China Has Much to Gain from a Public Housing Scheme
Straits TImes 13 January 2011
AS DEMAND in the developed economies continues to languish, the world increasingly is hoping that a burgeoning Chinese economy will pull the developed economies - and hence the global economy - out of the doldrums. The working of this reverse coupling theory rests on the premise that China, which has grown into the world's second largest economy predominantly by exporting until now, succeeds in building a sustainable internally driven growth.
Much to the world's disappointment, however, domestic consumption in China today remains relatively subdued.
At the height of the global financial crisis, the Chinese government acted decisively by pumping four trillion yuan into the economy. As the crisis evolved and external demand withered, more measures - on both the supply and demand sides - were introduced to stimulate domestic consumption to make up for the shortfall in export.
The bold rescue measures by the government succeeded in staving off widespread business failures and massive unemployment, but fell short of generating internally driven growth. Most of the increase in private consumption over the last two years has been artificially propped up by government subsidies and rebates given to consumers, and is therefore not sustainable.
However, given China's relentless push for urbanisation and economic restructuring in the years ahead, there is certainly room for its domestic economy to grow.
One way it can undergo a sustained expansion is for China to embark on a massive public housing programme.
So far, public housing programmes implemented by many local governments have achieved only limited and varied success. Only 6 per cent of urban Chinese families currently live in public housing, which includes low-rent homes and apartments with controlled prices.
The limited success can be attributed mainly to the government's hitherto emphasis on economic growth, leading local officials to focus on only economic activities that contribute to gross domestic product (GDP) growth. What little motivation left to provide low-cost housing was further eroded by corruption and by vested interests of local governments which depended heavily on land sales and private property development for fiscal revenue.
Things are set to change, however, with the resolute switch from the 'growth-at-all-costs' strategy to inclusive growth strategy as outlined in the recently announced 12th Five-Year Plan (2011 - 2015). Public housing is a key investment area in the new five-year economic plan. With that switch, career advancement of public officials will increasingly be coupled with improvement of living standards rather than growth of GDP. Local governments, for example, have been ordered to set their own goals for the provision of affordable public housing.
Already, many cities have stepped up their efforts. Shanghai's supply of public housing will increase by 25 per cent this year to reach 15 million sq m. For China as a whole, the government is projected to have built 5.8 million units of affordable housing by the end of last year. This figure is set to almost double to hit 10 million units this year. Altogether, the programme is projected to cost the government 700 billion yuan last year and 1.3 trillion yuan (S$253 billion) in the following year
This spending will generate an explosion in demand for building materials, home furniture, and other related products and services - with the ensuing multiplier effect driving the rest of the domestic economy. Given the government's strong financial reserves, there is no doubt that this new impetus for internal growth can continue for at least the next 10 to 20 years, as China gravitates towards its target of urbanising 70 per cent of its population.
Besides generating internally driven growth, the public housing programme also provides policymakers with a powerful counter-cyclical fiscal tool to complement the currently often used monetary tools (openmarket operations, interest rates and reserves ratio) to manage the macro economy.
In recessionary times, for example, the government can step up fiscal spending in the construction of public housing. Such investments certainly beat the indiscriminate construction of highways that lead to nowhere by officials keen to report higher GDP figures during the two years when the money from the four trillion yuan rescue package was being hastily dispersed.
Another macro-economic aspect the public housing programme will have an indelible impact on is asset inflation. Despite years of efforts using predominantly monetary policy tools, the runaway property prices continue to scale new heights. Government efforts have been largely unsuccessful because asset inflation in China is more than just a monetary phenomenon and therefore cannot be effectively addressed by using only monetary tools.
Given the rapid pace of urbanisation, there is indeed an insatiable demand for affordable public housing as young urbanites form new families and rural migrant workers continue to flood into the cities. As it is, the majority lower- and middle-income Chinese are deprived of the opportunity to own an apartment while the minority rich invest in high-end units which are then left vacant. Based on estimates from electricity meter readings, such empty apartments are estimated to number 64.5 million in urban China.
The fact is that private housing in China has become an investment asset even before home ownership has become prevalent.
The premature escalation of property from a roof over the head to an investment asset means that a larger proportion of the population are priced out of the market even before they have a chance to own a property. Without government intervention, the pursuit of maximum profits by private developers inevitably results in market failure which causes misallocation of economic resources.
More importantly, an out-of-control private property market polarises the society as the rich are further enriched by property investment while the poor remain poor or become even poorer. Without the government's intervention, profit accumulates in the hands of private developers, speculators and corrupt local officials. By intervening directly as a market player, two goals are achieved.
Firstly, the government provides a critical asset that everybody needs at a reasonable price and profit margin, determined based on wage growth and health of the overall economy. Secondly, the profit is redistributed in the form of housing subsidies so that more can rent or own a house and get to share in the fruit of economic growth.
Hence, the public housing programme not only generates internally driven growth directly, but it also facilitates redistribution of wealth and allows the lower- and middle-income population to spend less on acquiring a house and have more left for other consumptions. Until affordable public housing becomes a prevalent fixture in the Chinese landscape and offers a real alternative for the majority of the wishful home owners, any policy measures to curb rising home prices, redistribute wealth and raise domestic consumption are likely to be met with only temporary and limited success.
Finally, the development of public housing provides an opportunity for policymakers to revalue the yuan and speed up the restructuring of the economy.
Chinese policymakers have been unwilling to let the yuan appreciate - for fear of the social turmoil that can result from massive unemployment arising from the closure of factories whose products are made uncompetitive by a stronger yuan in the international market.
However, if the dislocated labour arising from yuan revaluation can be relocated to the public housing sector, then the government's fear of any impending social turmoil can be assuaged. This creates more room over time for the yuan to appreciate, which in turn helps to speed up structural reforms.
Inefficient producers and businesses still engaged in low value-add or polluting activities can be allowed to fail, so that resources can be re-allocated to more productive and emerging sectors.
The overdue economic upgrading will raise across-the-board wages which, together with the higher purchasing power afforded by the stronger yuan, can further help to boost domestic consumption and substantially improve the quality of living for the low-income masses.
In short, a successful public housing programme in the coming years will underpin Chinese policymakers' efforts in stimulating domestic consumption and setting in motion a sustainable and benign cycle of internally driven economic growth that economists and policymakers all over the world have been clamouring for. This internally driven growth will certainly gather momentum in the coming years. That is when the much-touted theory of reverse coupling will be put to a real test.
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