China is Once Again at the Crossroads of Housing Development
Photo Credit: United Global Asset
By Zhihua Zhou

China is Once Again at the Crossroads of Housing Development

Sep. 06, 2017  |     |  0 comments


China followed the Soviet socialist model of development in 1949, which was politically associated with the rule of the Communist party and economically characterized by public ownership of resources and central-plan management of national activities. The housing model acknowledged the general logic and ideological features of state socialism. Housing development was associated with the state monopoly over production by a highly-centralized institutional, administrative, and financial system of investment, distribution and management.

 

This welfare-housing model accumulated many problems. As many projects were done based on individual cases without systematic planning, master-planning for the city was absent and infrastructure provision was not well-organized. Although the central government forewent huge annual fiscal budgets for housing construction, serious housing shortages became a prominent social problem. The floor space per capita declined from 4.5 m² in 1952 to 3.6 m² in 1978 throughout the country.1 The 1 percent of wage as rent from households was insufficient for housing maintenance, leaving most of the housing units under-maintained.

 

There were also political urges to restructure the housing sector. After the ten-year political movement of the Cultural Revolution, economic recession, societal fragmentation, and political suspicion were the hallmarks of China. The leadership desperately needed an economic revival to underpin societal coherence and ultimately the legitimacy of the Communist party. Housing, as an essential element for every citizen and with close links to many industries (e.g., construction, cement, steel, concrete, glass, decoration), became the leadership’s reform target.

 

The opening-up reforms that started at the end of the 1970s provided favorable conditions for urban development and the propagation of enterprises in the private sector. The urbanization rate increased from 17.92 percent in 1978 to 26.41 percent in 1990, importing a population of around 115 million into the urban areas during this period. The large scale migration led to a deterioration of the housing shortages in the urban areas. Meanwhile, the fixed welfare housing arrangements disadvantaged the regime transition, as employees working in the private sector were unable to get accommodation from their employers.

 

As a whole, the problems within the welfare housing model (e.g., severe fiscal deficit of the government, housing shortages, abominable living conditions, housing inequality, and interruption of the master city planning), the large-scale urbanization, and the political urges to consolidate party legitimacy, together brought urban housing reform onto the political agenda.

 

With strong urges to abandon the welfare housing system, China struggled with finding the right path for housing development. The stellar growth of its East Asian neighbors was a major ideological inspiration for the reform path of the post-Mao leadership.2 The party leader, Deng Xiaoping, highly appraised the Singaporean model of state developmentalism after his visit to Singapore in 1978. The strategy of intense privatization of China’s post-socialist peers around the early 1990s instilled new neoliberal development logic and inspired the Chinese leadership with specific steps for its regime transition by privatizing public resources.

 

The urban housing reform of the mid-1990s successfully replaced the housing welfare system with a market system, by selling existing public housing to sitting residents and introducing the market element into the housing system. With a developmentalist justification, the government fostered the housing industry as an engine of the economy and declared market housing as the major source for the majority around the 2000s. The nature of housing hence transformed from a public good to an economic one and thus changed the way of producing and distributing it.

 

The following two decades saw a prosperous housing market across China. The floor areas of urban commercial buildings under construction and the floor areas of urban commercial buildings completed between 1998 and 2015 increased by 13.5 and 4.7 times, respectively. The living space per capita in the urban areas increased from 18.7 m2 in 1998 to 32.9 m2 in 2012.

 

The rapid expansion of the housing market greatly contributed to the economy through investment, employment, taxation, etc., and generated huge fiscal revenues for local governments. Official data showed that land revenues presented around half of local governments’ total fiscal incomes in the past decade,3 implying that local governments were playing an entrepreneurial and interest-involved role in the housing market.

 

The one-off privatization of public rental housing and the expansion of the housing market boosted urban homeownership from 17.0 percent in 1985 to 83.7 percent in 2013. The high levels of homeownership with low levels of mortgage debt paved the way for productivism. High homeownership with price inflation made homeowners wealthier and more self-reliant in terms of welfare. The government was thus able to sustain a low-public-expenditure economy with minimal social protection measures through the support of the family. For instance, public expenditure on social security and employment in 2014 remained low — 2.50 percent of GDP, much lower than the average figure of over 20 percent in the OECD countries that same year.4 High homeownership also helped to stabilize society, as few homeowners wanted to see depreciation or damage to their properties because of riots.

 

The Chinese housing approach bore the birthmarks of privatization from its post-socialist peers and typical features of developmentalism and productivism from its East Asian neighbors. Possibly inspired by the post-socialist countries where housing was a shock absorber to ease political turbulence,5 the Chinese leadership set housing as a tool to stimulate the economy (developmentalism and marketization), secure social stability (productivism and privatization), and ultimately consolidate the party’s legitimacy.

 

Nevertheless, China did not exactly follow the path that other countries had gone through; instead, its reliance on investment and construction was extreme even by East Asian standards,6 and it saw a more radical marketization of housing than most of its post-socialist peers.7 China was trying to develop a pragmatic model out of its resources, socialist heritage, civilizational genius, socio-economic constraints, and political desires. It was following a unique path of regime transition from one-party socialism to one-party capitalism in a rapidly urbanizing society with a huge population across a vast territory. The economic depression and social fragmentation after the Cultural Revolution challenged the one-party system ruled by the Communist party. It was a lower-middle income country with severe income inequality but with a relatively low unemployment rate. Urban communities, though displaying some level of conflict based on ethnicity or place of origin, had fairly homogeneous populations with relatively few religious rivalries; rather, the socialist legacy of dual Hukou and land systems, and large-scale migration carried more weight in shaping urban China.



The facts that economic deterioration and social inequality are rampant, and that government intervention is deep, show that the Chinese housing model has failed to achieve social harmony and sustain regime transition.


The stretch of privatization and developmentalism and the political premise of housing indicate that China had provided a contrast to the pattern of housing, society, and political economy from that embedded in liberal economies, its transitional peers, and its developmental neighbors. Factors such as its slower movement toward dismantling socialist institutions than the former Soviet bloc (e.g., dichotomy of urban and rural areas), its low public expenditure on social welfare, and the helmsman role of government in economic activities, suggest that China had developed its own trajectory of urbanism through radical economic stimulation amidst the traditional stage of social and political gradualism in its transition from state socialism to state capitalism; instead of liberal capitalism which was the routine in many Western countries. The question is: can the political premise of housing continue its mission amidst the new socioeconomic developments in China today?

 

China’s prosperous housing development has made a direct contribution to its GDP and has supported the welfare needs of the population. However, the massive supply of market housing in the past decades has led to high inventories nationwide. This, together with the overcapacities in certain relevant industries like steel and cement, and the need to protect arable land, suggests that housing may no longer serve as a durable source for growth.

 

The prosperous housing development might come at the expense of the stagnation of other industries, as banks prefer lending to the relatively lucrative real estate industry while other sectors have difficulty obtaining financial support for their business operations. Official data shows that new real estate loans presented 44.82 percent of total new bank loans; and the balance of real estate loans grew at 27 percent year-on-year in 2016, which was much higher than the figures for the industrial, service, and rural sectors (3.1 percent, 11.4 percent and 6.5 percent respectively).

 

The housing sector has seemingly become a threat to the stability of the banking system and the local governments’ fiscal stability. With over a quarter of bank loans assigned to the real estate sector, the banking system has become highly dependent on the real estate sector. As stated earlier, land revenues presented around half of local governments’ total fiscal incomes in the past decade. If the housing market collapses, the banking sector may be dragged into a crisis and local governments would be unable to continue their growth schemes.

 

With its developmentalist and productivist justifications, the objective of housing development has become stimulating the economy, rather than satisfying the housing needs of the rapidly urbanizing society. While housing is often treated as part of the package of social rights with appropriate degrees of de-commodification, the underdevelopment of social housing has left the poor and disadvantaged groups with low quality housing. The administrative type of regulations has failed to alleviate the unaffordability problems, but has instead distorted market mechanisms and caused social distrust towards governance capacity. Housing inequality exists, but has seemingly been ignored by the authoritarian government.

 

However, better-educated citizens with stronger awareness of their social rights are urging for more social power. Political transformation from an authoritarian regime to a new system that places greater emphasis on meeting the demands of the population is needed to sustain the party’s legitimacy in a climate with easy access to the internet and the media.

 

The rapid expansion of the market does not suggest a liberalized housing sector in China. To secure the political premise of housing, the leadership has to maintain its strong grip on the housing sector. Though the market mechanism has become an important force in housing development, market forces are partially unleashed and heavy government intervention continues. Though at the surface the political premise of housing has seemingly escorted a peaceful regime transition, it has suffocated the growth of essential market mechanisms.

 

The facts that economic deterioration and social inequality are rampant, and that government intervention is deep, show that the Chinese housing model might have contributed to economic growth and urban modernization, but has failed to achieve social harmony and sustain regime transition. The declining economic capacity, increasing social inequality, rising desires for social rights, market distortions by deep intervention, have together germinated the seeds of change for the housing model.

 

There are strong signs that the Chinese government is moving out of its developmentalist and productivist nature and is in the process of embracing more market-orientated initiatives with less political intervention. “New Normal” has become a catchphrase in the governance agenda, where it has sought to transform the housing-led and investment-intense economic model to one based on innovation, consumption, and services, to transform the role of local government, and to let the market play a decisive role in economic activities.

 

As for the housing sector, the leadership has proposed to transform the nature of housing from an economic engine to an accommodation purpose; future housing development will target a balance between social equality and economic growth. More specifically, the government will commit to the establishment of a two-layer supply system of social housing and market housing for different citizen groups, and introduce market-supporting mechanisms in the aspects of land, finance, fiscal and taxation systems to fledge the housing market.

 

Policies on social housing and large-scale redevelopment projects have come to the fore as public welfare spending in the past years, indicating that the productivist feature has been to some extent weakened to correspond to new social needs. Nevertheless, the centrally-planned housing projects in program and scheme forms instead of legislative frames, and the recent severe administrative type housing regulations imply that the government retains its grip on the housing sector. In other words, the leadership has developed a new structure of housing development which embraces more market elements but still has an interventionist development agenda. While the recent massive social housing programs might imply the fading of productivism, developmentalist management continues, but approaches have changed to be more neoliberal, pragmatic, and responsive to the population’s demands.

 

Though with a seemingly clear demarcation towards housing development, the transformations are by no means easy in the depressed economic climate. The shift of housing nature means reduced fiscal revenues and increased public expenditure for local governments. Local governments, which are struggling with their deteriorating fiscal situations eroded by the current economic volatility, might have no incentives to retreat from the lucrative housing industry. Indeed, revenues from land sales continued to rise to 3.56 trillion yuan in 2016, and constituted 40.82 percent of local government’s fiscal incomes that same year.

 

Power transformation from government to market, reflected in the overhauls in land, fiscal, and taxation aspects, are subject to the set-up of institutional legislative fabric for a “rule of law” governance system. In the Chinese elite-ruled top-down governance system, securing political agreement for legislative review from the elites for power redistribution from themselves to the market could remain substantially challenging.

 

With the shift of housing nature from an economic engine to accommodation purpose, the housing sector will make fewer contributions to the economy. As the expansion in consumption is not yet adequate to serve as a strong new engine for growth, a prosperous housing market remains essential to attain the goal of 6.5 percent in GDP growth in the 13th Five-Year Plan. The leadership may have no choice but continue its reliance on the housing sector to attain its GDP target, as economic revival is still foremost for a lower-middle income country with a huge population.

 

This has put the leadership once again at the crossroads for housing development. Whether the leadership will return to its housing-led development model to sustain the economy or carry on with its new strategy remains unknown at this stage.

 

Notes

 

1. Otherwise specified, all data in this article are from the Bureau of National Statistics.

 

2. Vogel, F. and Myers, J. (2011). Deng Xiaoping and the Transformation of China (Cambridge, MA: Belknap Press of Harvard University Press).

 

3. Ministry of Finance (23 January 2017). Information on national fiscal revenues. Retrieved from http://gks.mof.gov.cn/zhengfuxinxi/tongjishuju/201701/t20170123_2526014.html

 

4. OECD (30 January 2015). Social expenditure update. Retrieved from https://www.oecd.org/els/soc/OECD2014-Social-Expenditure-Update-Nov2014-8pages.pdf

 

5. Tsenkova, S. and Polanska, D. (2014). Between state and market: Housing policy and housing transformation in post-socialist cities. Geo Journal, 79(4), 401–405.

 

6. World Bank (2014). China’s urbanisation and land: A reform framework. Retrieved from https://elibrary.worldbank.org/doi/abs/10.1596/978-1-4648-0206-5_ch4

 

7. Tsenkova, S. and Polanska, D. (2014).

 

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