Price ceilings with Chinese (housing) characteristics
How does this work? First, the government sets a price ceiling, which is not yet publicly disclosed, on the maximum bid that residential development companies can bid. Firms have no obligation to bid up to this price, but they can bid no more than the ceiling. Beyond this price, companies can compete in a different dimension: they can sell housing equity back to the government. Ideally, the land bids won't go that high, but the government is ready to clamp down on price growth once it hits the ceiling. At the ceiling, a company can offer to sell "repurchase housing" back to the government at about 10,000 yuan per square meter, less than half of the market price. In effect, instead of bidding more for the land, the government is forcing firms to sell equity call options to compete. The government can use these houses to provide low cost lodging to the poor, or it could even sell the houses later to fund welfare programs or state owned enterprises.This move has forced companies to re-evaluate their bids as they need to adapt to a new system that, critically, changes the way volatility and price growth affect company and government finances.
If housing prices continue to rise, repurchase housing will cut hard into company profits. The companies are losing a large part of the return on the land bid. For the government, this is also a very good deal to make sure housing prices don't rise too fast. First, the ceiling allows the government to signal their commitment to lowering prices. Then, if housing prices are still going to rise and the land is still worth more than the ceiling value, the government can capture some of the upswing through equity call options. This also arguably prevents "fragility exporting" in the system, as the companies get less of the upside risk while still bearing the downside risk. The government also gets some upside risks while still having to deal with the possible costs of future stimuli to ease a Chinese housing contraction. I still don't have faith in Chinese housing policy, and I'm concerned how this game of musical chairs will play out. However, the use of a price ceiling coupled with call options strikes me as a particularly innovative way to limit price growth. Capitalism with Chinese characteristics indeed.