China Cracks Down on Real Estate Speculation Via Shell Companies

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Municipal governments around China have sought to prevent speculation in the real estate market by suspending the purchase of housing by companies.

The Ministry of Housing and Urban-Rural Development has just released the “Notice Concerning Special Actions in Some Cities to Strike in Advance against Illegal, Non-compliant Conduct that Harms Public Interest and Deal with Property Market Malfeasance” ( 关于在部分城市先行开展打击侵害群众利益违法违规行为治理房地产市场乱象专项行动的通知).

The Notice calls for local governments around China to “pragmatically implement their duties with regard to real estate market regulation,” as well as make “striking against illegal and non-compliant conduct that harms public interest the priority of priorities for work to rectify real estate market malfeasance.”

The local governments for the provincial capitals of Changsha, Hangzhou and Xi’an have already responded to the Notice by declaring that they will step up some of real estate property controls that municipal authorities around China first began to launch in March of last year.

These new control measures include barring enterprises from purchasing homes, as well as safeguarding the share of housing supply dedicated to inelastic demand.

State media reports that the “focus of the current round of housing controls is striking against speculative investment in property, and supporting the purchase of homes by those subject to inelastic demand.”

According to Yan Yuejin (严跃进) from the Shanghai E-house Real Estate Research Institute, a number of speculators in the property market have taken to the use of registered shell companies as “sock puppets” to participate in the lottery system for home purchases –  a measure that municipal governments have already introduced as a means of curbing speculative investment.

The Hangzhou municipal government recent revealed that three of the companies that won the lottery for public sale of the Jiulong Canlongxi project (九龙仓珑玺) all shared the same legal representative.

Yan said that suspending the purchase of homes by enterprises and other entities will serve to “specifically target speculative demand for homes via the use of companies,” and be of benefit to further ensuring the fairness of the housing purchase lottery system.

In addition to targeting speculative investment in real estate via companies, some cities have also outlined an “inelastic demand housing ratio” (刚需房源比例), such as Xi’an, which requires that developers “preferentially provide no less than 50% of housing supply to inelastic demand households” during lottery sales of homes.

The Sichuan province capital of Chengdu has also required that real estate developers ensure that at least 10% of housing supply for a given period be publicly used for preferential sale to  residents who have received monetary compensation for shantytown redevelopments.

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