[Editor’s Note: I recently interviewed Dr. Lou Jianbo about China's massive affordable project and his concerns about it. Dr. Lou is associate professor of law and Co-Director of the Center for Real Estate Law at Peking University. He is also a member of the Chinese People’s Political Consultative Conference Beijing Committee. He is currently drafting, along with the Asia Development Bank, the laws and regulations for China’s affordable housing project.]
Editor: The Chinese government has announced a massive program to provide affordable housing to qualified families.
Dr. Lou: Yes, in 2009, there were 5 million units of affordable housing; in 2010, the government added another 5.9 million units; in 2011, another 10 million units will be built; and finally, another 36 million units are to be built during the 12th Five-Year Plan, 2012-2017.
Editor: That’s a total of 46 million new affordable housing units in just six years. That’s ambitious.
Dr. Lou: Quite ambitious. And, I think the outcome looks good. The government plans for 20% of China’s urban population to have affordable housing by 2017, the end of the 12th Five-Year Plan.
More families who can’t afford housing will be helped. More people will be able to live a decent life, and this is one advantage.
But there is another advantage. As you know, a large part of China’s GDP consists of investment and construction. This project will help sustain economic growth, even if activity falters in other sectors.
Politically, access to affordable housing is a major issue for the Chinese people. I think the Chinese Communist Party and the Central Government are earning credit with this project.
But, the problem for the Central Government is that it promised 10 million low- and to middle-income units this year alone. If it fails, it puts itself in politically bad situation.
Editor: Is the Central Government directly responsible for building the housing?
This is project initiated by the Central Government. But, local governments, not the Central Government, are directly responsible for the construction and most of the financing of the project.
The Ministry of Housing and Urban-Rural Development has received signed commitments from almost every local and provincial government about how many units of affordable housing each would produce in 2011.
Ministry required each government to publicize its construction plans by the end of June, which most of the locals did, and to begin construction by the end of November.
But, by May 2011, local governments reported that they had already started to build 3.7 million of the required 10 million units. Then, in June they raised the number to 5 million.
Some people asked, how could you do that? In only one month, you raised the number from 3.4 to 5. And, the locals responded, ‘Well, half a year passed and at least we started to build the half of the 10 million. We are sure we can finish building all the rest by the end of the year.’
You can see from this how serious the Central Government is about this project, and how much pressure it is putting on local officials, especially ambitious ones who want to be promoted.
Editor: Will the units be sold or rented?
The original concept was to sell the units to qualified families. Here, the local government allocates the land to the developer almost for free. The developer constructs the housing. Then, after completion, the developer sells the units to qualified families, with the government deciding who is qualified. Note that the government put a ceiling on the profits the developer can make, usually 3%.
But, now we are turning more to ‘public housing for rent.’ In this model, the local government again virtually gives the land to the developer, and the developer does the construction. The local government has an agreement with the developer to purchase back the property after completion. Then, the local government leases the units to qualified families.
Chongqing is one of the first cities focusing on public rental housing rather than the sale of affordable housing. And, it is among the first cities to provide public rental housing to people without household registration in Chongqing, which means that migrant workers can qualify.
Chongqing also has affordable units built for sale. But, these are sold with the requirement that if you bought from the government, and if you want to sell the property, you can only sell that back to the government as well. You cannot sell to other people.
This discourages people who do not actually qualify from trying to buy cheap housing, then, sell it later for a profit. It also discourages the kind of corruption that this would bring.
Editor: What concerns do you have about this project of this scale?
Dr. Lou: I have three main concerns. The first is fiscal risk. This is an expensive project that will require massive debt. What if the government is not able to pay the debt? That would be a disaster.
My second concern is quality of construction. Already reports of shoddy and dangerous construction are coming in from all over China.
Third is corruption. Only qualified families will be offered this housing. But, among government officials, there is plenty of room for corruption in choosing which families are qualified, including those that don’t meet the qualifications.
Editor: Let’s take your concerns in order. First, the fiscal risk.
Dr. Lou: It’s estimated that for the 10 million low- and middle-income housing units for 2011 alone, the total investment, not including land, will be somewhere around RMB1.3 trillion. That’s more than US$200 billion.
The Central Government will invest only RMB100 million .
The local governments will have to raise the balance. The locals don’t have the equity, so the only way is to start borrowing again.
As you know local governments have racked up a very worrisome amount of debt in the last couple of years. And, the Central Government has been taking steps to sort it out. But, now Central Government has a new need for capital for this project, and it actually wants local governments to start borrowing again.
So, the State Development and Reform Committee [SDRC] recently issued a document that permitted local governments to raise money for low- and middle-income housing by issuing bonds or borrowing from banks.
But the Central Government realizes the potential risks here. The SDRC, Ministry of Finance, and the Ministry of Housing and Urban-Rural Development, now require each local government to report on an on-going basis:
- The total investment it plans to make
- The amount already invested
- The balance to be invested.
At least, they’re trying to do something to keep debt under some control.
There could be problems with repayment. Borrowing for the construction of low- and middle-income housing is riskier than borrowing, say, to build a factory or to build a road or other infrastructure project. When you borrow for these, you know that you will derive certain direct or indirect profits.
Sufficient profits from affordable housing, as currently structured, are problematic. And, for affordable housing rental projects, at below market rents, the government has on-going obligations to pay for maintenance and repairs on the property.
I personally think all this will be a huge burden on the local governments.
And, have no doubt, local governments will lose coming and going. They have to take on, just for the 10 million units in 2011, an additional aggregated debt of more than US$200 billion.
But, much of the money a local government needs to service its debt comes from revenue from the auction of land use rights. Because local governments have to provide land almost free developers who are building those low- and middle-income housing projects, they will lose one of their main sources of income. And, this, in turn, reduces their ability to pay off the debts they incurred on the construction of the housing.
Editor: What are your concerns about quality of construction?
Dr. Lou: Three days ago, I read about an affordable housing project in Anhui Province. A qualified family bought a unit, and after taking possession found big holes in the floor. Turns out, according to a government report, that the workers forgot to mix in the concrete into sand and stones. You wouldn’t believe that. And, there are similar reports from cities all over China.
I think there are three reasons why quality of construction is poor. First, money. The developers aren’t paid properly. 3% profit is low anywhere, but it is considered extremely low in China. So, corners are being cut, and quality suffers.
Second, time. Developers don’t give contractors enough time to do their work properly. You have to finish on time, or sometimes there are penalties, which means even lower profits. On top of that. the government has promised families housing, and there are very many families waiting impatiently. Just look at how local governments raised their construction starts to 5 million units in June from 3.4 million units in May, just one month, as I mentioned before. The pressure to complete a project quickly is tremendous, and again quality suffers.
Third, workers. The affordable housing project is one of many massive construction projects in China. And, there just aren’t enough skilled workers to work on them all. Failing to mix sand in the concrete could just be the incompetence of the workers doing the mixing.
I really feel for these poor families. They work hard to get enough money for even affordable housing. Then, they work their way through the government bureaucracy to get allocated units. Only to find that they don’t have, they were not allocated decent properties. And it’s even dangerous to their lives. How must they feel?
Editor: What about your third concern, corruption?
Dr. Lou: Here I will be brief. Every major construction project everywhere in the world has the potential to generate corruption. But, affordable housing is unique.
The only way to rent or buy a unit is for the government to say you are qualified. Many who don’t qualify will nonetheless try to obtain units, either because they are cheap to rent or because if they buy units at below market prices, they may be able to sell them later at a profit. The unqualified can qualify by submitting false documents, or by bribing local officials.
The truly qualified who are barred from getting units because of corruption will be outraged, and they will show it. If this type of corruption becomes rampant, we could see widespread demonstrations, even riots.
Editor: Is China’s affordable housing project an opportunity for foreign investors and developers?
Dr. Lou: As I described, the Chinese government is doing most of the low- and middle-income housing by itself. And, the government cannot afford the massive cost.
Foreigners could have an important role in affordable housing in China. They could immediately bring in capital and new technology. Also, new ways raising domestic capital, and new ways to encourage China’s private sector to invest. I recently learned that in the U.S., there are tax incentives for developers who build those social housing. I am still learning about this, but I think it might be a good idea here.
The problem, of course, is that a 3% profit will not attract the foreign investors and developers who could contribute so much to the success of this project.
Editor: Thank you, Dr. Lou
Dr. Lou: My pleasure.