China real estate: From government official to board director

By Dr. Ting Chen

For quite some time, real estate has served as a powerful growth driver for China with Caixin, a local consultancy, estimating the sector contributed to almost 30% of the country's GDP (value chain included). As the recent challenges faced by the real estate industry cast a looming shadow on the nation's future economic prospects, frustrated market participants are looking for answers. Surely, not everything can be blamed on the “invisible hand” of the market? Looking at real estate transactions in China, a new report[1] explores whether the masses are right to suspect that something is amiss in China’s property sector.

Amidst the prevailing trend of politicians transitioning into plush corporate positions –  just think of notable figures like former German Chancellor Gerhard Schröder, who became CEO at Nord Stream 2, or ex-US Defence Secretary Jim Mattis, who sits on the board of defense contractor General Dynamics – it is only natural to ponder whether these lucrative roles are, in fact, rewards for the favors these corporations received during their time in office.

By meticulously aligning land transaction data from 2000 to 2012 with the CVs of board directors in publicly listed companies, the researchers created a dataset that allowed them to explore potential connections between officials engaging in land transactions and their subsequent appointment to board directorships, as well as their compensation. Additionally, they examined the pricing of these same transactions. The crucial aspect of this investigation lied in the in-depth analysis of board directors' CVs, which facilitated the identification of officials involved in land transactions during their public tenure. The results? The discounted masses’ anger and scepticism towards such practices might not be unfounded!

Findings reveal significant disparities between prefectures where companies had purchased land and those where they hadn't. In regions where land transactions took place, firms were three times more likely to recruit former government officials as board members compared to areas without such land acquisitions. Moreover, once appointed as directors, officials involved in these deals enjoyed considerable financial advantages. Specifically, their annual salaries were approximately 23% higher (or roughly US$35,000) than their peers who served as directors but had no involvement in land transactions. Additionally, they were granted 81% more equity, with these shares worth around US$760 000 on average (a sum comparable to the annual compensation of a CEO in a publicly listed firm in China in 2012, and about 20x what the mayor of a prefecture was making at the time).

What did these officials do to deserve such plush assignments? It seems that the firms that hired them first enjoyed an average discount of 19.4% on land transactions involving these officials, equivalent to a windfall of US$8.95 mln. Interestingly, both the level of discount and director’s compensation vanished when “special audit” were conducted by the central government, only to resume once these pesky accountants returned to Beijing.

As the market continues to grapple with its challenges, one thing appears evident: China's revolving door system can serve as a profitable payment mechanism rather than just a means of establishing connections. Whether moving from “guanxi” to a more transactional approach constitutes an improvement remains a matter for debate!

Reference:

[1]  Chen, T., Han, L., Kung, J. & Xie, J. “TRADING FAVOURS THROUGH THE REVOLVING DOOR: EVIDENCE FROM CHINA’S PRIMARY LAND MARKET”  The Economic Journal, 133 (January), 70–97.(https://doi.org/10.1093/ej/ueac060)