Ronnie Chan On Moral Hazard In The China Real Estate Sector24 June, 2011, 16:11. Posted by Zarathustra
Tags: Real Estate, Ronnie Chna
If you think that US government is creating moral hazard by bailing out Wall Street banks, so is the Chinese government.
Ronnie Chan, the Chairman of Hang Lung Properties (101.HK), spoke in a forum in Shanghai according to Wall Street Journal (Chinese). He made a bold comment that the government should “let a few real estate developers go to bankrupt”.
He has rightly pointed out that after the Lehmanesque crash in late 2008, many of the Chinese real estate developers were essentially insolvent. In fact, he estimated that 85% of developers were insolvent. Unfortunately, the government bailed out the developers, and now the real estate market has gone through the roof. This is exactly why all those Chinese real estate developers are always so confident, telling analysts that “the government doesn’t want us to fail”.
He then pointed out that developers in China are now getting loans in Hong Kong for 13%, 15%, or even more (just as I have pointed out in 10 Reasons to short China), and that is very bad. He also pointed out that the root cause of the problem of high property prices is that local governments sell lands to get the money (for whatever reasons). The Chinese (central) government needs the political will to crack down on this, he said.
To solve the moral hazard issue, he recommends the government to let a few of them just fail. The government can takeover these failed firms, but these failed firms should pay for the price of over-leveraging.
In another report, Hang Lung Properties has prepared 20 billion Yuan of cash to wait for opportunities (i.e. correction in land prices) to acquire land.
On the whole, he has rightly pointed out the big issues, and he seems to agree with some that perhaps a significant fall of property prices (call it a crash, if you like) with failures of a few Chinese real estate developers would not be a bad thing. Richard Koo, of course, said there will be blood in the Chinese real estate sector, as he believes that the Chinese government is keen to crack down on high property prices, and is willing to let some developers fail.