Policy-based Housing Hindered by Money Shortage

By Xi Si, Song Yao, Gao Boya, Li Wenbo
Published: 2010-11-03

Cover , Issue 492, November 1
Translated by Tang Xiangyang
Original article:

Although China's property market has recently witnessed gloomy days, local governments are continuing to construct policy-based housing. 
"I suggest you come and have a look at the construction sites yourself. You've probably never seen such a sight and I believe you will be moved," said Luo Ming, director of the construction headquarters of Harbin's Qunli New District. He said that two directors of the city's construction bureau work on-site while the work schedules of the construction sites are decided by the secretary of the CPC Harbin Committee.
China has planned to construct over seven million policy-based houses this year. The State Council and the Ministry of Housing and Urban-Rural Development (MHURD) have jointly required local governments to meet this goal by the end of the fourth quarter. Local governors are consequently working on construction sites. Lanzhou City in Gansu Province has even determined to finish constructing policy-based housing in just 100 days. They are calling their task, the "100 day battle."
However, the issue of how to finance this construction spree has become a problem for both the central and local governments. The two perceive the problem differently. While the latter believes the central government should provide all the money necessary or at least provide more subsidies, the former believes it is the latter's responsibility to construct government-subsidized housing and will only subsidize construction in central and western provinces where financial capability is weak.
An investigative report recently released by the Budgetary Working Committee of the National People's Congress bluntly states, "Even after the central government has raised subsidies for policy-based housing, providing around 30 percent of the total money needed, local governments still consider it to be insufficient."
Speed of Construction
The investigative report states: "The MHURD and local governments have jointly-set this year's goal of constructing 7.98 million units of policy-based houses."
According to a notice posted on the website of the MHURD, from January to September, 5.2 million units of policy-based houses and transformed shanty towns were already under construction, accounting for 90 percent of the year's planned target of 5.8 million units.
Beijing, Shanghai, Hainan and Suzhou have claimed to have completed their targets. "100 percent of the construction projects are already underway," an official with the Suzhou Housing and Urban-Rural Development Construction Department said.
But central and western provinces are not as confident. Harbin has only begun 50 percent of its projects and it will soon be too cold to continue construction.
Lanzhou has been publicly criticized by the provincial government for its poor work in constructing policy-based housing. Lanzhou is supposed to construct 4,316 policy-based houses in 2010, but only 254 units had been constructed at the end of September. This is why Lanzhou is left to build all of its remaining policy-based housing in just 100 days.
Five cities in Henan Province, including Anyang and Jiaozuo had not begun to construct their policy-based housing projects by early August.
According to the above report released by the NPC, as of the end of August, all cities had only constructed 80 percent of the 2009 policy-based housing plan target; some cities had only completed 40 percent. Many cities have not even begun construction on the 2010 targets.
Zhao Luxing, director of the housing and property sector department of the policy research center under the MUHRD, has attributed the construction delays to the lengthy application and approval process between the central government and its local subsidiaries that was not completed until the end of August. However the underlying reason for the delay is that local governments are suffering a severe shortage of money.
It is known that Lanzhou needs 1.96 billion yuan to construct its policy-based houses, but its local government only has 771 million yuan.
Harbin is also suffering from the same problem.
The differences between eastern and western provinces are very clear. An official with the Suzhou Construction Bureau said, "The policy-based housing projects in our urban areas are directly financed by the city's financial bureau while the rural areas have to finance themselves. We are not short of money." The cost of construction in Suzhou is three times that of western provinces.
Misunderstandings Over Subsidies
According to the central government's plan, as of last year, China should have invested around 400 billion yuan every year in constructing policy-based housing. The central government will give a subsidy of 79.2 billion yuan to central and western provinces while the remaining sum will be dupplied by local governments. According to the above report, the central government has provided a subsidy of 23,700 yuan per unit for local policy-based housing, equal to 30 percent of the total investment. 
"Is 30 percent a large amount?" said a retired official with the Beijing Construction Bureau, "for western provinces, even 50 percent is not enough."
Zhao Luxing also stated: "The only income source of central and western provinces is tax and other revenue collected by the local financial bureau. They have little or no money to contribute to constructing policy-based housing. The land prices and land grant fees of those provinces are low, which is why they are always short of money. But their need for policy-based housing is huge, as is the area of construction that needs to be completed."

Many local governments require local financial bureaus to prepare money for policy-based housing outside the local government budget. "That means we have to have surplus revenue," said an official from a local finance bureau.
Some local governments hope to get additional "transfer payments" from the central government to fund the construction of policy-based houses. A local government official said bluntly, "The central government will surely provide some hundred billion yuan in extra revenue. Part of it will definitely be invested in local projects. We can fight for it."
Several people involved in the local construction system told the EO that central and western provinces misunderstood the central government's plan to construct policy-based housing. "On hearing that the central government would subsidize local policy-based housing projects, local governments rushed to report their policy-based housing construction plans for the purpose of obtaining the subsidy. But later they found out that the subsidy only covers a portion of construction costs. Now all the projects they have reported have become a heavy burden," an official with the Lanzhou Construction Committee explained to the EO.
The central government has already offered subsidies to local governments. According to an official with the Ministry of Finance Comprehensive Planning Department, the central government required local governments to provide sources of capital before reporting their construction plans. But as the end of the year approaches, they are beginning to say they are short of money.
According to public materials, Lanzhou planned to construct 34 policy-based housing projects from 2007 to 2010. But construction has not gone ahead as planned. The local government left two projects incomplete in 2008, five unfinished in 2009 and five of the projects assigned for 2010 have yet to begin construction.
A National People's Congress Working Committee Report states that the policy-based housing project plans of some local governments cover one-third of their population. "Some local governments did not do a thorough job in planning their policy-based housing projects. Lacking accurate projections, they only relied on the amount of their government subsidy or the result of a sample survey to formulate their plan, and ended up unable to meet actual demand."
Disputes Over Land Transfer Fees 
Land transfer fees are essential to resolving disputes about the best way to finance policy-based housing.
The EO has learned that the central government once required local agencies to devote 10 percent of revenue gained by land sales to policy-based housing construction. But the latter only put aside 2 percent of the total amount of land grant fees or 5 percent of the net profit of land sales. 
However, it is difficult to find precise data on what proportion of land grant fees are used to construct government-subsidized housing. "This is something that nobody knows about. It has never been publicized and those who are aware are silent on the matter," Zeng Guoan, director of the National Housing Research Center, said.
Statistics obtained by the EO show that the Chinese government gained 1.47 trillion yuan in land grant fees in 2009, of which between 580 billion yuan and 980 billion yuan was net profit. 10 percent of the net profit is over 58 billion yuan; if the local governments had put it aside as required, they would not be suffering from a severe shortage of money for the construction of policy-based housing.
Other public data shows, in 2006, local governments should have invested 13.5 billion yuan of their land transfer fees into the construction of policy-based housing. But in fact only 300 million yuan was used. For example, in 2009, ten cities in Hunan Province had not used the profit from land sales to construct policy-based houses. Some projects did not even begin construction, meaning they missed out on the subsidies offered by the central government.
Zhao Luxing said it is difficult to determine whether local governments had met the 10 percent requirement because different regions have different ways of calculating land sale profits. Some local officials may even report less profit so as to reduce the sum of money that has to be invested in policy-based housing.
The China Railway Real Estate Group (CRREG) is a class A developer. Chen Yuedong, deputy general manager of CRREG said the land transfer fee differed among different regions. While Beijing and Shanghai may receive a profit from selling land ten times of its development cost, cities in western China may see a profit of half of the land transfer fees as an achievement. 
It is difficult for the central government to solve the financial difficulties of the central and western provinces regarding policy-based housing construction because they all are suffering from a severe shortage of money. The NPC report stated that because of the pressure to construct policy-based housing, many local governments are relying on bank loans to finance their projects or are delaying the payment of construction fees.
In western China where policy-based housing has dominated the local housing supply, one county-level governments decided to sell part ownership of the government-subsidized houses to home buyers. Many local governments have followed their lead
Lanzhou has established a specialized office to sell the policy-based houses. Though they only sell 60 percent of the ownership, they still attract many people because their prices are very low. By September 14, 360 qualified families had bought policy-based houses and the government had raised over 30 million yuan.
However, Wu Xiaoling, vice chairman of the NPC Financial and Economic Committee, suggested at an NPC meeting on October 28, "There are only three kinds of policy-based houses: low-rent housing, economically affordable housing and public housing."
This article was edited by Rose Scobie and Ruoji Tang