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The Importance of Risk Management

INTRODUCTION

The real estate business in China started its pace in the 1990s, which has significantly boomed in the next 20 years. It has been found that investments in real estate have been increasing by 20 per cent from 1999 to 2006. The contribution of real estate to Chinese GDP accounted for 9.2 per cent in 2006 (National Bureau of Statistics of China https://www.51lunwen.org/StudentPapers/ , 2007), reflecting Chinese economy’s heavy dependency on real estate business. Since the further and rapid process of urbanization and booming market in real estate in China, real estate is a strong business sector that will not badly impacted by any financial storm despite the doubt to sustainability of high Chinese GDP growth rate. There is no doubt that real estate industry has contributed much to the development of Chinese economy and its rapid evolution and transition pace to more mature and complete development. However, there are heavy bubbles in Chinese real estate industry due to Chinese economy’s dependency on real estate and sever speculation by local governments and individuals. Chinese real estate’ booming originated from the immaturity of the market and incompletion of regulatory system that have brought investors’ unbelievable high profits. Both internal and external risks will not be taken into account in the pursuit of tremendous profits. With the gradual maturity of real estate market, opportunities for huge profits will reduce, such as the launch of property tax. Chinese government is trying to change distorted situation of real estate market and bring sustainable development.
Many experience from other countries such as Japan’s lost 10 years, American subprime mortgage crisis have warned us that there are enormous risks in real estate market that investors need to be cautious. An outstanding risk management plan is necessary to prevent investors from disturbing and fighting against various types of risks and ensure their stability of business. Risks stem from social, political, economic factors as well as land price, marketing, financing and resettlement risks so that corporations need to learn how to deal with risks in the Chinese changing property environment effectively so as to enhance their competitive advantage and thereby, survive in such an evolutionary point of time.
Risk management refers to a management process, including the strategy to define, measure, evaluate and manage risks, which is beneficiary to reduce the number of uncontrollable risks, the chance of making wrong decisions, reduce losses and enhance added value of corporations (Liu et al., 2007 https://www.51lunwen.org/StudentPapers/ ). Chinese real estate corporations become familiar with the processes and system of managing the risk with their experience accumulation. However, they still need risk management studies which are based on real estate industry development with Chinese special characteristics.