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Capital Structure of Listed Company in China: Based on Real Estate
Industry
CHEN Sheng-quan
Jiangsu Teachers University of Technology, Changzhou, P.R.China, 213001
[email protected]
：
Abstract Real estate industry is characteristic of its deep debt based investment and consumption,
which develops its own characteristics of capital structure. Based on the current condition of real estate
industry in China, this paper investigates the main features concerning capital structure of the listed real
estate companies and proposes ways and suggestions to optimize the capital structure through statistic
and financial analyses of the samples of listed real estate companies.
Key Words: capital structure; listed company; real estate industry; financial level
1. Introduction
Real estate industry is the pivotal industry in national economy that relates to development of other
50 industries and occupies 1/4 of GDP, therefore finance of real-estate industry is the key problem in
national macro-control. Foreign experience shows that housing consumption, which is obviously related
to real-estate industry, will rise constantly when GDP per person increases from $ 800 to $1300.
Likewise, China’s housing consumption comes to the turning point since its GDP per person is now
more than $1000.
In the late 90s, more and more China’s real-estate enterprises get involved in capital market with
the government’s support and impelling. They issue stocks and turn themselves into listed companies.
But there are many problems and limitations in the process of their development, especially in their
capital structure, which restricts their further development and affects the macro economy. It is therefore
necessary and significant to conduct a study of the problem of optimization of the capital structure of the
listed real estate companies.
2. Methodology
2.1 Sampling
The sampling steps are taken as follows:
1) Listed companies in real estate industry are sampled; 2) A-share companies are chosen; 3) Data
space is fixed in the period between 2003 and 2005; and 4) ST, PT companies are ruled out, for some of
them are abnormal in their finance, others have been deficient for more than two years and sampling of
them would infect our conclusion. The final samples are 27 listed companies.
2.2 Data analysis
Capital structures of the 27 companies from 2003 to 2005 are listed as below:
List 1
Company
Capital Structure in 2003
Stock
Code
Deep Debt
Amount
Percentage (%)
Preferred
Stock
￥yuan
Unit: RMB
Common Stock
Amount
Percentage (%)
Asset-Indebted
Percentage (%)
New
Huangpu
600638
0
0
0
561,163,988
100
8.19
Zhujiang
600684
0
0
0
187,039,387.20
100
26.35
330
Industrial
G Meidu
600175
0
0
0
106,680,000
100
32.78
G Lujiazui
600663
0
0
0
1,867,684,000
100
35.63
0
0
767,624,000
100
39.03
5.62
0
148,980,783
94.38
46.52
0
0
0
720,102,101
100
46.67
600167
0
0
0
190,000,000
100
48.73
600634
0
0
0
87,207,283
100
49.38
600215
239,000,000.
00
40.05
0
357,717,600
59.95
51.1
600376
0
0
0
173,200,000
100
51.21
600748
0
0
0
587,541,643
100
51.52
600322
255,000,000.
00.
23.1
0
423,707,417
76.9
53.69
G Donghua 600393
0
100
0
200,000,000.00
100
53.93
Jindi Group 600383
450,000,000.
00
62.5
0
270,000,000.00
37.5
55.86
0
0
0
344,145,888
100
58.3
20.23
0
247,990,600
79.77
59.36
39.7
0
721,717,704
60.3
60.33
24
0
340,565,550
76
65.45
66.89
0
457,470,000
33.11
65.58
4.34
0
128,700,000
95.56
67.86
0
0
745,057,500
100
67.94
6.04
0
483,633,492
93.96
68.76
0
0
697,455,097
100
69.04
77.4
0
447,865,971
22.6
70.89
61.98
0
92,000,000
38.01
74.67
75.66
0
140,000,000.00
24.34
75.32
G Golden
600639
0
Bridge
Haitai
75,927,154.5
600082
Development
0
Heven-Earth 600665
Shenyang
Xinkai
Seabird
Development
Changchun
Jingkai
Tianhong
Baoye
G
Development
Tianfang
Developmen
Nanjing
Hi-Tech
600064
51,195,714.2
0
Guanghui
634,382,272.
200256
Share
64
107,493,450.
Lijia Share 600696
12
Suzhou
924,000,000.
600736
Hi-tech
00
G Xinmei 600732
GTianchuang 600791 5,835,699.02
Waigaoqiao 600648
Zhejiang
Guangsha
0
68,000,000.0
600052
0
G Zhongqi 600675
0
Zhongyuan
1,533,000,00
600641
Development
0.00
Pioneer
150,000,000.
600246
Share
00
435,068,252.
G Xixia 600533
58
List 2
Capital Structure in 2004
331
￥yuan
Unit: RMB
Company
Stock
Code
New Huangpu 600638
Deep Debt
Amount
Preferred
Stock
Percentage
(%)
Common Stock
Amount
Percentage
(%)
Asset-Indebted
Percentage (%)
0
0
0
561,163,988
100
9.23
600684
96,180,000.00
30.24
0
187,039,387.20
69.76
25.34
G Meidu
600663
16,858,600.00
0.89
0
1,867,684,000
99.11
31.84
G Lujiazui
600175
0
0
0
106,680,000
100
52.79
100,147,500.00
27.2
0
268,165,413
72.8
39.98
0
0
0
767,624,000
100
42.96
600665
429,776,462.50
37.38
0
720,102,101
62.62
44.64
600634
0
0
0
87,207,283
100
62.96
600215
168,000,000.00
31.96
0
357,717,600
68.04
50.39
600748
265,893,717.80
31.16
0
587,541,643
68.84
50.54
600322
273,074,638.00
39.19
0
423,707,417
60.81
49.33
600383
350,000,000.00
48.61
0
370,000,000.00
51.39
53.47
600167
70,000,000.00
26.92
0
190,000,000
73.8
57.52
Zhujiang
Industrial
G Golden
600082
Bridge
Haitai
600639
Development
Heven-Earth
Shenyang
Xinkai
Seabird
Development
Changchun
Jingkai
Tianhong
Baoye
G
Development
Tianfang
Developmen
G Donghua 600064
0
0
0
344,145,888
100
58.76
Jindi Group
Nanjing
Hi-Tech
600732
3,251,239.88
1.29
0
247,990,600
98.71
60.25
600376
200,000,000.00
53.59
0
173,200,000
46.41
53.47
G Xinmei
600641
628,000,000.00
58.37
0
447,865,971
41.63
61.28
Guanghui
Share
600393
16,126,122.25
7.46
0
200,000,000
92.54
61.44
Lijia Share
200256
544,627,660.57
38.61
0
866,061,245
61.39
62.82
Suzhou Hi-tech 600696
85,637,526.03
20.09
0
340,565,550
79.91
65.26
GTianchuang 600648
0
0
0
745,057,500
100
65.31
Waigaoqiao
600791
6,305,495.03
4.67
0
128,700,000
95.33
66.01
Zhejiang
Guangsha
600052
454,550,000.00
48.45
0
483,633,492
51.55
66.67
G Zhongqi 600736
Zhongyuan
600675
Development
380,000,000.00
45.37
0
457,470,000
54.63
64.49
120,000,000.00
14.68
0
697,455,097
85.32
72.55
Pioneer Share 600533
3,462,300.00
2.41
0
140,000,000
97.59
75.09
92,000,000
100
Unit: RMB
75.42
G Xixia
List 3
600246
0
0
0
Capital Structure in 2005
332
￥yuan
Deep Debt
Stock
Code
Amount
600638
0
0
600684
130,393,919
G Meidu
600663
G Lujiazui
600634
Company
Preferred
Percentage
Stock
(%)
Common Stock
Asset-Indebted
Percentage (%)
Amount
Percentage
(%)
0
561,163,988
100
10.86
41.08
0
187,039,387
58.92
28.02
48,379,522
2.52
0
1,867,684,000
97.48
36.51
0
0
0
87,207,283
100
38.51
0
0
0
844,386,400
100
44.04
0
0
0
190,000,000
100
44.34
600665
690,305,562
48.94
0
720,102,101
51.06
48.01
600641
378,800,000
45.82
0
447,865,971
54.18
48.44
600215
486,000,000
57.6
0
357,717,600
42.4
49.93
600082
101,660,000
27.49
0
268,165,413
72.51
50.67
600748
176,075,489
23.06
0
587,541,643
76.94
53.3
600383
500,000,000.00
42.88
0
666,000,000.00
57.18
53.71
600732
123,000,000
33.15
0
247,990,600
66.85
55.88
G Donghua 600322
322,210,246.16
43.2
0
423,707,41
56.8
57.26
Jindi Group 600393
Nanjing
600696
Hi-Tech
268,853,990
47.26
0
300,000,000
52.74
58.48
54,529,872
13.8
0
340,565,550
86.2
58.73
New
Huangpu
Zhujiang
Industrial
G Golden
600639
Bridge
Haitai
600167
Development
Heven-Earth
Shenyang
Xinkai
Seabird
Development
Changchun
Jingkai
Tianhong
Baoye
G
Development
Tianfang
Developmen
G Xinmei
600064
0
0
0
344,145,888
100
58.93
Guanghui
Share
200256
399,868,183
31.5
0
866,061,245
68.41
60.15
Lijia Share
600175
181,000,000
58.57
0
128,016,000
41.43
65.03
Suzhou
Hi-tech
600675
590,093,500
45.83
0
697,455,097
54.17
66.61
GTianchuang 600791
26,782,519
17.23
0
128,700,000(
82.27
68.36
Waigaoqiao 600736
960,000,000
67.23
0
457,470,000
32.27
69.99
600052
569,000,000
54.05
0
483,633,492
45.95
70.15
G Zhongqi 600376
Zhongyuan
600648
Development
Pioneer
600246
Share
550,000,000
76.05
0
173,200,000
23.95
71.91
180,450,000
19.5
0
745,057,500
80.5
72.03
0
0
0
92,000,000
100
73.01
513,177,973
70.96
0
210,000,000
29.04
75.59
Zhejiang
Guangsha
G Xixia
600533
333
Note: Data listed above are taken from http://www.cninfo.com.cn/default.htm
2.2.1 Analyses of asset-indebted percentage
From the data above, assets liabilities ratio in real-estate industry has been keeping increasing by
degrees, with an average ratio 56.99% in 2003, 59.27% in 2004 and 59.28% in 2005; while in other
industries, it stays at around 40%-50%. This indicates that most of the capital in real-estate industry
relies on debt, which is the feature of the industry. In China, lack of capital is a common problem in the
real estate industry; therefore most of its capital comes from bank loan, earnest money, advance receipts
and outer investment. There is little capital from its own. This results in over dependence on loan and
advance receipts and deep assets liabilities ratio.
2.2.2 Analyses of financing order
Capital collecting in the lists above is quite abnormal, because from the view of capital collecting
cost, it is necessary, as modern capital structure theory and capital collecting practice from market
economy countries show, to be in an exogenous financing first, endogenous financing second order. In
exogenous financing, debt financinghould be put in the first place and equity financing the second. Debt
financing always occupies most in exogenous financing in developed countries. Whereas in China, it is
not difficult to find that equity financing is preferred. This is deviant of the order of “endogenous
financing-debt financing-equity financing” and modern capital structure theory.
2.2.3 Analyses of debt-financing
Due to steady interest rate and strong financial leverage, most of the debts of modern enterprises
are long term loan and none of the above 27 samples have collected capital by issuing bonds, for the
chances are different in between equity financing and debt financing for the listed companies. For a
long time, there exists a seller’s market and profit effect that matter in China’s stock market. Debt
financing is resisted after the disordered capital collecting and financing environment in the early 1990s.
Therefore it is not easy for ordinary companies to issue bonds except those big profitable state-run
enterprises that are assured by the government. Another factor is bad exchange of bonds and thus a
certain choke phenomenon in the bond market. There are just 13 bonds in exchanging, while stocks
exchanged in Shanghai and Shenzhen Stock Markets have reached more than 1,000. The financing
market is not balanced, especially under various restricts to bond market, which is one of the main
reasons for which bond financing/ debt financing is not preferred by listed companies in China.
2.2.4 Analyses of preferred-stock financing
As discussed above, none of the 27 samples have collected capital by preferred-stock financing.
However, for preferred-stock financing the investment risk is little and the income is ensured, so it is
easier to collect capital in preferred-stock financing than in common stock. Despite no preferred-stocks
issued by listed companies in China, the companies are surely welcome to investors if they issue
numbers of preferred-stocks in the falling and occasionally bouncing stock market.
On the whole of the industry, the capital structure is not reasonable. Nor the leverage effect of the
most of the listed companies. Therefore we can draw a conclusion that the particular system and
inefficiency of the capital market for the listed companies in China is the main reason why their capital
structure is not reasonable, and also the reason why the leverage effect is not reasonable in the most of
the companies in real-estate industry in China.
2.2.5 Analyses of leverage effect of capital structure
Calculation and analyses of the accounting reports of the listed companies from 2003 to 2005
indicate that (see List 4)
(1) On the whole, the average EBIT(earning before interest & tax) ratio of the listed companies in
real estate industry in China is currently 5%, less than 1- year loan interest rate of the same year
collected by the bank . Therefore the No. 121 Documentation issued by The People's Bank of China is
the right prescription for loan prerequisites and housing loan risk to real estate companies.
(2) The asset-indebted rate is deep or low among the listed real estate companies in the 3 years.
In the 27 samples, there are only 30-40% companies whose EBIT ratio is higher than the current loan
rate by commercial banks, but more than 50% companies whose assets liabilities ratio is under 50%.
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In 58.82%-66.67% companies, EBIT ratio is less than the current 1- year loan interest rate by
commercial banks, among which there are more than 50% companies whose assets liabilities ratio is
more than 50%. Hence at present the financial leverage effect in capital structure in most of the listed
companies is not reasonable and there are two problems: 1) In the occasion where profit is high, there is
ignorance of profiting ability to increase equity capital by borrowing loans and loss of financial level
interest that should has been available; 2) In the occasion where profit is low, debt is kept deep with
ignorance of its risk and financial leverage is lost.
List 4
EBIT rate< Bank Loan Rate
Number
of the
Percentage
Enterpris
(assets
Percen
es (assets
liabilities
tage %
liabilities
ratio
ratio
>50%)
>50%)
Averag
e
EBIT
rate %
2003
5.31
4.67
10
29.63
5
50
17
58.82
11
64.71
2004
2005
5.58
6.12
5
5.03
9
9
33.33
33.33
4
5
44.44
55.56
18
18
66.67
66.67
13
9
72.22
50
Number of the
Enterprises
Year
Bank
Loan
Rate
%
Number of the
Enterprises
EBIT vs. Assets Liabilities Ratio
EBIT rate > Bank Loan Rate
Number
of the
Percentage
Percenta Enterpris (assets
ge
es (assets liabilities
%
liabilities ratio
ratio
>50%)
>50%)
2.2.6 Determining of Optimized Assets Liabilities Ratio
It is not easy to determine the optimized assets liabilities ratio for the listed companies in real
estate industry because the industry is different from others and the present theories do not deal with
such a problem. In recent years, experts find that assets liabilities ratio of an enterprise is related to its
management performance and reflects its financial leverage, which is representation of its financial
management. Neither deep nor low assets liabilities ratio helps to optimize the enterprise’s asset-liability
structure and to improve its management efficiency. In the current constant recoveries of macro
economy, appropriate assets liabilities ratio will promote management performance.
List 5
Assets Liabilities Ratio vs. Management Performance
Assets
ROE (Rate of Return on Common
Liabilities
Stockholders’ Equity)
Ratio
2003
2004
2005
2003
<30%
2.765
3.095
2.98
0.101
31%-40%
6.378
6.830
5.538
0.242
41%-50%
-1.515
4.188
4.402
-0.003
51%-60%
5.771
7.94
5.60
0.195
>61%
9.755
6.18
5.38
0.1426
￥ yuan
Unit:RMB
EPS(Earnings per share)
2004
0.116
0.171
0.107
0.249
0237
2005
0.113
0.178
0.118
0.205
0.184
List 5 indicates that management performance varies with assets liabilities ratio. The data in the 3 years (see
Appendix 1) show that management performance tops the list when assets liabilities ratio is around 50%-60%,
where bankruptcy cost, agency cost and tax-economizing cost are balanced. The theoretical study provides a basic
framework for optimization of capital structure , while the empirical study presents a debt ration that optimizes the
real estate industry because it depends on the enterprise’s specific management.
3. Conclusion
3.1 Indebted structure
Deep current debt , certain amount of current account and low long term debt in real estate
industry are not in step with managing characteristics of the industry. According to modern theory of
335
control rights of capital structure, debt is not only a financing method but also a managing method for
companies (Williamson, 1988). Kaplan and Stromburg (2000) view control of capital structure as a
control by chance, therefore a good conducting system that helps govern capital structure and managing
performance as well as a good adjustment of capital structure provide further stimulation and bond for
enterprises, which is a compensation of incentive contracts (Hart,1995). In addition, management of
capital structure is the management of listed companies in real estate industry and beyond in China.
Hence it is necessary to improve capital structure for the development of bond market (Wuxiaoling,
2005) and increase of bond financing of the listed companies.
3.2 Profit mode
It is necessary for profit mode to be shifted from resource dependent to efficiency improving, from
extensive to intensive so as to accelerate perfection of competing markets to be a fair, open and just one.
With the quick process of marketization, competition is increasingly intense. When the current
management in the real estate industry is not satisfactory and technology is low, elements advantage is
not exercised and neither capital structure. Hence perfection of competing market system is the first
problem for the listed companies in real estate industry and more urgent for outer system including
government and market.
3.3 Running of State-Owned Share
It is necessary to let state share circulate, to optimize shareholding structure and to build a perfect
capital market gradually. The circulation of state shares helps bond market to configure sources and
build a perfect managing structure for governance of listed companies, which is beneficial to the
solution of the problem of “the biggest state stock” and improvement of managing performance as well
as increase of value of the companies.
3.4 Strategic management
It is necessary to execute strategic management in the listed companies in real estate industry to
strengthen their competence. For the purpose of competence, enterprises should make an overall, long
term and creative development plan of their capital structure on a basis of analysis of inner and outer
elements . To develop and strengthen their competence, they have to have both safeguard of sufficient
funding and economizing of the funding. Therefore management is vital to capital structure and strategic
management helps enterprises to plan a long-term strategy, sound operation and steady development.
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