FROM WELFARE TO THE MARKETPLACE MANAGING CHINA'S URBAN HOUSING REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00990R000400030001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 23, 2016
• Document Release Date: July 23, 2013
• Sequence Number: 1
• Publication Date: May 19, 1988
• Content Type: MEMO

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Central Intelligence Agency
Washington. D. C.20305
DIRECTORATE OF INTELLIGENCE
19 May 1988
From Welfare To The Marketplace
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Managing China's Urban Housing Reform
Summary
China's urban housing, with chronic shortages complicated by
corruption in allocating units, has long been a source of anguish for the
leadership. Beijing hopes to alleviate these problems by gradually
commercializing urban housing--raising rents, while using economic
incentives such as low-cost mortgages to encourage private home sales.
We believe Beijing's reforms will ease shortages, although economic
constraints and problems with oversight and abuse of the system will
render progress slow and painstaking. Indeed, in our view China's
reformers are taking a significant political risk with both the public and
more conservative leaders by raising expectations of rapid improvements.
This memorandum was prepared by China Division, Office of East Asian Analysis.
Information available as of 2 May 1988 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, China Division, DEA,
EA M 88-20071
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A Financial And Social Headache
Senior Chinese officials recently admitted that poor housing is the number one
complaint of urban residents. Surveys underscore the dimensions of problem: average
per capita floorspace was just eight square meters in 1986--compared to about 13.
square meters in Japan--much of it of substandard quality. Moreover, despite a
construction push that has added more than a billion square meters of housing since
1978, the State Commission for Restructuring the Economy estimated in March 1988 that
up to a quarter of urban residents live in conditions that are poor even by China's
standards. Many city apartment dwellers must squeeze three generations into a couple
of rooms and use communal bathrooms that may not even be located on the same
floor. These hardships contrast sharply with the boom in construction of relatively
luxurious, single-family homes in well-off rural areas surrounding major cities
Urban housing is an increasing drain on Beijing's budget Because nominal -
monthly rents--about 1 fen (three cents) per square meter--do not cover even
maintenance, the bulk of funds for new construction, upkeep, and _management come
directly from enterprise and government coffers at a cost of over $8 billion yearly.
Indeed, housing has averaged 19 percent of total state investment in new construction
over the last seven years, according to official statistics (see table). Urban population
growth continues to outpace housing construction, suggesting that correcting the
housing problem will only become more costly.
Table 1
State Investment In Housing Construction 1981-87
Billion US $
Total Investment
Housing
Share of Total
(percent)
1981
11.9
3.0
25
1982
14.9
3.8
25
1983
16.0
3.4
21
1984
20.0
3.6
18
1985
28.9
5.8
20
1986
31.0
4.9
16
1987
35.6
3.2
9
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Beijing--sensitive to worker sentiment--is also increasingly concerned about
manager and cadre abuse of housing distribution. Because housing is apportioned by
work units (see inset), factory managers and party officials can exert their influence to
obtain better housing than their fellow workers According to press reports, party cadre
regularly take advantage of this power to occupy the largest and best-quality homes,
and there have been numerous reports of officials custom-building houses, sometimes
with illegally obtained money or materials, or securing housing several years in advance
for their children.
The Enterprise Housing System
A Special Challenge To Reform
Control over the construction and allocation of most urban housing in
China is widely dispersed among industrial bureaus, cities. and individual
enterprises. Before 1978, the state sector invested little in urban housing
construction?usually between 4 and 9 percent of its annual capital construction
outlay. Since 1979, however, housing construction investment by state-owned
units has increased greatly, up to 25 percent of total construction investment in
1981 and 1982. Nonetheless, during the last decade individual enterprises have
come to provide the lion's share of total funding--perhaps 60 percent,
according to US Embassy sources. Enterprises obtain much of this capital from
budgeted social welfare funds and from retained after-tax profits.
If an enterprise lacks sufficient land for housing construction, it must
apply to higher level units, although press reports indicate that illegal
occupation of land for housing construction is common Enterprises may obtain
scarce building materials?many of which are still regulated under the state
plan--on the slowly expanding producer goods markets, hoard and divert
materials from planned construction, or bargain on the black market with
enterprises that have surplus stocks. The largest industrial bureaus and
enterprises have their own construction departments, allowing them to build
housing with little outside assistance.
Municipal and enterprise party officials allocate housing to workers and
their families on the basis of workers' personal connections, job performance,
political attitude, and family need. The entire process of employee housing
allocation is extremely time-consuming. Editors of a major Chinese newspaper
recently commented to Westerners that they spend more time on employee
housing matters than on any other professional task.
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Commercializing Housing Step-by-Step
By shifting provision of housing from the state to a commercial industry, Chinese
leaders plan to transfer the cost from the government to consumers, while reducing
corruption. Housing reform is not new in China, but the program introduced
experimentally last year takes a more pragmatic, step-by-step approach. According to a
February 1988 State Council housing policy document, China's long-term goal is the
emergence of an independent, purchase-based real estate market. Reforms will be
implemented over the next five years, with major cities leading off this year and smaller
cities and towns following as the housing program solidifies.
In the first stage of housing reform/ according to the State Council's plan, rents
will rise to reflect real costs. The plan calls for new rental rates to factor in
depreciation, maintenance, management, interest on investment, and taxes. Initially,
rents will increase to at least 27 cents per square meter, and by 1993 are to rise to
about 42 cents per square meter. By raising rents and enumerating the components of
the increase, we believe Beijing wants not only to cover expenses but also to make
renters aware of the real costs of housing.
To allay widespread fears that the reform will dramatically raise housing costs for
consumers, Beijing is promising that housing subsidies will shelter renters, at least
initially, from the financial impact. The February policy announcement bases subsidies
on average local per capita living space, rent increases, and wages. Commentary in
authoritative press adds that subsidies will range between 18 and 25 percent of workers'
pay and, for families with several workers, would exceed rent increases. But workers
may use the subsidies only to pay rent increases or to save toward the purchase of new
housing. Indeed, enterprises will initially issue the subsidies as coupons good only for
housing, though Beijing plans eventually to incorporate them as cash into regular pay.
Meanwhile, Beijing is encouraging renters to deposit their subsidy funds in
special housing accounts, making them eligible for mortgage loans and thus drawing
banks increasingly into housing finance. In April, Li Guixian--new governor of China's
central bank--affirmed that China's banks will participate more in financing housing.
According to Dress reports, specialized housing banks have been set up in a few pilot
cities.
The government hopes that higher rents and the availability of bank loans will
encourage workers to buy homes. The State Council document urges enterprises to try
to sell new housing before renting it, stating that buyers able to offer at least a
1.
In April 1980, Deng Xiaoping advocated turning housing into a profit-making industry,
and later that/year the state sanctioned construction of housing for sale to private
individuals. In April 1982, the State Council approved a plan under which workers
could buy housing for one-third of its construction cost, with work units subsidizing
the rest. The idea was widely implemented in 1984 and received an enthusiastic
initial response from buyers, but was abandoned in 1985 because it still left too
heavy a financial burden to the state.
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30-percent downpayment will receive preference and favorable mortgages. We believe
Beijing also sees housing sales as a prime opportunity to soak up individual savings--up
over 800 percent in the last eight years by official estimates--and redirect spending
away from inflation-ridden consumer goods markets.
The Obstacles Ahead
We judge that housing reform will be long and arduous. Although press and
embassy reporting indicate that the program enjoys wide support in the central
government, the fact that its success hinges on implementation at the local level leaves
it vulnerable to bureaucratic foot-dragging and manipulation. Moreover. the dearth of
administrative guidance suggests that Beijing will be hard-pressed to ensure local
implementation.
We believe conflicts with other economic priorities may result in slower progress
than Beijing envisions. For example, extensive home construction is at odds with the
leadership's efforts to clamp down on nonproductive construction that competes with
key industrial projects for scarce urban land and construction materials In our view,
economic strains imposed by such conflicting policies will yield at least sporadic
slowdowns while Beijing reconciles housing reform with other needs.
We also believe China may have trouble reducing the state's role in financing
housing. Beijing will have to manage the subsidy program carefully to ensure that it
defuses potential unrest over rent hikes without becoming a permanent addition to
workers' incomes. We believe Beijing hopes to phase out subsidies quietly as salaries
rise and as workers adjust to the real costs of housing. However, without specific
guidance on when and how to begin eliminating subsidies, enterprises?wary of worker
discontent--will be torn between the temptation to retain subsidies and the need to cut
costs and show profits. As a result, we expect enterprises may petition Beijing to
continue underwriting their housing expenditures, making reform potentially more costly
than the old housing system.
Eliminating corruption will be perhaps the thorniest problem Beijing faces in
housing reform. The managers and party cadre who profit most from today's system
will be loathe to turn housing funds over to banks and see their control of housing
allocation dissolve. These officials, who will be in charge of day-to-day implementation
of housing reform, are well-situated to delay or water down local programs to fit their
own agenda. In addition, they may take advantage of some results of the reform plan to
derail it. For example, a recent press article in a PRC-affiliated Hong, Kong newspaper
criticized profit-seeking housing departments that add excessive taxes and the costs of
public utility construction to home prices, suggesting that commercialization could
become simply too expensive to work. On the other end of the scale, loopholes such as
rent exemptions for the disadvantaged could weaken the program if too many people
find ways to exploit them.
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At the same time, popular expectations will make it difficult for Beijing to shelve
the program. Beijing's focus on housing reform is raising workers' hopes, and the help
that the initial reforms offer through subsidies and mortgages, supplemented by existing
individual savings, makes home ownership financially feasible for at least some. For this
reason alone, Beijing's initiatives will probably provide China with more and better
housing in the long term. The program. nevertheless, will require close, painstaking
monitoring. China's reformers, who have taken an enormous political risk with housing
reform, will have to make adjustments to assure progress.
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