Budget paradox

Cheaper housing on the way?

Budget paradox

Li Keqiang: cheap talk

China’s housing market is full of paradoxes. For instance, after the government launched measures aginst property speculation in mid-April, transaction volumes fell in some cities. Analysts believed it was the prelude to a substantial drop in prices.

Instead, prices carried on increasing on the year before. Even in August, when transaction volumes dropped 10.1% on the same month a year earlier, prices remained stubbornly high at 9.3% up on the year before.

Land trading has also been active. August revenue from land sales in China’s top 10 cities reached Rmb21.9 billion ($3.2 billion), a 2.3% increase over July.

With property prices continuing to climb – and affordability moving beyond the reach of many – the central government is trying to respond with its most ambitious programme yet to erect low-income housing. The Beijing leadership has set provincial governments a target of 5.8 million new housing units for poorer citizens (the completion date is not immediately clear), which analysts estimate will involve spending of up to Rmb400 billion ($59 billion), says the China Securities Journal.

There have been attempts to boost construction of low-income housing before, not always successfully. Not enough stock has been built and much of what has been completed has ended up in the wrong hands (see WiC60).

But if public promises are anything to go by, new efforts are now going to be made. In early September, Premier Wen Jiabao said an increase in low-income housing was overdue. Two weeks later, Vice Premier Li Keqiang called on local governments to speed up the construction of cheaper housing to ensure social stability, boost economic growth and encourage the healthy development of the property market in general. Keqiang’s contribution is more significant than most, as it comes at a crucial juncture in the Chinese political cycle (with a leadership handover due in 2012).

The first step taken last week was the introduction of a series of tax exemptions for companies responsible for building and managing public housing projects.

But the real challenge is in identifying who is going to finance the construction of the all the new low-income housing that the central government has promised.

Although the central government is prepared to subsidise low-income housing, local governments will probably be made responsible for forking out the bulk of the funds. And one problem, say industry observers, is that local government officials lack incentives to build low-income housing – since it tends to drive down property prices. That then hits land sale proceeds. Local governments, which often suffer from a chronic shortfall of tax revenues, fund many of their outgoings by buying land cheaply from farmers and selling it to developers at a hefty mark-up. (They are generally not permitted to directly borrow from banks or issue municipal bonds.)

In China’s 70 biggest cities, government land-sale revenues leaped 140% in 2009, to $158.1 billion, providing up to 60% of local government funding by some estimates.

As a result, any proposals looking likely to limit land sale proceeds resemble plans for toxic-waste dumps: vital for the greater good, but better in someone else’s backyard, says the Economist.

The conundrum is clear enough, with the local government faced with a budgetary dilemma whenever it has a piece of land to sell. If the city puts up low-cost housing, that will cost it financially. But it will also be forsaking revenue it might have got from selling the land to a developer. And it may drive down property prices in the area. In fact, building lots of low cost housing might be the quickest way for a city to wreck its budget.

Nor does low-cost housing have much of a multiplier effect in terms of boosting local GDP – which remains the measure by which bureaucrats advance their careers. Ergo, stick with what’s worked before: sell land to developers, and use the budgetary gains to finance infrastructure that catalyses the city’s economic growth.

That’s why most analysts remain dubious on whether local government will follow-through on the lofty targets being set in Beijing. Many reckon local bureaucrats will pay lip-service to their overseers in the country’s capital: rushing out ostentiously to kick-start a series of low-cost housing projects this year, but then taking as long as possible to finish the construction.

A case of looking active, but doing as little as possible…

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