Home Ownership For The Chinese? Well, Maybe Later

Zhu's program for private housing is lagging badly

Chinese Premier Zhu Rongji is known for setting tough goals and delivering on them. So when Zhu declared in March that he would eliminate China's system of state-subsidized housing in four months, many were willing to believe him. Alas, Zhu's deadline has come and gone, and it's clear that achieving his vision of millions of homeowners will take much longer.

China's economic slowdown is a major hindrance: With unemployment on the rise, this is no time to jack up rents to market prices or force employees to buy company-owned apartments. There also are more intractable problems. Private property rights and regulations on reselling housing are blurry. And with an average urban income of just $650, "only a small number of people can buy their own house, with or without a mortgage," says an official at China Construction Bank. "We can't commercialize our housing overnight."

SLOW GOING. Besides being an embarrassment for Zhu, the derailing of housing reform sets back Beijing's plans to deal with economic problems ranging from sluggish domestic consumption to a weak banking sector. By promoting home ownership, the idea is to boost the construction industry and get Chinese workers to spend more of their $602 billion in personal savings. Creating a big mortgage industry would provide China's banks, which now do most of their lending to money-losing state enterprises, with a lucrative new business. At the same time, state enterprises--which typically charge as little as $7 a month for a 40-square-meter flat--could improve their balance sheets by cutting a costly perk.

Not that China's market for private housing is a bust. Over the last six months, 3,000 housing units were sold in Beijing alone. Several cities in rich provinces like Guangdong and Jiangsu already have ended subsidized housing. And Chinese banks are hawking mortgages with outdoor advertising. But business is far short of expectations. Construction Bank, for one, has only written one-third of the $1.8 billion in new mortgages for home buyers it targeted for 1998. And many units are being sold at below-market prices because they're still treated as part of compensation.

TOUGH TERMS. The example of one Beijing commodities trader shows how primitive the market is. After living five years in a crowded company dormitory, the 26-year-old trader bought a 40-square-meter flat from his employer, one of China's biggest trading firms. He paid $6,700, one-quarter of what the flat was worth on the open market.

Sounds like a bargain--until you consider the strings. Before he owns the deed, the buyer will have to stay with his company for 15 years. He could sell in the interim--but only to his employer, and for $6,700. Some Chinese are buying such flats in the hope that curbs on reselling will be lifted. But "all regulations are uncertain for now," says the trader.

Another stumbling block for property buyers is getting mortgages for longer than five years. Chinese banks are still cautious about lending large sums to individuals. Also, it is hard to legally repossess property from deadbeats.

China's mortgage industry could get a boost if foreign financiers were allowed in. But except on a limited basis in Shanghai, foreign banks cannot make loans in local currency. And while foreigners can invest in housing projects, it's hard to make money due to government controls on land and construction prices and requirements that foreigners form ventures with Chinese partners. "They're not very serious about opening to foreign participation," says an American consultant based in Beijing.

Despite these obstacles, the private housing market should keep growing at a steady pace as more Chinese enter the middle class and leave their state employers. In Beijing, the new deadline for ending subsidized housing is now the end of the year. But it is unlikely that this vestige of China's 50-year-old welfare state can be wiped out any time soon.

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