance of local government debts amounted to 40 trillion yuan. However, in August 2023, Goldman Sachs estimated that the total local government debts of China reached as high as 94 trillion yuan, including debts of local government financing platforms, which are off-balance-sheet liabilities.
Local financing platforms are considered as black holes in China’s financial system by the industry. A previous report from the China Banking Research Institute indicated that the debts of the main body of local financing platforms – chengtou platforms – amounted to hundreds of billions of yuan, posing a systematic threat to the financial stability of the Communist Party.
The principal of chengtou debts is typically rolled over through the practice of “borrowing new funds to repay old debts,” while the interest portion of the debts must be paid off. Huatai Securities stated that in 2023, chengtou companies across the country paid out 3.43 trillion yuan in interest, while the total government fund income for the year was 6.62 trillion yuan. With government fund income contributing significantly to land acquisition by chengtou companies, and substantial costs such as land requisition, relocation, and compensation, there is still an anticipated payment gap.
Xie Tian analyzed, “This kind of supporting is similar to how the Communist Party supports the housing market. The Communist Party artificially holds up housing prices and now land prices, just to prevent the devaluation of their assets. Their funds are trapped, the debt problem arises.”
Sun Guoxiang stated that the extensive land acquisition by chengtou companies without development poses significant risks to the real estate and financial industries. “The idle vast land holdings could lead to waste of land resources and imbalance in the market supply and demand.”
The impact of chengtou debts on the financial market is even more profound. Sun Guoxiang mentioned that as financing platforms for local governments, chengtou companies raise funds through issuing bonds but continue to roll over debts by borrowing anew, leading to financial institutions having excessive exposure to them. If debt defaults trigger a chain reaction, it could shake the market’s confidence in local governments and chengtou companies, affecting overall financial market stability.
Huatai Securities noted that from January to May 2024, the nationwide land transfer fees amounted to 751.3 billion yuan according to the China Index, a 37% year-on-year decrease. Chengtou land acquisition amounted to 178.4 billion yuan, down 16% year-on-year, impeded land acquisition mainly due to increased cash flow pressure on the platforms and reduced capability for stabilization.
Earlier this year, the State Council of China instructed 12 provinces and cities with high debt risks to strictly control infrastructure projects funded by government investments to manage debt risks.
Sun Guoxiang indicated that the slowdown in land acquisition by chengtou companies since 2024 is primarily due to the overall market decline in real estate, making it challenging to sell properties and initiate new developments. Presently, the chengtou companies are merely trying to maintain a basic real estate price through land acquisitions, preventing a complete collapse of the real estate market.
Xie Tian stated that chengtou companies were initially established to assist with land finance. However, they are no longer acquiring land as before. “They are now stuck with lands they are afraid to devalue. They lack development capabilities, banks are not lending them money, and there is no market for them either.”
Xie Tian described that the situation with these lands held by chengtou companies is as unsatisfying as a chicken rib – neither enjoyable to eat nor palatable to discard. Or, it’s like a hot potato that they are hesitant to drop.