Banking & Finance

Dead money

China’s housing provident fund scheme is a mess

Dead money

Housing provident funds: not one of Zhu’s better ideas?

When Zhu Rongji, then Shanghai’s mayor, visited Singapore for the first time in 1990, the idea of copying its Central Provident Fund was very much on his mind.

A year later Zhu would pioneer China’s own compulsory savings scheme in Shanghai. Setting aside 5% of monthly wages – with a sum matched by employers – the purpose was to provide loans for homebuyers. The same model, when Zhu subsequently pushed for more drastic property reforms as Prime Minister, was rolled out to most Chinese cities.

A city-state the size of Pudong was never going to be the perfect model for a country as large and diverse as China. While Singapore’s compulsory savings scheme has helped 85% of its citizens buy publicly built housing, the Chinese government cannot afford to be the biggest home provider. The State Council has promised to build 36 million affordable homes before 2015. But even if the target is met, public housing would only account for 20% of total residential supply.

As of 2011, housing provident funds across China amounted to Rmb4.1 trillion ($644 billion) in assets. But less than a quarter of the pool was drawn as housing loans. The rest is sitting as zombie deposits on the books of state lenders. (This offers meagre returns but was made a requirement after a series of scandals in which city officials embezzled cash.)

That’s led to a less-than-ideal outcome: runaway home prices have made flats unaffordable to large swathes of the population; this means Chinese workers are left with an irritating compulsory savings scheme that eats into their disposable income but does little to further their homeowning aspirations.

“The housing provident fund, whose ATM machines are they?” the Southern Weekend asked in a report published this month. “It robs the poor and aides the rich,” was the newspaper’s conclusion. “It helps state lenders too,” a web user added.

The irony is that homebuyers with higher monthly incomes don’t necessarily need help with government loans. Many pay cash, eschewing mortgages completely.

Worse still, many developers refuse to do business with customers financed by provident funds as – fore reasons of bureaucratic inefficiency – they are often slower to disburse the cash, hurting developer cashflows. But worst hit by the current scheme are migrant workers who can find it difficult to get their money back when they leave cities in which they have been employed. That’s why an input of ‘housing provident fund’ in an online search sees so many results returned for intermediaries. These firms are familiar with circumnavigating the red tape to help people get their compulsory savings back. But they charge a hefty fee.

“The housing provident funds have completely lost their policy function,” reckons Zhong Maochu, an economist at the Nankai University. “There is no reason to carry on with such system.”

“Our provident fund system needs wholesale reform and rethinking,” the Beijing News agreed.

Policymakers are already pondering how to put the giant provident funds to better use.

The China Securities Regulatory Commission (CSRC) announced this month that it has started preparations to allow workers to invest their provident funds in Chinese stocks too. That could prove a boost for the A-share market, although it’s debatable whether investment in the casino-like conditions of much of China’s stock market is really in keeping with Zhu Rongji’s original vision of a nation of happy homeowners.

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