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Heady march of China's property revolution - Property moves from
'public' to 'private' ownership By
RICHARD McGREGOR 11/16/02
Within days, the tickets were changing hands on the black market, some fetching as much as 200,000 yuan. Other prospective buyers queued for 24 hours to secure a place in the seven-tower, US$850 million (S$1.5 billion) development. 'It was freezing,' recalls Mr Qin Hua, sales manager for Shimao, a Shanghai developer. 'But that did not prevent these rich people from standing outside all night to get the apartments.' Just 10 years into its experimental housing-reform programme, Shanghai has gone from having next to no private home ownership - all but outlawed after the communist revolution - to a market where more than 90 per cent of homes are privately owned. It has been a genuine revolution, one with the potential to uproot the foundations of communist rule in China as it is replicated in wealthy urban areas along China's coast. 'The housing market, along with the ownership of stocks, is the most powerful means to transform society and politics in China,' says Mr Fred Hu, China economist at Goldman Sachs in Hongkong. The success of private housing reform has already drawn new commitments from the Chinese Communist Party's leaders. In his speech to the party's 16th congress last Friday, outgoing general secretary Jiang Zemin promised to create a legal framework to protect private property. His comments suggest that the official view of property has changed. LIQUID ASSETS PROPERTY reform in Shanghai, as elsewhere, has come at a cost. As part of the city's plans to remake the urban environment and clear land for developers, tens of thousands of people have been forced out of their homes with minimal compensation. However, the creation of a new mass class of property owners means that government orders to claim properties forcibly will be increasingly difficult to enforce. 'With new developments, it's virtually impossible to knock them down because so many people have a vested interest. But a single house standing on its own is still vulnerable,' says Mr Andy Xie, an economist at Morgan Stanley in Hongkong. The key to the transformation has been reform of the property-title system. Deregulation has turned capital locked up in the government-owned housing sector into privately-owned, tradeable assets. Says Mr Zhang Xudong, chief executive of An Jie, a property-consulting company in Shanghai: 'For the first time, you have created a pool of liquid assets, and that is a huge change.' As economist Hernando de Soto has argued, legally enforced and tradeable property rights are a necessary condition for economic development. In his 2000 book, The Mystery Of Capital, he recounts how California created 800 property-title classifications after the 1849 gold rush. The United States, he says, took more than 100 years to pass laws integrating US property assets. 'The result was an integrated property market that fuelled explosive economic growth thereafter,' he writes. As recently as 1995 in Shanghai, there were different types of land titles, designated by the colour of the paper on which they were recorded. A green title meant that land could be traded; red meant government ownership; yellow deeds covered houses but not the land they occupied; brown meant property could be sold to foreigners. The last obstacle to a Western-style property market was removed late last year, when foreigners buying land were put on a par with locals. A single title now covers ownership of any building and the right to use the land for between 50 and 70 years. The decision to distribute rights to use land adheres to communist dictums that all land should remain in public ownership. It also keeps the government involved in the property market. But new owners have been quick to protect their investments: Increasingly, they are taking legal action against the government. Shanghai's courts have recently agreed to hear a number of cases mounted by residents challenging the government's seizure of their properties or demanding greater compensation. Shanghai's property reforms began as an attempt to head off a fiscal crisis. By the time China embraced market economics in the early 1980s, the government's policy of providing public housing through state-owned enterprises at peppercorn rents had become a disaster. Construction and maintenance of public housing cost the government 35 billion yuan in the first half of that decade. This drain on public coffers was offset by meagre annual rental revenues of about one billion yuan, according to Goldman Sachs. Even with this big subsidy, housing was of low quality, small and in chronically short supply. KNOCK-ON EFFECTS WHEN Beijing decided to allow Shanghai, China's largest city, to experiment with private housing in the early 1990s, municipal officials followed Mrs Margaret Thatcher's example. Apartments once provided by state-owned enterprises were sold to workers at a fraction of their cost, just as the former British prime minister had done. In turn, Shanghai's workers were allowed to resell their homes and keep any profits. At one stroke, a liquid, private market was created. Professor Chen Bogeng of East China Normal University says: 'Generally speaking, the amount people paid to buy their old homes was about 10 per cent of the cost of the structure.' The Shanghai authorities gave home buyers a further incentive in 1998 by allowing them to write off all their mortgage payments against their taxable income. The market has matured rapidly as a result. Shanghai's resale market in houses will be larger than that for new homes this year - a first for modern China. Within a few years, the city could resemble a mature Western urban property market, with resales representing 80 to 90 per cent of transactions. Says Mr Zhang: 'It's now getting into a healthy circle, with people getting a two-bedroom apartment first and then, after their kids are older, trading up into a three-bedroom place, or, if they are doing really well, a townhouse.' There are many positive knock-on effects: Debt-heavy state banks are building profitable mortgage businesses; China's first credit-rating system unaffiliated with a financial institution for individuals has been established; the local economy has grown as the building and home-furnishing industries have expanded and household wealth has increased. Mortgage loans offered by Chinese commercial banks were valued at 560 billion yuan last year, just under 5 per cent of their total loans, up from 13 billion yuan in 1997, or a paltry 0.2 per cent of loans, according to Goldman Sachs. Shanghai and Beijing have created municipal credit-rating agencies to provide financial institutions with information to assess the credit-worthiness of borrowers. A national credit system is now being set up. Despite the growth in mortgage lending, the banks are still learning about risk assessment; they subcontract most of this work. The use of property as collateral for consumer loans, a basis for wealth creation in the West, has been restricted by the government for fear that borrowers will use the funds to speculate on the stock market. Nonetheless, banks are already using property as collateral. Says one property executive: 'The banks close one eye and say to us: 'As long as you bring in loans with a defined purpose, either buying a car or decorating a home, and secure them with assets, we will finance them.' ' But Shanghai and other coastal cities are still the exception. It will take many years to build a national system of property titles. The government has barely begun to tackle the issue in rural areas, where most of China's 1.3 billion people live. A near-term priority is to introduce a public tendering system for property sales. Private deals now account for 90 per cent of transactions. Nevertheless, the Shanghai experiment has planted an idea in the minds of China's new generation: Private property is a secure investment. As Mr Xie puts it: 'Political reform in China has allowed people to believe that private ownership is credible - it has been a 10-year process. Many old people still don't believe that but the psychology of young people is different.'
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