China is helping to improve the balance sheets of some state-owned firms - and boosting prospects for their IPOs - by allowing them to place a value on their landholdings, according to a property valuation expert. The issue of property ownership has clouded many Chinese financial deals because so little land in the vast country has proper titles, and all of it technically is owned by the communist state.
The first beneficiaries of the new practice are Air China, which will list in London and Hong Kong next month, and telecoms operator China Netcom, which made its Hong Kong market debut last week.
"They're using a new system of 'authorised land' for companies the government wants to see list," said Paul Brown, chief executive at Sallmanns (Far East) Ltd, which has valued property for over half of China's biggest IPOs.
Many state-owned firms lack titles to their real estate holdings because the government "allocated" them the land decades ago, before tradable leases - or land use rights - were introduced in the 1980s.
Technically, the land and buildings they hold cannot be sold, so valuers in the past have determined the assets have no commercial value. That has reduced investor confidence and lowered the IPO price the firms can raise.
But this year, Beijing began to allow big state-owned firms to gain title to their land use rights, which are easy to value, even if the land is leased and not technically owned. Typically land use rights are granted for 30 to 70 years, but for valuation purposes the leases effectively give them ownership rights.
The land can then be recorded on a company's balance sheet, giving investors more confidence the assets could be sold if the company collapsed.
To obtain lease title authorisation, a state-owned parent firm would contribute "allocated" land it holds to the listing subsidiary in return for shares.
Authorities would grant the parent firm a land use right for an indefinite period, which could be assigned to the subsidiary. The listing firm would then apply for it to be converted into a fixed-term land use right.
The right to privately own property was enshrined in the Chinese constitution this year, reversing a central tenet of communism. But, in fact, freehold land does not yet exist.
Most private firms, for example property developers, have bought land use rights on land that has been newly "granted" by authorities.
Companies already holding allocated land can buy a title giving proof of their land use right. But many companies are unwilling to pay the fees.
One cash-rich firm planning an IPO has turned down the chance to spend around $4 million to gain title to a lease on its land. The move would add $45 million in land and building assets to its balance sheet, according to Brown, who declined to identify the company.