China's economic development zones and development zone-related real estate projects are under strong attack because of ongoing macroeconomic adjustment which, experts say, may lead to a major change in China's real estate development model.

"Low-cost real estate construction in development zones will be hit and the model might be abandoned," said Wang Yong, an analyst with Soufun.com Academy, which is a research department of Soufun.com, China's largest property portal.

The Ministry of Land and Resources (MLR) and other government departments last July launched a massive nationwide investigation into rampant land abuses in economic development zones.

By the end of this June, 4,735 development zones -- including economic and technological development zones, high-tech zones and new agricultural exemplary zones -- have been closed down, according to MLR.

Revoked development zones account for 70.2 percent of the original total number.

The planned area of development zones nationwide was reduced by 64.4 percent to 24,100 square kilometers.

While many farmers happily received their land -- local government requisitioned -- as development zones at low costs, the country's major development zones are also affected.

Lin Qihui, deputy secretary-general with China Association of Development Zones, said that ratification for new land necessary for State-level development zones has been suspended, leaving many State-level development zones with no area to locate new investors.

China has 49 State-level development zones. They are approved by the State Council, China's cabinet, and play important roles in attracting foreign investment and fuelling high-tech industries. The most important preferential policy granted to State-level development zones is a 15 percent income tax rate for industrial projects, compared with 33 percent for enterprises that locate outside the zones and China's five special economic zones.

Lin's comments were echoed by an official surnamed Zhou with the Tianjin Economic and Technological Development Area (TEDA).

"Starting early this year, we have to give up several major campaigns to attract foreign investors because we have little land for new investors," said Zhou.

Growth of contracted foreign direct investment (FDI) in these zones was 26.15 percentage points lower than the country's level of 42.66 percent in the first six months, which is commonly contradictory to the common pictures previously. Development zones, especially those at State-level with better infrastructure, have long been major arena attracting foreign investment.

Wang said current measures to clear development zones should be based on the principle of "closing smaller and weaker ones and encouraging stronger and State-level ones"

However, land management departments have to cancel all development zone-related land transactions because illegal ones might find it easier to survive without harsh policies.

Under China's current administrative system which hardly eliminates power abuse by local governments, the central government has to suspend all land transactions concerning development zones and gradually adjust the policy thereafter.

Wang said that real estate projects in development zones, especially in revoked ones, are seriously influenced by the strict policy against development zones.

While offering cheap land to real estate developers, many development zones have denser population. Most importantly, these development zones have easier ratification procedures to build developments.

In China, under a basic policy of protecting arable land, it is very difficult for local governments to endorse a real estate developer to purchase land-use rights of arable fields from farmers. But many local governments requisitioned or expropriated land from farmers to construct development zones at very low costs. Farmers commonly cannot maintain their rights because local governments' requisitions are done using the excuse of public interest.

Many of these development zones become ideal places for real estate developers to build low-cost suburban residences. The practice is often encouraged by local governments as infrastructure projects to lure investors to development zones, said Michael Lee, general manager of Regal Lloyds International Real Estate's Beijing branch.

It is hard to estimate how many real estate developments are built in development zones, but in Beijing, nearly all development zones in Tongzhou, Shunyi and Changping -- three suburban districts close to downtown areas -- have their own real estate developments.

As many property developments are suspended or cancelled together with the development zones they are located in, prices for finished projects in these zones will rise, but for a long time, many property projects planned for development zones will find it hard to get permission, Li said.

This is very likely to change the model of building real estate projects in development zones, forcing most developers to give up developments in those areas to avoid risks, said Wang.

(Business Weekly August 17, 2004)