The Great Haul Of The People

Chinese tenants are buying state-owned apartments for a song

A 56-year-old academic has just made the buy of his life: a 45-square-meter apartment. His employer, the Chinese Academy of Sciences, was also his landlord until last year, when the bespectacled physicist paid $3,400 for the place, located in Beijing's choice Zhongguancun neighborhood of universities and research institutes. The professor could have remained a tenant and kept paying a paltry $5 monthly rent. But the academy offered him a price only 10% of the market value. After five years, he'll have the right to sell his flat at a hefty profit.

It's a quiet revolution. In China's cities, people who long paid only nominal rents are buying their apartments from the state-owned enterprises that until recently owned most urban housing. In the process, they are slowly shrinking the state's role in housing--creating a mortgage market and turning many ordinary Chinese into property owners for the first time. Says Pieter Bottelier, chief of mission for the World Bank in China: "This is terribly important for the overall success of China's reform."

NO OPTION. Of course there are problems with the sell-off scheme, such as corruption and red tape. But Beijing wants the trend to continue. At the National People's Congress in March, top leaders stated that housing reform will be a centerpiece of future economic development.

The government has no other choice. The state-run companies that own the housing are bleeding some $6 billion in losses annually. As a result, they often have to raise cash by selling off noncore assets such as housing. Meanwhile, the state-owned banks hold some $96 billion in nonperforming loans they have made to state companies. China's banks realize that private customers, eager to keep their homes, have a low default rate (1% to 2%), despite mortgages that exact stiff interest payments of 13%.

These homeowners look like much better risks than the state companies. So China Construction Bank and Industrial & Commercial Bank have jumped into the mortgage business. "Banks now have to follow profit-seeking behavior," says Li Yang, director general of the Finance Research Center at the Chinese Academy of Social Sciences. The total value of mortgages expected to be given this year should hit $1.2 billion, up from almost nothing in 1995. Many other Chinese pay for apartments from their own savings or provident funds run by state companies. These are enforced savings accounts that set aside 5% of an employee's salary and match it with company funds.

CORRUPT. As with any other reform in China, obstacles have emerged. To entice workers into giving up their cheap rents, state companies must sell their housing at less than market value. That's good for the buyer, but the sales don't raise nearly as much money as they could. Corruption has also reared its ugly head. State enterprise managers and municipal authorities sometimes buy apartments for themselves to resell or rent for huge profits. And companies and city officials administering housing provident funds can channel assets into other deals. "Local governments sometimes spend the money on buying stock or commercial real estate," says Li Yang. At Shanghai's provident fund, 90% of the money has gone into luxury housing and other projects.

These problems will impede housing reform, but they will not arrest it. Many southern provinces such as Zhejiang, Jiangsu, and Guangdong have privatized more than 70% of their housing. Cities such as Tianjin and Kunming in Yunnan want to accelerate the process by banning state enterprises from buying and building housing.

By creating demand for low-cost housing, the reforms are also attracting foreign investors. Australia's Macquarie Bank Ltd. has formed a $66 million venture with Tianjin's Housing Fund Management Center to build inexpensive flats. Says Yong Tong, deputy general manager of the bank's Tianjin office: "We can sell low-cost developments quicker [than luxury housing]." This reform looks unstoppable.