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A Study on the Impact of China’s Macro-control to the Financing

Structure1 of Small and Medium-sized Real Estate Enterprises

Rui LIN, Di WU, Xiuting LI, Jichang DONG

School of Management

Graduate University of Chinese Academy of Sciences

Beijing, PRC

linrui10@mails.gucas.ac.cn

Abstract- With the real estate macro-control policies carried out in China, an increasing number of real estate

enterprises are facing huge financial pressures, especially bankrupts for small and medium-sized real estate

enterprises. This paper analyzes the impact of China’s macro-control to the financing structure of small and

medium-sized real estate enterprises theoretically and empirically, and proposes that the capital structure of small

and medium-sized real estate enterprises is consists of four components: the own funds (including equity financing

funds), the housing revenues, the construction unit loaning and the credit funds. This study concludes that the

financing structure of small and medium-sized real estate enterprises is closely related to China's macro-control,

and China’s macro-control has no significant influence on the more autonomous part of the finance structure

while significantly influence on the less autonomous part. Based on the conclusions, this paper provides some

policy recommendations for both the small and medium-sized enterprises and the state so as to help the small and

medium-sized enterprises and ensure the steady and healthy development of China's real estate market.

Keywords- Macro-control; Small and Medium-sizedReal Estate Enterprises; Financing Structure; Analysis of

Variance

I. INTRODUCTION

From the stringent macro-control of avoiding the excessive growth of real estate investments and

housing prices in 2003, to the “Eight Regulations Issued by General Office of the State Council” in 2011,

existing macro-control policies not only failed to stop the over development of the real estate market, but

also contributed several oligarchs of the real estate industry, such as Vanke. Meanwhile, a group of

small and medium-sized real estate enterprises (SMREEs) have projects uncompleted due to the broken

funding chain and financing difficulties, turn to the private lending and cannot afford to the price

reduction in virtue of the increasing cost in trust financing, lands, taxes, building materials, etc., which

are beyond the normal range of profits. Under such circumstances, whether the real estate industry will

become a game of several large enterprises, with small and medium-sized enterprises (SMEs) only

standing aside? Does the macro-control make the real estate market healthier?

Considering 140 A-share listed real estate enterprises (REEs), nearly 90 of them are SMREEs, by the

way, more other SMREEs not yet listed. Meanwhile, more than 90% of China’s REEs are SMEs, and

the survival and development of SMREEs needs for more social concern. Actually, it needs these SMEs

to maintain a competitive market for China’s future real estate and break the monotony of community

1 The financing structure (or capital structure) in narrow sense is a proportional relationship referring to the

long-term liability and the equity capital of the enterprise. This paper adopts a generalized definition of the

financing structure (or capital structure), which is the combined funds structure of the various elements of the

enterprise.

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decision and architectural models of large enterprises, as well as to introduce some new development

models and management approaches, which, however, are all based on the necessary funding support.

Therefore, studying on the financing problem of SMREEs by current macro-controls will provide a

strong guarantee for their development, thus contributing to the overall development of the real estate

market.

II. LITERATURE REVIEW

In western countries, scholars have studied the financing structure problem deeply, and there are many

related research literatures which cover various aspects of the macroeconomic, including inflation,

taxation, enterprise size, the state system, legal, etc.

Among the studies of macroeconomic to financing structure (of the REEs), Laurence (2001) analyzed

the impact of the systems of 10 developing countries to their financing structure, and his research

showed that the state system had a significant impact on the financing structure. Hackbarth (2006),

based on the optimal financing structure, analyzed the capital structure of listed REEs, and his research

results showed that the macroeconomic influenced their capital structure significantly. When the

macroeconomic performed well, the adjustment speed of the capital structure was faster than that in

macroeconomic downturn. Hackbarth (2007) believed that if the company’s operating cash flow

fluctuated great with the macroeconomic environment, the company’s capital structure policy would be

adjusted with the macroeconomic conditions. He also established a random theoretical model on the

basis of this assumption, which found that: the company in times of macroeconomic prosperity would

increase its debt financing and adjustment number more frequently than in economic recession, but the

adjustment is small. Heng, Li, Vera (2010) surveyed of 58 people, including experts and scholars,

related to China’s real estate, and found the financing advantage, market share and management

advantage of the REE, are essential to its own competitiveness. Xiaohong Tai and Nan Chen (2011) also

studied the relationship between the capital structure and enterprise value of listed real estate companies

by building a compare regression model.

On the basis of western scholars’ researches and China’s characteristics, scholars in China also

studied the financing problem of SMREEs, and made some recommendations. Lin Yongliang (2001),

Guo Dongyue, Shi Baodong (2003), emphasized that China's single real estate financing channels and

low market led to high risk of the real estate industry, and the real estate financing channels should be

expanded for the healthy development of the real estate industry. Ling Changfeng, Zhang Hongfang

(2001) pointed out that, confronted with the strong demand for real estate funds and the narrow

financing channels, optimizing the capital structure and expanding the capital scale will become a

dominant factor in determining the competitiveness of small and medium-sized real estate companies.

Qiao Zhong, Dong Chunlin (2006), Du Guangru, Zhao Junyan, et al. (2010) also pointed out that

breaking the financing bottleneck under the macro-control for effective financing, and selecting the

appropriate financing channels, is a key to the survival of the SMREEs. Yang Yongqing, Sun Yuanyuan

(2006) proposed a kind of union financing for SMREEs to absorb idle funds to solve their own financing

problems by learning from the syndicated financing methods, and proved its feasibility by the game

theory. Wang Hongbing, Wang Shuqiang (2007) also proposed a new idea combining traditional

financing models with emerging financing models to achieve an organic integration of the real estate

market, the securities market and the capital market, and the diversification of the financing models of

the REEs.

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In addition, Zeng Deming, et al. (2004) empirically analyzed the listed companies in China, and found

that there existed a significant negative correlation between the financial leverage and the performance

of the companies. Liu Chun, Wu Yong (2009) believed that, the main external factors influencing the

financing structure of listed companies in China, were financing policies and the financing party

(including financial, government, credit, guarantee agencies and shareholders), and the government and

the financial institutions as funds providers had a significant influence on the financing structure of listed

companies in China. Tang Xiaofei, Kangyi, et al. (2011) found that the external financing constraint

degree of state-controlled listed REEs was significantly different from that of non-state-controlled ones,

and there also existed significant differences to the constraint degree by different financing channels for

those listed REEs who had similar ownership structures. Shen Tianfeng, Han Lingli (2011) suggested

that, in order to solve the financing problems of the real estate market under macro-controls, REITs

could well meet the development demand of financial innovation.

III. THEORETICAL ANALYSIS

A. The Review of China’s Real Estate Regulations

Since China’s real estate market started in 1998, until 2002, government regulations have been

focusing on regulating the real estate market system, and stimulating the real estate market supply and

demand, thus contributing the prosperity of the real estate market. However, since 2003, the housing

prices began to increase rapidly, and especially after a brief waiting and seeing period in the 2008

financial crisis, the growth rate of housing prices rebounded in retaliatory. National statistics department

data showed that the national average selling price of the commercial housing in 2009 rose 23% than

that in 2008, and from the late 2009 to 2010, the year on year growth of the commercial housing price

had been double-digit for six months continuously. The high prices brought to the country with serious

social and economic problems, which also seriously affected the normal consumption of the residents

and exacerbated the gap between the rich and the poor.

In order to ensure the steady and healthy development of the real estate market, the Chinese state has

issued various control policies. Real estate macro-control policies from 2003 to 2011 are shown in Table

1:

Table 1 Review of Macro-Control Policies From 2003 To 2011

Period Date Macro-control Policies

2003 – Sep., 2007:

regulate the housing

supply and demand

to keep the price

stable.

Jun., 2003

“No. 121 document” was issued, which requires four certificates for the mortgage

loan, and increases the first payment proportion of the personal second housing to

40%.

Jul., 2003 Starting to levy real estate tax on the sale of houses.

2004

The State Council issued the “Urgent Notice on Strengthening Land Market

Management”. Next, a series regulations like strengthening the supervision and

approval of the affordable housing, the monitoring of the real estate credit, as well

as the central bank to raise interest rates for the first time, etc.

Mar., 2005 The “Notice on Effectively Keeping the Housing Price Stable By General Office of

the State Council” (called the “Old State Eight Regulations” for short).

May, 2005

The “Recommendations on efforts to stabilize the housing price” (called the “New

State Eight Regulations” for short), which levies the business tax to the personal

investment in real estate.

2006 The nine ministries and commissions of the State Council jointly issued the “Notice

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on the Adjustment of the Housing Supply Structure to Stabilize the Housing

Price”(called the “State Six Regulations” for short), which required the new

construction part of the commercial housing bellowing 90 square meters should

account for more than 70% of the total construction.

2007

Strengthening the regulation of the real estate credit and the land, carrying out 1.1

times the interest rate to the personal second housing, and six times to raise the

interest rate, 10 times to raise the deposit-reserve ratio in a year. The loan interest

rate was from 6.12% in the beginning of the year to 7.47% at the end of the year,

while the deposit-reserve ratio was from 9% in the beginning of the year to 14.5% at

the end of the year.

Oct., 2007 – Oct.,

2009: relax the

macro-control policy

to revive the market.

The second half of

2008

In the second half of 2008, the financial credit was gradually relaxed with the

deposit-reserve ratio several times down, and interest rate five times cut.

Dec., 2008

The General Office of the State Council issued “A Number of Recommendations on

the Promotion of the Health of the Real Estate Market”, which included that the

own part of the investment funds of the affordable housing and the normal

commercial housing is 20%, and the relaxation of the mortgage loan policy to the

personal second housing, 7% discount of the interest rate, tax relief, etc. The state 4

trillion yuan to economic stimulus also increased the scale of bank credits.

Oct., 2009 – now:

Strengthen the

market regulation, to

curb the housing

price.

Dec., 2009

The State Council executive meeting issued the “Policy Measures to Perfect and

Promote the Healthy Development of the Real Estate Market”, and also announced

that the time of the free individual housing transfer business tax recovered to 5 years

from 2 years.

Jan. 10, 2010

The State Council issued the “Notice on the Promotion of the Stable and Healthy

Development of the Real Estate Market” (called the “State Eleven Regulations” for

short), which included: 1) differences in credit; 2) strengthening the supervision of

the credit risk, and the guidance of the real estate lending window; 3) speeding up

the small and medium-size, and medium and low-cost housing construction; and

strengthening the supply of the housing land, and the responsibility of the local

government.

Feb., 2010

The CBRC issued the “Notice on Strengthening the Regulatory of Real Estate

Trusts”, which required that the trust funds could only be used for those who had the

real estate secondary development qualification, four certificates for the

development project, and the capital ratio to 30%.

Mar. 18, 2010

The SASAC requires the 78 enterprises under the central government whose

primary business is not real estate to restructure their business and quit their real

estate business.

Apr. 15, 2010

The Ministry of Land and Resources announced the “Supply Plan of the National

Housing Land in 2010”, which said the housing land for the affordable housing, the

small and medium-size commercial housing and the shantytown in 2010 would

account for more than 70%.

Apr. 17, 2010

The State Council issued a notice (called the “Limited-credit Policy”), which

required to suspend the mortgage housing loan of the personal third or more housing

in areas of high housing price, fast housing price increase, or tight housing supply

and demand, and to suspend the mortgage housing loan to the non-residents who

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cannot provide local taxes more than 1 year or social security contributions.

Apr., 2010

The relevant departments emphasized that they would suspend the IPO and

refinancing applications to the REEs who had the idle land or the land speculation

behavior.

Oct., 2010 The restructuring of REEs was officially halted.

Nov., 2010 The supervision department required the listed enterprises whose primary business

contained the real estate to suspend their market refinancing.

Early 2011

The General Office of the State Council issued the “Notice on Better Regulating the

Real Estate Market” (called the “New State Eight Regulations”), which mainly

included: 1) each city to develop and publish its price control target; 2) increasing

the proportion of the first payment of the personal second housing mortgage loan to

60%; 3) extending the “Limited-purchase Policy” to second and third tier cities; 4)

strengthening the full collection measures to the transaction business tax of the

second-hand housing.

From Table 1, though the government has different priorities and means of control at different times,

basically it includes several aspects of financial credit, taxation policy, land policy, housing and

security policy, etc. Actually, from the targets of several controls and the development trend of the real

estate market, a series of macro-control policies have produced some positive results to a certain extent.

However, the eight-year regulatory policies do not really keep the steady development of the real estate

market. In times of moderate control regulations, the price kept still; in times of strong control

regulations, the price rebounded in retaliatory; and under recent stronger control regulations, many real

estate enterprises were occurred general operating crisis. How do the policies affect the market and

achieve the expected results? It really needs us to figure it out based on the macro-controls in the past

eight years.

B. The Financing Situation of China’s SMREEs

The capital structure of REEs for real estate development consists of their own funds (including

equity financing funds), the housing revenues, the construction unit loaning and credit funds. Each part

of the funds can be replaced in each other at different real estate financing stages, and eventually the

other three funds will be replaced by the housing revenues to end the entire development process of the

real estate project (Figure 1).

Figure 1 Funds Structure of the Real Estate Development

Real Estate

Development

Funds

Construction Unit

Loaning

Credit Funds

Housing Revenues

Own Funds (including

equity financing funds)

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For further analysis, we divide the entire development process of the real estate into 4 stages by the

time when each fund is involved. The funds structure at each stage is shown in Table 2:

Table 2 Match of the Development and Funds of the Real Estate Project

Development

Phase Classification Criteria

Funds Structure

Own Funds (including

equity financing funds)

Construction

Unit Loaning

Credit

Funds

Housing

Revenues

Land Purchase From the land contract signing to

the land transfer payment √

Early

Construction

From purchasing the land to

obtaining the four certificates √ √

Medium-term

Construction

From obtaining the four certificates

to the roof-sealing √ √ √ √

Late

Construction

From the roof-sealing to the project

completed √ √ √ √

Construction

Completed Project completed

√

Large REEs due to its advantages of scale, brand and capital, occupy a strong position in the

financing aspect, while financial institutions are also willing to cooperate with large REEs providing

them relatively more favorable loan terms, longer term of the loan, as well as more flexible lending

model than SMREEs. By comparison the debt asset ratios of “Four Largest REEs” with those of 89

SMREEs in Table 3, we can see that banks and other financial institutions mainly invest their capital to

large REEs, with SMREEs facing financing difficulties. When the economic situation is bad or a new

state regulation issued, the SMREEs are firstly affected, for banks more considering the risk than the

profit, and SMREEs also facing more operating risks than large REEs.

Table 3 Debt Asset Ratio Comparison of the Past Eight Years (Unit: %)

Security Abbr. 2003 2004 2005 2006 2007 2008 2009 2010

Vanke A 54.92 59.42 60.98 65.04 66.11 67.44 67.00 74.69

China Merchants Property 43.88 57.98 56.49 70.54 63.58 56.51 61.79 64.65

Financial Street 69.53 64.74 66.14 63.61 64.63 46.11 62.36 68.17

Poly Real Estate 70.96 81.40 84.99 75.66 68.62 70.78 69.99 78.98

Average of “Four Largest REEs 59.82 65.88 67.15 68.71 65.73 60.21 65.28 71.62

Average of 89 SMREEs 52.36 52.93 55.12 54.25 53.59 53.17 52.80 54.35

In addition, seen from Table 4, the scale of the credit financing of “Four Largest REEs” is larger than

that of 89 SMREEs since 2006, while the total credit financing of “Four Largest REEs” in 2010 is 2.2

times the 89 listed SMREEs, which means the total credit financing of SMREEs is relatively small. All

these show that supports for SMREEs are limited, with the development of the macro-control and the

real estate industry, large REEs get larger credit scales. Besides, after the state adopted a series of

policies to stimulate the economic in 2009, the credit scale of the real estate industry has been

significantly improved, but those getting the larger share of the credit scale are still large REEs.

Table 4 Credit Financing Scales of REEs (Unit: Billion Yuan)

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2003 2004 2005 2006 2007 2008 2009 2010

“Four Largest REEs” 12.132 14.653 20.340 39.048 63.795 73.458 107.135 182.992

89 SMREEs 33.785 32.015 36.163 36.897 36.059 42.943 60.924 82.481

C. The Impact Mechanism of Macro-policies on the Financing Structure of SMREEs

In recent years, real estate macro-control policies always aimed at controlling the housing prices,

but most of the control policies (except the limited-price housing policy) were indirectly through

their impact on the supply and demand of REEs to achieve this goal, while the changes of the

supply and demand also can be directly reflected in the capital structure of the REEs. Based on the

analyses of the macro-control policies over the past years, this paper will study the impact of the

three main types of macro-control policies - monetary policies, fiscal policies and administrative

policies on the financing structure of SMREEs.

1) The Impact Mechanism of Monetary Policies

Monetary policies mainly influence the credit fund, including its size and cost. Among the four

sources of funds in real estate development, the construction units loaning often comes from the

credit financing, and the individual mortgage loaning part of the housing revenues also belongs to

credit funds, so monetary policies may not only just influence credit funds, but also have a more

comprehensive impact.

When the credit reduces, the REE, on the one hand, will inevitably increase its non-credit

funding, and on the other hand, will also make a choice within the credit funds, for example, it

may choose the trust loaning which is not subject to the limits of the deposit-reserve ratio, but has

a higher capital cost. In addition, the adjustment of the loan interest rate will increase the cost of

the credit capital, and affect both the cost and the amount of consumer loans, resulting in the

decreasing of the total housing price and the monthly payment that buyers can afford. Meanwhile,

the loan interest rate can influence the entire economic sectors, which can increase the total cost of

the real estate construction and real estate development funds.

Figure 2 Trend of the Debt Asset Ratio From 2003 To 2010

(Unit: %)

Figure 3 Comparison of the Short-Term Loans and the

Long-Term Loans of SMREEs (Unit: Million Yuan)

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Figure 2 and Figure 3 show that, compared with “Four Largest REEs”, the Debt Asset ratio of

SMREEs changes less due to their smaller financing total assets under the macro-control, but the

financing structure changes a lot in the period, with the short-term loans basically stable at around

300 million yuan, while long-term loans have been an upward trend all the time.

The adjustment of monetary policies directly affects the housing revenues and the credit funds

of SMREEs, and changes the structure of the long-term loans and the short-term loans of the

financing structure, thus changing the risks and the borrowing costs of SMREEs.

2) The Impact Mechanism of Fiscal Policies

China’s fiscal policies are mainly focused on the tax policy and the land policy.

a) The impact mechanism of the tax policy

The control of tax policies starts from both the supply and the demand, and try to regulate both

the housing buyers and the real estate developers: a) the increasing of the housing buyer’s

transaction and holding tax will reduce the investment housing buyer’s opportunities and increase

its costs, thus resulting in lower demand and the indirect adjustment of the housing revenues; b)

the increasing of the REE tax will require more development funds and use them in advance; c)

the increasing of the land tax will enable REEs to speed up their real estate development process,

to reduce their idle lands, to directly increase the supply of housing market, and to indirectly

decline the housing prices, thus resulting in the reduction of the housing revenues; d) strict

supervisions to taxes will lead to the decrease in profits of REEs, because in order to ensure profits,

REEs will increase their financial leverage, which indirectly affect the financing structure.

b) The impact mechanism of the land policy

The regulation of the land policy will increase the own funds of REEs, which leads to the

disadvantage of SMREEs in the land reserve. Meanwhile, the funds occupied by the land reserve will

directly influence the financing structure of REEs, especially for increasing the funds demand of the

entire development. With the own funds to increase, the demand for credit funds, especially for

long-term funds will also increase. When lack of the own funds, equity financing will also become an

inevitable choice for SMREEs. Actually for Figure 3, the substantial increase in long-term loans is also

closely related to the fact that the land reserve cycle occupies the funds of SMREEs for a long time.

3) The Impact Mechanism of Administrative Policies

Administrative policies influence the financing structure of SMREEs by affecting the supply and

demand, and conducting the real estate development.

To the impact on the supply and demand, administrative policies of the limited-purchase housing

policy, the limited-credit housing policy and the housing policy of improving first payment are most

obvious. These policies increased the access threshold of buyers, and kept those who had the

purchasing power from buying, resulting in a drop in demand. Actually, the limited-purchase housing

policy issued by the state in 2010 was accompanied by the limited-credit housing policy at the same

time. The limited-credit housing policy will increase the amount of their own funds and the

construction units loaning of REEs, and force SMREEs to increase the credit structural adjustment and

to borrow high interest rates of trust funds or private funds, due to SMREEs lack of bargaining power,

and banks apt to reducing the loaning of SMREEs. If further faced with capital difficulties, and no

major sales breakthrough, SMREEs must cut prices to stimulate sales.

To the impact on conducting the real estate development, the main policies include restrictions on the

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dwelling size, the supporting low-income housing or the small apartment housing. These administrative

policies made REEs give up the profits of the high-end residential construction and the construction of

villas, and instead invest in the practicality housing closer to ordinary people, thus affecting the

financing structure of the REE. For example, because the construction of the low-income housing

requires less own funds than the commercial housing, and is not limited by the credit policies and

repurchased by the government or for direct sales, SMREEs can actively participate in the tender

construction to avoid the great funds pressure under the macro-control, with the entire demand for

funds reduced, the speed for payment back accelerated, and earlier taking money out of the

development for new projects.

In summary, the impact of the three main types of macro-control policies on the financing structure

of SMREEs is shown in Figure 4:

The Capital Structure of China's SMREEs

the own funds (including

equity financing funds)

the construction unit

loaningthe credit funds the housing revenues

monetary policy fiscal policy administrative policy

China's Real Estate Macro-control Policies

the tax policythe land

policy

the supply

and demand

The conducting of the

real estate development

the deposit-

reserve ratio

the loan

interest rate

Figure 4 Impact Mechanisms of Macro-Policies on the Financing Structure of SMREEs

IV. EMPIRICAL ANALYSIS

A. Data and Description

1) Samples

Based on the facts that the data of listed companies is available, and that the number of China’s listed

SMREEs before 2006 is relatively small, we remove the listed large REEs, and select the listed

SMREEs from 2007 to 2011 as the sample.

In this paper, the selection criteria for SMREEs is set as follows: (1) In accordance with the SME

provisions, those whose yearly prime operating income is below 2 billion yuan are defined as SMEs

(small and medium enterprises); (2) The prime operating income of the REE must be real estate

development and account for more than 70% of its total operating income (70% included), with the ST

enterprises removed. The final sample includes 26 listed enterprises, such as shown in Table 5:

Table 5 Selected Listed SMREES

Corporation Name Stock code Proportion

Shahe Industrial Co., Ltd. 000014 95.75

Oceanwide Real Estate Group Co., Ltd. 000046 97.89

Yihua Real Estate Co., Ltd. 000150 84.27

Lvjing Holding Co., Ltd 000502 97.92

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Shenyang Ingenious Development Co., Ltd. 000511 98.47

Tianjin Guangyu Development Co., Ltd. 000537 99.66

Lander Real Estate Co., Ltd. 000558 99.87

Hainan Haide Industry Co., Ltd. 000567 92.1

DongGuan Winnerway Industrial Zone Ltd. 000573 85.69

Milord Real Estate Development Group Co., Ltd. 000667 97

Tianjin Tianbao Infrastructure Co., Ltd. 000965 73.82

Guangdong Shirong Zhaoye Co., Ltd. 002016 98.43

Yunnan Tourism Co., Ltd. 002059 81.34

Shenzhen Heungkong Holding Co., Ltd. 600162 97.44

Shanghai Prosolar Resources Development Co., Ltd. 600193 94.84

Tianjin Realty Development (Group) Co., Ltd. 600322 94.56

Guangzhou Donghua Enterprise Co., Ltd. 600393 98.89

Shanghai Fenghwa Group Co., Ltd. 600615 92.6

Shanghai Wanye Enterprises Co., Ltd. 600641 100

Shanghai Duolun Industry Co., Ltd. 600696 90.09

Shanghai Xinmei Real Estate Co., Ltd. 600732 100

BEIH-Property Co., Ltd. 600791 98.1

Shandong Tyan Home Co., Ltd. 600807 89.77

Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd. 600895 78.64

Hefei Urban Construction Development Co., Ltd. 002208 98.24

Jiangxi Zhongjiang Real Estate Co., Ltd. 600053 99.95

1. Proportion =”The proportion of the prime operating income to the total operating income”;

2. The above data are from the company’s annual report.

2) Variables

After reviewing the relevant researches of both western scholars and Chinese scholars, we select the

Debt Asset ratio, the Bank Loans ratio, the Accounts Payable ratio, the Revenue Received in Advance

ratio and the Additional Paid-in Capital ratio as the dependent variables, and study the impact of the

macro-control on them. The selected variables and the measure are shown in Table 6:

Table 6 Variables and Formulas

Variable Abbr. Variable Name Formula

Dependent

Variable

DAR Debt Asset ratio Debt/Asset

BLR Bank Loans ratio (Long-term Loans + Short-term Loans)/Debt

APR Accounts Payable ratio Accounts Payable /Debt

RRAR Revenue Received in Advance ratio Revenue Received in Advance /Debt

APCR Additional Paid-in Capital ratio Additional Paid-in Capital ratio /Debt

Macro-control

Variable MC Macro-control Policy 0 before the third quarter of 2009, 1 later

B. Methods and Hypotheses

Firstly, we will study whether the macro-control policies reduce the Debt Asset ratio of SMREEs as

the expectation. Secondly, considering that China’s existing macro-control policies have increased the

limit of the bank loans of SMREEs, we will examine whether the macro-control policies reduce the

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Bank Loans ratio of SMREEs. Fourthly, the Accounts Payable ratio of the REE reflects the

relationships between the REE and the construction enterprise and the government, and is one of the

financing channels by its own credit. While the Revenue Received in Advance of the REE, which

mainly come from the sales revenue of the future housing sales, with this part of the liabilities arising

from business sales activities, reflects the relationship between REEs and consumers. Finally, the

premium of the stock issued is the most important source of the additional paid-in capital of the listed

enterprises, so we use the Additional Paid-in Capital ratio to measure the equity financing ratio, and

test whether the macro-control policies increase the equity financing ratio of SMREEs.

The housing price kept rising sharply after the property market recovery in 2009, and in September

of the same year, the government issued a document requiring local governments to strengthen the

supervision of the construction land after being granted, in December the time of the free individual

housing transfer business tax recovered to 5 years from 2 years. The business tax relief rules published

by the Ministry of Finance and the Ministry of National Tax marked the beginning of China’s

macro-control to the real estate market. In this paper, we take the fourth quarter of 2009 as the

macro-control node, which means the change of the macro-control policies of the state to the real estate

market. The value of the macro-control variable is 0 before the third quarter of 2009 (including the

third quarter of 2009), and 1 after the third quarter of 2009.

In this paper, we mainly adopt the descriptive statistical analysis method and the significance

test (ANOVA analysis) method to empirically analyze the impact of the macro-control policies on

the financing of SMREEs through the following five tests:

H 1: The macro-control policy has no significant impact on the Debt Asset ratio of SMREEs.

H2: The macro-control policy has no significant impact on the Bank Loans ratio of SMREEs.

H3: The macro-control policy has no significant impact on the Accounts Payable ratio of SMREEs.

H4: The macro-control policy has no significant impact on the Revenue Received in Advance ratio of

SMREEs.

H5: The macro-control policy has no significant impact on the Additional Paid-in Capital ratio of

SMREEs.

C. Analyses and Results

1) Descriptive Statistical Analysis

According to the medians and means of the variables’ season data of the selected SMREEs from

the first quarter of 2007 to the third quarter of 2011, the descriptive analyses in Figure 4 - Figure 7

are as follows:

Figure 1 the Debt Asset ratio

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From Figure 4, we can see that the trend of the Debt Asset ratio of the SMREEs is closely related to

the macro-control. The trend reaches its peak at the third quarter of 2007, but relatively flat and

maintaining a low level from the fourth quarter of 2007 to third quarter of 2009. From the fourth

quarter of 2009 to the first quarter of 2011, the Debt Asset ratio keeps on continuously rising, which

means it is becoming harder for the operating of the SMREEs affected by the macro-control; after the

first quarter of 2011, the Debt Asset ratio declined, but the median of the SMREEs basically don’t

change since the fourth quarter of 2010, indicating that the overall operating level of SMREEs tend to

improve. It may be the result of a large number of poor operating SMREEs being bankrupt and

eliminated during this period. It also can be seen that China’s macro-control policies do affect the

SMREEs greatly.

Figure 2 the Bank Loans ratio

In Figure 5, the trend of the Bank Loans ratio of the SMREEs is basically related to the

macro-control, but is downward in the overall. It reaches its valley at the fourth quarter of 2007; from

the first quarter of 2008 to the third quarter of 2009, affected by China’s lowered deposit-reserve ratio,

interest rates cutting, relaxation of financial credit, etc., the Bank Loans ratio keeps between 30% and

35%, but its tread is still downward in the overall. After the fourth quarter of 2009, the trend keeps

relatively steady and low, but never more than 30%, which demonstrated the attitude of banks to

SMREEs for the credit under the macro-control. SMREEs face more difficult indirect financing.

Figure 3 the Accounts Payable ratio and the Revenue Received in Advance ratio

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In Figure 6, the trends of the Accounts Payable ratio and the Revenue Received in Advance ratio of

the SMREEs are both basically related to the macro-control. At the third quarter of 2007, affected by

the real estate credit and the land regulation, the real estate industry goes into the winter of

industry-wide financial strain. The Accounts Payable ratio of the SMREEs reaches its valley, and the

Revenue Received in Advance ratio reaches its peak. The SMREEs faced huge financial pressure, and

from the market, some SMREEs defaulted, and went into bankrupt. From the fourth quarter of 2007 to

the third quarter of 2009, the Accounts Payable ratio of SMREEs fluctuates a lot, and is relatively high,

while the Revenue Received in Advance ratio is relatively low, which means SMREEs had sufficient

funds for housing construction at that time. This is also the benefit of the encouraging policies by the

state for this period. So far from the fourth quarter of 2009, the Accounts Payable ratio of the SMREEs

drops and keeps low steady, while the Revenue Received in Advance ratio fluctuates at a high level,

which indicates that the SMREEs were facing increasing pressures and operating difficulties by the

strict macro-control in this period.

Figure 4 the Additional Paid-in Capital ratio

By Figure 7, the trend of the Additional Paid-in Capital ratio of SMREEs is downward in the overall,

and from the means, it seems not to be significantly influenced by the macro-control policy, which may

be related to the fact that the REE needs larger own funds. However, after the second quarter of 2009,

the median of the Additional Paid-in Capital ratio of SMREEs drops a lot, and is all the way down. The

growing gap between the median and the mean indicates that the Additional Paid-in Capital ratio

presents an obvious right skewed distribution, and that a greater number of SMEs have a greater

Additional Paid-in Capital ratio. Only those SMREEs who have adequate own funds can survive; poor

self-financing SMREEs will eventually be bankrupt and eliminated.

2) Descriptive Statistical Analysis

Firstly, we make the normal distribution test, the variance homogeneity test and the variance test on

the data, and make the data transformation and adjustment for those not meeting with the assumptions.

Ultimately all the data meet with the assumptions of the Analysis of Variance. The result of each

variable’s analysis of variance is shown in table 7:

Table 7 Results of the ANOVAs on the Dependent Variables

Dependent Variables Sum of Squares df Mean Square F Sig.

Debt Asset ratio 623.610 1 623.610 2.367 .125

Bank Loans ratio .467 1 .467 10.187 .002

Accounts Payable ratio .053 1 .053 4.902 .027

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Revenue Received in Advance ratio .156 1 .156 3.958 .047

Additional Paid-in Capital ratio .982 1 .982 3.086 .080

By Table 7, the significance values of the Debt Asset ratio and the Additional Paid-in Capital ratio

are both greater than 0.05, and therefore we accept the two null hypotheses. The macro-control policy

has no significant influence on these two ratios of SMREEs. Though from Figure 5, we can see that, on

the one hand, the overall trend of the Debt Asset ratio of SMREEs is closely related to the state real

estate macro-control, the total financing of SMREEs is small and most funds come from autonomous

sources, like non-bank liabilities and the equity financing, because SMREEs get limited supports of the

state or the government. On the other hand, because of the demand for large funds in the real estate

industry, SMREEs will try to improve their debt level, and make full use of the financial leverage and

the equity financing for more profits, resulting in a high Debt Asset ratio and a high Additional Paid-in

Capital ratio. When faced with great financial pressures by the macro-control, SMREEs will also

increase their debt level and equity. Finally, it seems that the Debt Asset ratio and the Additional

Paid-in Capital ratio are not affected by the macro-control policy.

The significance values of the Bank Loans ratio, the Accounts Payable ratio and the Revenue

Received in Advance ratio are all less than 0.05, so we reject the three null hypotheses. The

macro-control policy has a significant influence on these three ratios of SMREEs. The main reasons for

this result were that the macro-control severely affected the credit funds of SMREEs from financial

institutions like banks, and the credit of SMREEs was reduced due to their great operating risk in the

poor external industry situation. Because SMREEs have less autonomy to the Bank Loans ratio, the

Accounts Payable ratio and the Revenue Received in Advance ratio, the macro-control influence these

three ratios indirectly but significantly.

V. CONCLUSIONS AND POLICY SUGGESTIONS

A. Conclusions

By the above theoretical and empirical analysis, we get the following two conclusions:

(1) The capital structure of SMREEs consists of four components: the own funds (including equity

financing funds), the housing revenues, the construction unit loaning and the credit funds. The

macro-control policies (monetary policy, fiscal policy and administrative policy) influence on the

financing structure of SMREEs mainly through these four aspects and the financing structure of the

SMREEs is closely related to the state macro-control policies.

(2) China’s macro-control has no significant influence on the more autonomous part of the

financing structure of SMREEs (such as the Debt Asset ratio and the Additional Paid-in Capital ratio),

but significant influence on the less autonomous part (such as the Bank Loans ratio, the Accounts

Payable ratio and the Revenue Received in Advance ratio).

B. Policy Suggestions

(1) Suggestions for the Financing of SMREEs

SMREEs must actively explore some new financing channels and find their really suitable financing

models. To conquer the financing difficulties of China’s SMREEs, we suggest: a) SMREEs should

transfer from short-term orient to focusing on their own qualities, such as the credit, the brand image,

etc.; b) SMREEs should strengthen the cooperation with other REEs and take the advantages of their

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cooperators (such as the capital, the land, the reputation, etc.) for their common developments; c)

SMREEs should take full advantage of public financing channels and actively explore other, such as

private financing, real estate entrusted loaning, mortgage financing, etc.

(2) Macro-control Policy Suggestions

a) Macro-control policies should combine the “strategic control” and the “temporary control” to

provide a reasonable developing environment for SMREEs; b) Usually in backward areas exist most

SMREEs, so to strengthen the “regional difference” of the macro-control will enable SMREEs to

accumulate experience and capital in a relaxed environment, avoiding their disadvantages for the

competition with large REEs in the hot spots; c) Bank credit funds should be reasonably allocated

between small, medium and large real estate enterprises, and a diversified financing platform should be

built to meet the funds need of SMREEs in different growth cycles, and to help the growth of

high-quality SMREEs; d) Some macro-control policies should link the housing sales price to the loan

interest rate (even the tax rate). For instance, the state can fix the expected housing sales price to the

loan interest rate (even the tax rate), which can directly reflect the reduced part of the real estate

construction cost to the terminal housing price, and make REEs cut their price actively after getting a

reasonable profit.

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