China-wide Corruption Investigation Underway

Thursday, September 28, 2006 11:31

In what may be China’s first (public) China-wide anti-corruption effort, Beijing is in the middle of a campaign to investigate, identify, and punish officials who have misused their powers and/or access to funds in real estate transactions.

As often in the case, when an economy or a sector is on fire, and hot money flows in, everyone wants a piece of the action. In the United States, this lead to the downfalls of Enron and Arthur Anderson, and in China, it appears that the hammer will fall on local officials and developers.It is an age old story of power, money, and the belief that no one is looking.

Unfortunately, for officials and developers alike, someone is looking. As can by articles in the China Daily, IHT, Business Week, and Asia News).

Previously, in our post about 2nd tier real estate investment we highlighted our report on second tier real estate investment. Well before its time, this report showed the potential for real estate investors to capitalize on the growing 2nd tier economies by investing in residential properties. At times, we were seeing 30,40, and 50 percent gains in properties before the buildings were completed, and it is these gains that Beijing not only believes are irrational, but are in part due to illegal activities.

China Real Estate Developers

As these investigations unfold in the 11 cities (My guess, see map above, is that the cities of Dalian, Ningbo, Wuhan, Chengdu, Chongqing, Tianjin, Wuxi, Suzhou, Nanjing, and Hangzhou are all included), it is sure to have an impact on the real estate market and future development of properties as both local officials and developers will have to begin looking at a development proposal with sober eyes to ensure it will stand up to the scrutiny of Beijing.

The question will be what checks and balances will be put into place to ensure: (1) the market does not collapse; (2) that good property development plans are approved; and (3) that markets that still need investment are able to receive it.

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