Cover, Issue 512
March 28, 2011
Translated by Tang Xiangyang
Original article: [Chinese]

According to the "eight measures" announced by the central government earlier this year, local governments are required to issue specific pricing targets related to their efforts to rein in the housing market by the end of the first quarter. However, with only one week to go before the end of March, only a few third and fourth-tier cities have announced their targets. Places like Beijing, Shanghai and other cities where housing prices have rocketed in recent years are still in the process of "mulling over" their targets.

What are they mulling over exactly? If the target they set is too loose, they will be criticized for being irresponsible. If the target is too severe, even more pressure will be placed on the real estate and land auction market, which are already struggling to deal with the impact of recently-introduced purchase restriction policies.

Since January and February, the land auction market has been falling. Local officials and developers who have become used to earning easy profits from the residential housing market, now find that they are having to learn to dance to a new tune.

In an attempt to continue earning revenues from the land auction market, developers are submitting countless reports about plans to develop industrial properties, tourism properties and commercial properties.

However, other real estate projects are unlikely to generate as quick a return on investment. Investors have to hold on to assets for longer periods of time and rely on the provision of good after-sale service in order to be profitable. This differs completely from residential property development, which offers quick returns on investment.

Local policy makers are very cautious in relation to how they interfere in the land sale market, which they regard as an important source of revenue. On the one hand they want to tackle rising housing prices, but on the other, they don't want to cut off an important revenue stream.

The thirst for revenue from land sales among local governments this year is unprecedented.

During the "Two Sessions" (the annual meeting of the National People’s Congress and Chinese People’s Political Consultative Conference held in March), representatives were anxious to know how this year’s ambitious target for the construction of government-subsidized housing would be financed.

In their hearts, local representatives to the political meetings knew that the goal of constructing ten million policy-based apartments over the next 5 years will not only require the provision of free or cheap land, but also a huge amount of capital.

But with a cooling land auction market, they wanted to know where this additional capital was supposed to come from.

The Art of Delay

"The art of delay" (拖字訣) has already become a peculiar feature of China's contemporary political landscape.

Problems, set aside long enough, will be forgotten when another, more pressing problem comes along. No one will be held responsible since there is no real mechanism for allocating blame, and no one will be investigated as such an investigation would be meaningless.

This is not the first time local governments have used the art of delay in response to calls to construct government-subsidized housing. In 2006, the Ministry of Construction resumed its goal of constructing policy-based housing and handed down several "strict orders."

However, whether it was because these orders were ignored by local governments or whether the ministry did not push for their implementation, throughout 2007, 2008 and 2009, the push to construct government-subsidized housing gradually withered on the vine.

The trend continued through to October 2010, but then, when it appeared they were unable to delay construction any further, local governments launched a construction spree, claiming at the end of year that construction had already begun on 5.8 million units of public housing.

But no one said when or how many of these projects would be completed and the government failed to provide detailed records of projections or construction activity.

As the central government announced grand plans to construct ten million units of government-subsidized housing over the next 5 years, the doubts that were raised about last year's figures now seem to have been forgotten.

The fact that despite orders from the central government, local governments still haven’t issued detailed targets related to their efforts to rein in housing prices indicates the special nature of the relationship between local and central governments when it comes to housing.

Let's consider two possible outcomes to the current situation.

If local governments were to do a good job in constructing government-subsidized housing and were able to meet the demands of low and medium-income households, do we still think these governments will be as sensitive to housing prices?

And if the rise and fall in the cost of housing are only related to the market, then why are there controls on housing prices?

We can also consider the following situation.

It is not easy to say whether local governments will manage to fulfill their goal of constructing government-subsidized houses, so they may be forced to place price controls on housing in order to make up for the shortfall in policy-based housing construction.

This means, the extent to which housing prices are controlled is influenced by the determination to complete construction on government-subsidized housing.

Everybody knows that over the past decade, many local economies have become overly dependent on land.

Of the numerous on-going infrastructure construction projects, including projects funded by the four trillion yuan stimulus package, how many have been financed by money raised via land?

Land has become a monster in the workings of China’s political economy, one that cannot be easily slain. 

While the money market can be controlled by top-down methods, the leveraging of land is harder to control as the situation becomes increasingly distorted the further down the chain you go.

The multiple disputes related to demolition and forced relocations and the ensuing "mass incidents" are basically all triggered by ongoing land expropriation.

The program to construct ten million units of government-subsidized housing and to increase the supply of low and medium-priced housing are an important task that the government should undertake in order to improve people’s quality of life.

However, the problem is, if local governments continue to make false construction claims and exaggerate data, it will become even harder to curb the rise in the price of commercial residential property.

The root of the problem is an excessive reliance on revenue raised through land sales.

This editorial was edited by Ruoji Tang