Written by Timna Michlmayr
The Chinese government announced significant changes in the regulation of the real estate market in the course of the Central Financial Work Conference in early November (refer to Document No. 14, “Guanyu Guihua Jianshe Baozhangxing Zhufang de Zhidao Yijian“). Emphasis was placed on the swift advancement of the so-called “three major projects,” including the renovation of run-down inner-city districts and the construction of affordable housing (baozhangxing zhufang), aiming to establish a new model for real estate development. The objective is to propel these initiatives at a rapid pace, as outlined in the official announcement. According to the plan, China intends to make at least RMB 1 trillion ($137.22 billion) in low-cost financing available for urban village renovation and affordable housing programs.
Particularly noteworthy is the strong emphasis on affordable housing, aimed at improving people’s livelihoods, expanding effective investment, and supporting the healthy development of the real estate market. Fundamentally, social housing entails not solely relying on the free market for rents and housing prices but also offering residences subsidized by the government. China aims to draw inspiration from Singapore’s successful affordable housing system, where nearly 80 percent of the population resides in subsidized housing. As part of the plan, between 2021 and 2025, 6.5 million new low-cost rental housing units are scheduled to be added in 40 major cities. The goal of transforming urban neighborhoods and urban villages is closely tied to this objective, as it enables the rapid creation of new space for the construction of social housing. Ultimately, the aim is to establish a tightly regulated social housing market with limits on who can purchase the new houses and how they can be resold. Simultaneously, alongside the social housing market, a more liberal commercial market will be permitted, allowing wealthier households to acquire properties at higher prices.
A major reason behind the pursuit of this dual-track approach, which has been characteristic of Chinese market development during the reform period, is undoubtedly the support for young people and low-income groups. For them, acquiring housing in Chinese cities has become unaffordable due to the rising real estate prices. In this context, the Chinese leadership is also mindful of achieving “common prosperity” (gongtong fuyu), which diametrically opposes the growing inequality in property ownership. According to the Ministry of Housing and Urban-Rural Development, this initiative aims to address housing challenges for 15 million citizens.
However, another backdrop of this new policy is also buried in the problems of the existing development model. The renewed push for social housing comes amid the ongoing crisis in the real estate market, where an increasing number of developers are grappling with repayment issues of their debts and default risks due to falling land and house prices and a weakening demand. Additionally, local governments are facing a revenue shortfall because of a lack of land sales (see also https://sino-spark.net/chinas-real-estate-crisis-once-again-highlights-a-dilemma-in-the-political-economic-system/). Amidst this crisis, the contradictions of Beijing’s real estate policy and its impacts in recent years have become increasingly pronounced. While the government has attempted to counteract price inflation in the real estate sector under the principle “housing is for living in, not for speculation” (fang zhu bu chao) to prevent speculation and the formation of bubbles, it simultaneously had to prevent a drastic price decline. This is because not only is the debt of private households linked to real estate prices, but the revenues—and rising debts—of local governments in China are largely reliant on rising land and house prices. This contradiction has turned the regulation of the real estate market into a Herculean task from Beijing’s perspective in recent years.
The new housing policy can be seen as an attempt to address these challenges in the existing development model, which is heavily focused on the real estate market. After all, the real estate market accounts for nearly 25 percent of China’s total economic output.
On the one hand, the expansion of social housing provides an opportunity to allow property prices to rise in a defined segment without simultaneously jeopardizing social stability. According to a State Council document, one of the goals is the return to market principles for commercial housing (shangping fang yao huigui shangping shuxing). While low-income citizens can avail themselves of social housing, wealthier segments of the population can still acquire housing at higher prices. This approach would enable a resurgence of speculative activities on property values, something that Beijing has been combating for many years. Ultimately, it would also allow the “land finance” (tudi caizheng) system, characterized by the high dependence of local government revenues on the land market, to persist, as the government would no longer need to intervene in price developments across the entire market as before.
On the other hand, the policy can also be viewed as a form of support or indirect bailout for development firms. Document 14 has called on cities with a “large inventory” of unsold private residences to purchase these properties and transform them into public housing. This implies that government funds could be used to acquire those residences that developers either cannot sell or have not been able to complete due to financial challenges. While profits for developers in the public housing segment would be limited, there could be potential for increased profit in the private sector. This is especially true if existing regulations, such as those governing the construction of luxury apartments, could be relaxed. Therefore, the dual-track approach could potentially benefit real estate companies currently grappling with financing difficulties.
The attempt to shift the real estate market more towards social housing is, therefore, not surprisingly not an effort to depart from the prevailing development model but rather to make it more sustainable. This is also evident in the financing of the program. The primary sources of funds for implementing the program are expected to include fiscal subsidy policies, bank loans, special bonds, and market-oriented funds. The mentioned special bonds (zhuanxiang zhaiquan), a type of government bonds issued by local governments in China (see https://sino-spark.net/chinas-planned-financial-policy-focuses-on-stability-the-regulation-of-local-debts-is-a-central-element-that-requires-drastic-measures/), signify the anticipated broad fiscal support for the construction of affordable housing. Bonds for shantytown reconstructions, which are linked to the planned expansion of social housing in Chinese cities, have been issued since 2018, and in 2019, the proportion of Shantytown Reconstruction Bonds (penghuqu gaizao zhuanxiang zhaiquan) in all special bonds even exceeded 30 percent (see Graph 1). However, the percentage has decreased in the two subsequent years. It’s worth mentioning that these bonds were exclusively financed from revenues generated by the land sales of local governments (see https://hasp.ub.uni-heidelberg.de/journals/asien/article/view/20425).
Recently, local governments have already begun preparing special bonds specifically for the construction of affordable housing (baozhangxing anju gongcheng zhuanxiang zhaiquan) (see, for example, https://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/BOND/2023/2023-12/2023-12-06/19609486.PDF, https://www.xizang.gov.cn/zwgk/xxfb/gsgg_428/202311/t20231129_391461.html). In 2023, the province of Hunan issued special bonds worth RMB 234 million (US$32 million) for financing urban renewal projects and affordable housing to stimulate the economy. Overall, between January and October 2023, RMB 3.52 trillion (US$ 541.54 billion) in special bonds were issued for industrial parks, transport infrastructure, and affordable housing.
However, the extent of bonds for affordable housing and the sources for repayment are yet to be clarified. Given that the repayment of special bonds has historically been closely tied to revenues from the land market (see https://hasp.ub.uni-heidelberg.de/journals/asien/article/view/20425), it can be expected that this connection will not undergo drastic changes in the immediate future concerning the co-financing of affordable housing projects.
Graph 1: Issuance of Shantytown Renovation Bonds
Given the ambitious goals of China’s new social housing policy, it remains to be seen to what extent these objectives can be translated into practice, as a shift towards a Singaporean model seems improbable. In the past, the implementation of affordable housing policies has encountered challenges, particularly at the local level. Since the 1990s, but increasingly over the last decade, the Chinese government has issued policies aimed at introducing social housing. As is often the case in implementing central policies in China, local government interests have conflicted with central interests. Local governments, dependent on rising land prices, have resisted offering land at favorable terms for affordable housing projects. While this resistance might be mitigated by strong central support this time, the incentives driven by the significant reliance of local finances on the land market persist. A spontaneous transition of China’s social housing policy to a Singaporean model is nearly impossible, especially considering the substantial catch-up needed. As of the end of 2020, approximately 38 million people, constituting less than 3 percent of China’s population – in contrast to nearly 80 percent in Singapore – lived in public housing.
Nevertheless, it can be asserted that the new policy provides further insights into China’s economic policy under Xi Jinping. While the prevailing development model continues, changes in its specific implementation are planned, notably at the core of real estate market regulation.