In an effort to force businesses deemed by the Chinese government as focused on real estate out of the real estate sector, the Chinese government has limited the number of enterprises eligible for property development loans to a mere 16[1]. Another 78 businesses who were determined not to have real estate at their “core” have been instructed to pull out of the property sector, although at this time only seven have complied. In response to this recalcitrance, the Chinese government is demanding that banks pull property development funding from these “unqualified enterprises.”

Although the Chinese government has recently become highly involved in the nation’s real estate market in an attempt to stall inflation and prevent the formation of a real estate bubble, most businesses remain “optimistic about the market’s future,” according to the China Post. It is this optimism that prompted the display of stubbornness on the part of 71 of the 78 businesses told to withdraw from the property sector. Most companies wanted “to see how their counterparts would react to the order” before acting themselves, said “insiders from the property industry.” The result was an impasse that the government appears to have resolved by simply withdrawing the funding these companies need to actually be involved in the real estate sector.

Not surprisingly, this move is predicted to create a wave of mergers and acquisitions in the Chinese real estate industry. Do you think that this type of government control over the real estate market is a good thing for China? What about for the rest of the international investing community?

Thank you for reading the Bryan Ellis Real Estate Letter! Your comments and questions are welcomed below.

[1] http://www.chinapost.com.tw/business/asia-china/2010/12/07/282652/China-banks.htm