A speech entitled "Reasons for the Domestic Housing Price Hike -- Half of all Property Development Costs Flow to the Government", delivered by the All-China Federation of Industry and Commerce (ACFIC), aroused heated debate during this year's annual sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC).

The speech stated that according to a survey of property development costs in nine cities, almost 50 percent of total expenses go to the government, including land costs and tax revenues. Among the nine cities, Shanghai's developers top the list with 64.5 percent of their expenses going to the government.

During the parliamentary sessions in March, Han Zheng, the mayor of Shanghai, responded to the speech by casting doubt on the sources of the data. But he did not reveal any alternative statistics from his side.

During a video-phone conference on administration and the law on March 18, Han said: "The Shanghai government promises to make information on government funds accessible to the public." According to the budget reports of Shanghai in recent years, land transfer fees represented a significant share of the municipal government's funds.

An insider told China Economic Weekly that Shanghai Municipal Planning, Land and Resource Administration Bureaus are preparing the required calculations and documents for an "open clarification" in response to the ACFIC's statistics.

However, property tax revenues may not be included in the disclosure. Xu Jun, an official in charge of media relations for the municipal financial and tax department, admitted to the China Economic Weekly that property taxes were not included in the information which "should be disclosed" and they had not received any instructions to calculate the revenues from local property developers.

64.5% of revenue goes to the government?

The ACFIC speech raised a question: What has driven housing prices up, and who has benefited -- the government or the developers?

Ren Zhiqiang, president of housing developer Beijing Huayuan Group, revealed part of the answer in his blog. Ren, also the vice chairman of ACFIC Real Estate Chamber of Commerce, topped the income list of Chinese mainland developers in 2008, at 7.74 million yuan.

Ren wrote in his blog on March 11 that the ACFIC speech at the annual sessions of NPC and CPPCC revealed the cost breakdown of domestic property development. The speech answered the question -- who was behind the housing price hike -- by disclosing that government land fees and taxes constitute the major share of housing prices. If we want to curb soaring prices we would have to start with the government, because "it's hard to make cheap bread from expensive flour."

According to the ACFIC speech, 64.5 percent of sales revenues of Shanghai's property projects go to the government, the highest in the country, and developers' profits represent only 4.15 percent.

The statistics seem to answer accusations of "profiteering" by developers. But most municipal governmental officials, including Han Zheng, cast doubts on the data and disagreed with the speech.

One official, on condition of anonymity, said to the Weekly that "all the data and opinions in the speech came from the developers. The speech aimed to protect the developers' interests under the cover of the ACFIC."

What, then, are the sources of the data quoted in the speech?

The ACFIC speech was based on investigations and studies submitted by the subordinate Real Estate Chamber of Commerce. In the second half of 2008, the chamber interviewed 62 developers in nine cities, including Beijing, Shanghai and Guangzhou, and formulated an analysis of 81 real estate projects: Basic Analysis and Summary of Real Estate Development Expenses and Sales Revenues in China.

On February 6, based on the Summary, the chamber submitted another document -- Investigation and Study Report on Real Estate Development Expenses in China -- which was intended to form the basis of the ACFIC speech.

Comparing the three documents mentioned above (the speech, the Summary and the Investigation and Study Report), the Weekly raised several questions:

Was the sampling process of 81 projects from 62 developers in the Summary representative? In Shanghai, the Summary analyzed 30 projects from 29 developers; in Guangzhou, 31 projects from 19 developers. In contrast, only 7 projects from one developer in Beijing were analyzed.

In the course of the research, 4 of the 9 cities (Xi'an, Suzhou, Chengdu, and Shenzhen) were represented by only one project from one developer, and the projects were still at the design stage.

All the statistics in the report are from the same source: REICO Studio, which is jointly run by ACFIC Real Estate Chamber of Commerce, Chinese City League, and the Beijing Wantong and Huayuan Real Estate Groups. Some professors suggest that the statistics may have been subject to selective use of data, and need to be validated.

The Shanghai municipal government has clearly stated its view that developers should lower housing prices, said one senior expert. The government has said, "Prices are much too high. The government should react by introducing guidelines and promoting consumption to attract more buyers."

During the NPC and CPPCC sessions, property developers suggested that the Shanghai municipal government should stabilize housing prices, but there is no need for a widespread policy of building economically affordable houses and low-rent houses. One developer said the government should look into the true causes of high prices, while appealing for action to lower prices -- one of the original intentions of the Investigation report.

Cheng Siwei, a well-known Chinese economist, presents a price model comparing 3 cities: Beijing, Shanghai and Fuzhou. "The analysis indicates that the building cost of a house accounts for 50 percent, tax revenues 20 percent, and profits to the developer 30 percent. But of this 30 percent, some may find its way into the pockets of government officials -- either they actively demand a 'share', or passively accept one."

In fact, other cases in the real estate industry suggest this kind of corruption. Although not going into the details, there is a 3 percent "contingency sum" in the analyses of the Investigation report.

(China.org.cn by Huang Shan and Jessica Zhang, March 22, 2009)