How Successful Are China s Public. Housing Schemes?

How Successful Are China s Public Housing Schemes? Bingqin Li 1 Abstract This paper examines the outcomes of the housing reform in China and the main challenges for public housing schemes. In the past 30+ years, the Chinese governments at various levels have introduced numerous housing reform measures and the meaning of public interventions in housing has shifted overtime. Despite of the improved urban housing conditions, until very recent, the role of public housing had been increasingly marginalised and urban housing inequality had increased dramatically. There has been a renewed interest in public housing provision from 2008. As far as housing with a public element goes, so far, the government intends to create a system in which public funds may reach different income groups and for different tenure types. The access to the funds or housing will be mean-tested. However, despite of these efforts, housing issues appear to be more at the centre of public attention these days. The paper tries to explore the main reasons behind this phenomenon. Keywords: public housing, China, policy review, housing reform 1 Contact: Bingqin.li@anu.edu.au 1

Introduction Housing is probably among the earliest areas of reform in the late 1970s. Overtime, with the continued changes, the housing system and the housing outcomes in urban China are barely recognisable. Even if we only trace back to 1990, when major reform measures took place, there have been dramatic changes since then. In 1990, the average living space per person in Beijing was 7.17 square metres, Shanghai was 6.4 square metres and Tianjin was 6.5 square meters. The housing poverty line set by the Central government in these large cities in the 1990s was four squaremeters per person. By the end of 2009, the average housing construction size 2 per person was 28.8 square metres in Beijing, 34 square metres in Shanghai and 29.9 square metres in Tianjin 3. The actual size for household usage is much lower though. Various sources suggested that it should be around 20 square metres per person at the national level. The number for large cities should be less than 20 square meters. By the end of 2009, about 87% percent of houses are privately owned. The improvement in the overall housing conditions seems to be obvious. At the same time, the surveys by mass media repeatedly suggest that housing is among the most concerned life issues by the public. In 2010, it has topped the list for the first time (Guo, 2010) and housing was a main subject area for discussion in the latest People s Congress (Yu, 26-02-2010). In this paper, the author examines why the apparent improvements in housing have not led to subdued public concerns. In the following sections, The author first identifies the sources of growing pressure for affordable housing. The second part 2 Including shared public space that is inside the building but outside the private apartments. Private living space inside the wall of an apartment is much lower. However, the data are not comparable for different cities. Therefore, we do not use the number for private space. 3 Data quoted in this paragraph comes from the Public Communiqué on Social Economic Statistics of each city at of each year. 2

tries to examine how successful China s public housing schemes are. We will first examine the housing outcomes and then look at whether the reforms have achieved the intended goals. The purpose is to study how different interests have played out in the process of housing reform over the past 30+ years. Criteria for evaluating the success of public housing schemes To evaluate how successful public housing schemes are is an illusive task. In theory, a housing system should include different sectors of housing market, such as owner occupation, shared ownership, private rental either formal or informal. These submarkets working together should be able to sort out the housing distribution through market pricing, i.e. everyone will have somewhere to live that matches their affordability. However, market solutions, such as shantytowns or even squatters, may not be pleasing to the eyes of urban middle class. The miseries associated with poor housing and the cry for better housing often drive the state, the representatives of the public (either democratically elected or not, and want to maintain a relatively stable governing position), to do something in order to improve or appear to improve the housing conditions of the poor. This is where public housing policies kick in. However, there are some complications regarding the public housing schemes when we try to evaluate whether they are successful. The outcomes of public housing schemes can be evaluated objectively and subjectively. The objective ways are usually determined by experts based on their understanding of user needs. The first is housing adequacy. This is an area that has been studied by many researchers. Various indicators have been set by researchers in order to measure whether people are housed adequately in a society. This type of indicators is designed to measure hardship (Meyers and Garfinkel, 1999). However, these objective criteria are criticised for being manipulated by researchers, and may not reflect the actual 3

experience and concerns of residents themselves (Newman 1984). The second is about affordability. This angle of evaluation assumes that when the price to household income ratio is above certain level, houses become unaffordable. When this happens, the state should try to offer assistance to improve the quality and affordability of housing. Therefore, evaluating public housing schemes should aim to look at whether the intervention has been successful in helping the targeted groups to obtain better and more affordable housing. Unfortunately, this type of evaluation is also prone to criticism. It is because public houses though more affordable are often associated with poorer quality and maintenance. Even if public housing is able to offer shelter to the poor, and even if it does not suffer from quality problems, it may also bring about social segregation (Turner, Popkin and Rawlings 2009) and various social problems (Griffiths and Tita 2009). Literature on public housing tend to suggest that many researchers consider public housing schemes are doomed to fail one way or another (Bloom 2008). It is also very difficult for them to agree on the criteria for improved housing. The subjective assessment looks at whether users are satisfied with their housing conditions. In this way, the objective criteria may be undermined, as the users could be very satisfied whilst others take an opposite view. This phenomenon can be observed in people s attitudes towards urban slums where slum dwellers have learnt to adapt to the life in slums and found it friendlier to the poor {Hasan, 2006 #66}. Whereas outsiders, including urban middle class and the government, often consider slums to be an eyesore, an inferior form of settlement that needs to be replaced by better houses {Gilbert, 2007 #67}. However, champions for user satisfaction would unavoidably come across the difficult problem of voluntary under-consumption, especially by lower income groups, i.e. some people may prefer to spend as little money as possible on housing {Li, 2009 #59}. 4

Another type of evaluation tries to focus on the relationship between policies and outcomes. One aspect is to examine whether policy makers have achieved the intended goals. However, these goals may not be about improving housing outcomes, but rather about achieving various social purposes, such as reducing crime(beckett and Herbert 2008; Forrest and Murie 2009), winning votes(mccarty 2008), boosting economic performance(harloe and Martens 2009), or maintaining social stability(lipman 2008). Another aspect is to examine whether government interventions have made any differences and whether these impacts have managed to achieve some socially desirable results. The problem with this approach is that if the interests of policy makers are not in line with the need of lower income group, a public housing policy that has successfully achieved its goals may actually harm the poor. Given the restrictions, evaluating policy success becomes an elusive exercise. What is a realistic goal might be to strike a balance between objective and subjective views and at the same time looking at the goals and outcomes. In this way, we may hope to build up a realistic picture to understand the possible causes of public discontent. Pressure on urban housing system Several social trends may help to explain the increased pressure on urban housing system. They affect the demand and supply of housing in Chinese cities. Changing population size and structure The total population has grown overtime, despite of the One Child Policy, from 960 million in 1978 to 1.33 billion in 2008 4. The growing urban population means that there need to be more houses to accommodate the increased number of people. 4 Official statistics do not include Hong Kong and Macao. In addition, the data is often criticised for not including people who are not registered with the Public Security System. 5

Figure 1 also shows the pressure imposed by structural changes. Urban population has grown faster than rural population. Therefore, unless equivalent number of rural houses are also urbanised, it means that there will need to be more housing supply in cities. What makes the scenario more serious is that the national level data only shows rural and urban population according to the Household Registration. The reality is, there are also people moving from rural areas, and working and living either long term or short term in cities without being registered. They also need to be accommodated during their stay in cities. Figure 1. Population growth (in 10,000s) 140000 120000 100000 80000 60000 40000 20000 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Data Source: China Statistics Bureau, China Statistics Yearbook, various issues since 1978. Rural Urban Most information on migration is based on estimation. There are around 150 million migrant workers from rural to urban areas. Not all of them are permanent residents in cities. As shown in Figure 2, the registered population in Beijing (i.e. people holding Beijing Hukou (Household Registration)) had grown from about 8 million to more than 12 million. However, the total number of urban residents (who have stayed in the city 6

for more than six months), including Beijing citizens and people coming from outside the city (wailai renkou), has been growing much faster than the registered population. By the end of 2008, the total number has reached 16.95 million. If we look at the left end of the chart on Beijing in Figure 2, the numbers between registered and total population are not very different in 1978. Moving toward the right end of the chart, by the end of 2008, there is a gap of more than 4.6 million people. According to the definition, these people are not registered as Beijing citizens and have lived in Beijing for more than six months. They are in essence migrant population from other parts of the country. What is clear is that local rural population actually dropped from 1991 to 2008. The growth in the total population is mostly in the urban area of the city. In this sense, the pressure of population growth on housing mostly falls on the urban area. The official data in Shanghai does not report the same categories of population. However, even if we only examine the trend of total population and registered population, the similarity to Beijing cannot be missed. There is a five million gap between the afore-mentioned groups. Tianjin is an example of a second tier city that is not as large as Beijing and Shanghai. There is also a gap of about two million people. Shenzhen is an example of the rapid growing industrial centres in southern provinces. The city grew from a fishing village to a multi-million people city in thirty years. As shown in the chart, the growth in registered population is much slower than migrate population. Figure 2 Total number of permanent residents and number of registered residents with Hukou in Beijing, Shanghai, Tianjin and Shenzhen (1978-2008) (in 10,000s) Beijing Shanghai 7

1800 1600 1400 1200 1000 800 600 400 200 0 1978 1983 1988 1993 1998 2003 2008 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1978 1983 1988 1993 1998 2003 2008 Urban Residents Rural Residents Registered Rural and Urban Total Residents Registered Population Tianjin Shenzhen 1400 1200 1000 800 600 400 200 0 1000 900 800 700 600 500 400 300 200 100 0 1979 1984 1989 1994 1999 2004 Total Residents Registered Residents Total number of residents Registered residents Data Source: Beijing Statistics Bureau, 2009, Beijing Statistics Yearbook, Table 3-4; Shanghai Statistics Bureau, 2009, Shanghai Statistics Yearbook, Table 3-4; Tianjin Statistics Bureau, 2009, Tianjin Statistics Yearbook, Table 3-1; Shenzhen Statistics Bureau, 2009, Shenzhen Statistics Yearbook, online version. Shrinking household size Starting from the early 1980s when One Child Policy was enforced, the household size of Chinese families has declined over time. As shown in Figure 3, the number of household members reduced from 4.41 to 3.16 between 1982 and 2008. In large cities, household size is even smaller. Beijing has the smallest number of people per household, less than 2.6 at the end of 2008 (as shown in Figure 4). However, not only One Child Policy caused the shrinking household size. There is a growing trend 8

for extended families to live separately from each other. This is clearly only made possible by improved housing conditions. However, once it has developed into a norm, younger people would expect to leave home when they are married. Then this would be automatically transformed into social pressure for greater housing supply. Another trend is the increased number of single person households. This is mainly older people who live independently on their own or young adults who delay their marriage either out of career or financial considerations. As shown in Figure 5, in large cities (except for Tianjin), one person or two person households increases in importance. Migration also affects household size. In theory, it has the potential to contribute to smaller household size. In the 1980s and 1990s, rural to urban migrant workers came to towns either on their own or at most with their partners. They rarely brought their school age children to towns. In 2003, when restrictions for rural workers to working in cities were relaxed, migrant workers started to bring their children to cities. Even so, migrant workers family size was on average much smaller than that of local citizens (Guo, et. al., 2006). However, this does not necessarily mean that migrant workers would have actually lived in smaller households. They might share houses or live in dormitories at very high density. As a result, the household size can be much larger than usual. Nevertheless, if we examining the life cycle of migration, it is not difficult to see that migrant workers also have a housing ladder to climb. As they stay longer in cities, they move out of employer provided houses and become private renters; they move out of shared houses to live on their own, or with their families {Li, 2006 #52}. This means that shared houses are only temporary solutions. Figure 3: Household size changes over time (1982-2008) 9

5 4.5 4.41 4.4 4.2 3.96 4 3.5 3 3.7 3.7 3.63 3.44 3.42 3.39 3.38 3.36 3.13 3.17 3.173.16 2.5 2 1.5 1 0.5 0 1982 1985 1988 1990 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Data Source: China Statistics Bureau, China Statistics Yearbook, various issues since 1978. Figure 4: Household size changes of the whole country and of the four major cities (2001-2008) 3.6 3.4 3.2 3 2.8 2.6 2.4 2.2 2 2001 2002 2003 2004 2005 2006 2007 2008 National Beijing Tianjin Shanghai Chongqing 10

Data Source: China Statistics Bureau, China Statistics Yearbook, various issues since 2001. Figure 5. Share of Households by Household Size Beijing Tianjin 2001 2002 2003 2004 2005 2006 2007 2008 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% One Person Two Persons Three Persons Four Persons Five persons or more 2001 2002 2003 2004 2005 2006 2007 2008 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% One Person Two Persons Three Persons Four Persons Five persons or more Shanghai Chongqing 2001 2002 2003 2004 2005 2006 2007 2008 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% One Person Two Persons Three Persons Four Persons Five persons or more 2001 2002 2003 2004 2005 2006 2007 2008 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% One Person Two Persons Three Persons Four Persons Five persons or more Data Source: China Statistics Bureau, China Statistics Yearbook, various issues since 2001. Pressure on urban housing These demographic and social changes have significant impact on urban housing supply. First of all, there need to be more houses in Chinese cities. Considering the 11

difficult housing conditions before the economic reform, i.e. most households suffered from extremely poor housing conditions in today s standard (for example, most people needed to share facilities and parents needed to share bedrooms with children), it was very difficult to further split up existing housing stock for new comers. This means that for many years, even if the housing conditions of existing urban residents were to be improved slightly, there would need to be massive increased in housing supply. Secondly, as the total population grows and extended families split, it means that housing supply does not have to multiply existing housing stock. Smaller families mean that smaller flats may be more manageable and affordable to the lower income groups. Thirdly, increased number of temporary migrants requires a much more developed private rental sector that can provide the flexibility of a large proportion of highly mobile and low-income population. Finally, it is also important to bear in mind that urbanisation will reach its peak at some point. This means that eventually, natural growth in urban population will be the main source of population growth. This will have two implications. On the one hand, the existing migrant population may move along the housing ladder and seek to live more like urban people. This in turn may impose greater pressure on ordinary urban housing supply. Given these demographic and migration trends, the demand for housing can be roughly summarised as 1) more houses; 2) houses that fit smaller households; 3) houses that can accommodate a large number of migrant population who may or 12

may not want to settle down in this city and the household size may not be as stable as local residents. Are the state interventions successful? In the past 30 years or so, the state has enforced a whole range of policies trying to setting up a housing system that will be able to maximise the usage of private market and at the same time relieving the social pressure on housing. This section examines the performance of state housing interventions against satisfying housing needs and goals of policy makers. 1. Housing outcomes vs. housing needs The macro level statistics quoted at the beginning of the paper are often challenged by the public, as it is unlikely for an average urban wage earner to be able to be identified with the massive improvement. A survey of Chinese Family Panel Studies carried out by the Institute of Social Science Survey at Beijing University offers some information on the living conditions of urban households. The household level data might be able to offer a better insight in the actual housing conditions in Chinese large cities. According to the summary statistics published in Chinese Family Dynamics (Institute of Social Science Survey 2010, pp27-31), in 2009, about 42 percent of urban households lived in owner occupied houses. Forty-three percent were private renters. The rest were sharing houses with parents. The average living space per person for owner-occupiers was 33 square meters. The size for renters was 23.5 square meters. About 25.2 percent of households had more than one house. At the same time, the proportion of people living in publicly provided houses (including government and employer provided free) was only 3 percent. In terms of housing difficulties, about 13 percent suffered from various difficulties 5. These 5 The reported difficulties are mostly about over-crowdedness. 13

100 million sq. m sq. m numbers, though not comprehensive, can give us a flavour about the issues related to housing poverty in Chinese cities. Figure 6 shows that there are indeed increases in urban housing supply and the supply increases on a per capita basis. However, there are two problems with the usage of average housing supply figure. Figure 6 Newly built Residential Building in Urban China 8.00 30 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1978 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Floor Space of Newly Built Residential Buildings in Urban Areas Per Capita Floor Space of Residential Building in Urban Areas The first problem is increased household income and income inequality. Urban household income has been growing in the last 30 years. The annual growth rate is above 10 percent on average. Such high growth in disposable income means that households would be able to save more money than before. Apart from the financial market speculation, housing market has been considered one major fields for investment and speculation(jun, Zhe and Zhongze 2008). Sun and Zhang (2008) 25 20 15 10 5 0 14

studied the data for 28 provinces and concludes that private savings in the banking sector helped to create real estate bubbles in all provinces, including the poorer provinces. These speculations made it very difficult for households that do not have much savings to be able to afford housing. Income and wealth also shows strong tendency of unequal distribution (Gustafsson et al. 2008). According to the Chinese Family Panel Studies (2010), the average income of the highest quintile was 15 times higher than that of the lowest quintile in 2009. This ratio varies across the country. For example, in Beijing, it is more than 20 times and in Shanghai, it is a bit higher than 10 times (Institute of Social Science Survey 2010, p10). Inequality in urban income within cities means big gap in housing affordability within a city. Not only can some families afford good quality housing, but they can also afford several houses. Also, speculators often bet on the booming market rather than buy-to-let, as a result, large numbers of houses remain unoccupied and at the same time, many people struggle to get a place to live at all (Huque 2005). It is estimated that around 30 percent of houses in Beijing are unoccupied. In some other cities, the ratio could be as high as 50 percent. According to a survey carried out by the National Electricity Network, there are at least 65 million empty apartments in 660 cities throughout China, which have not consumed any electricity for a period longer than six months. As estimated by Zhao (2010), these houses could potentially accommodate 200 million people. Although there are disputes over the accuracy of this number, it can still give us a crude idea about the potential scale of the problem. Second problem is that there is only statistics on housing construction. However, very little is known about how many houses were demolished during urban regeneration. The rate of housing demolition can have two indications. 1)The improvement of housing statistics are accumulated construction size divided by population, not the net growth of housing supply. Therefore, the actual improvement can be less. 2) Fast demolition can caused uncertainty for households. Given that 15

urban regeneration often targets poorer neighbourhoods, they are the ones that suffered the most from such uncertainties. In recently years, demolition becomes more aggressively in favour of business interests and the tension over compensation become more serious (Wu 2004a). Thirdly, the population size used for calculating average housing size is the number of urban residents who are registered with the local authorities, i.e. they are urban citizens. However, with growing number of rural to urban migrants and the more relaxed household registration requirement, it is very difficult for the local authorities to capture all the people living in cities. Fourthly, these statistics did not take into account the housing condition of rural to urban migrants. Apart from the small number of well-to-to migrants who are able to afford houses in the private market, the majority of migrant workers are stuck at the bottom end of the private housing market, employer provided dormitories and informal sector. These houses suffer from poor quality or unsuitable conditions for family living(li and Duda 2010; Li, Duda and An 2009). At the same time, migrant workers do not have the same access to urban housing benefits, even if they are also taxpayers. This has led to sustained disadvantage and difficulties of migrant households(wu 2002; Wu 2004b). Finally, despite that nearly more than 90 percent of houses are privately owned. They are not all owner occupied houses. A much smaller proportion of people are private owners (Shen 2008). This is, however, not the result of the existence of active private rental, but rather higher rate of unoccupied houses. These can be houses that were bought by housing speculators or homebuyers or houses that were never sold. In contrast, private rental market is seriously underdeveloped. The house price to (annual) rental ratio is well over 500 in cities like Beijing and Shanghai. In theory, 16

when it is not worthwhile to buy, there should be more people trying to rent so that rent level will increase. The high price to rental ratio shows the huge gap in housing affordability, i.e. some people can afford to keep their houses empty. It also shows the aspiration of urban residents to buy rather than rent. This is associated with the public discourse cultivated under the state homeownership oriented policies(duda, Zhang and Dong 2005). 2. Outcomes against goals In this section, the author would like to compare the goals and housing outcomes to see whether the reformers have achieved the intended results. There are many ways to mark the different stages of the housing reform in China. In this paper, the reform periods are defined in order to highlight the changing goals and evolving housing market. Changing the attitudes (1970s-1992) Housing reforms in China since the late 1970s can be perceived as a persistent attempt to sell the concept of private housing to urban households and break away from state dominated housing provision. The public housing system to be discussed in this paper can be summarised as a system in which the state provided funding and land for housing construction and allocated houses to urban residents through its agents at various levels. The allocation was based on a set of criteria set by the state. In this sense, even if there were a number of actors in this field, such as employers and local housing authorities, the Central Government imposed heavy-handed control, and local actors were merely policy enforcers. The earliest reform began in the late 1970s when private ownership with heavy state subsidies was created. It meant to be a pilot scheme to push for a radical shift to housing privatisation. However, after the pilots in several cities it was soon realised 17

that such a radical change could not work, because even with heavy subsidies, the majority of urban residents would not be able to afford private houses. What is more, people were not willing to give up welfare housing. In the mid-1980s, even though the state continued to allocate most of the funds for housing construction, the sources of funding began to diversify. For example, some employers encouraged workers to pay out of their own pockets a proportion of the construction costs and once the houses were built, the contributors could own the houses. However, this did not help to boost the housing sale. The lack of enthusiasm in housing privatisation was because of little incentives of public housing tenants to move into the private sector (Zhang, 2002) and inability of the majority to afford private houses. Later, a small number of cities started experimenting with rental reform. To avoid dramatic increase in living costs, vouchers were introduced to assist households to pay for the higher rents. The idea was to make people realise that welfare housing was in essence heavily subsidised houses. When subsidies were make explicit, it might also be withdrawn at any time. In this way, people might not feel secure in the public housing sector and would be motivated to purchase their own home. In 1988, the Central Government endorsed the experiments and decided to roll out the reform to the whole country. To help people to build up affordability, a Housing Fund was set up. It meant to be a three-tier funding system jointly contributed by local governments, employers and individuals. In principle, individuals could use the money accumulated to exchange vouchers in order to pay rents and buy houses. In sum, the reform in this period started from pushing for radical changes and ended up being a battle against the public tenants struggle to stay put. On the surface, there were mounting complaints about the public housing allocation for its unfairness, inefficiency and the demoralising effects at work. The employees wished to be less dependent on the mercy of employers or officials in charge of housing allocation. 18

There was also high hope for the free market to be able to relieve the housing burden on the shoulders of the state and employers. However, when housing was indeed to be privatised, the level of resistance and the distance that people would cover to game the newborn system was not expected by the reformers. The resistance came from several directions. First, people realised that not counting on employers or the government would mean spending more money out of their own pockets. Given that the average income level were very low, taking this major welfare item away means that household disposable income would drop immediately. Housing Fund was still in its early stage and the sum accumulated were not yet a significant amount for home buying (Li 2001). Second, because of the limited funding for public housing in the past, there were a long waiting list to be cleared off. People who had waited in the queue for a long time found it hard to take if the allocation was stopped just when it was about time for them to be allocated a house. These were usually people at the bottom of the political and administration hierarchy. They were the ones who actively pleaded for continued (or at least another round of) housing allocation (Li 2001). Finally, people were still uncertain about the future of the country. They would rather wait and see than venture into the uncertain part of the economy in fear of a reverse in the direction of reform. Apart from the institutional rigidity, the reform in this period also had to face external constraints. Firstly, the wage control was not fully relaxed for a large part during this reform, so housing reform had to count on the very limited savings abilities. For most people, buying houses in this period meant a lion share of their life-savings would be devoted to the house. Secondly, formal housing finance system did not really exist. The informal fund raising schemes were not encouraged by the state. People needed to pay off their housing debt at once. Thirdly, when house price increased, heavily subsidies meant even greater liabilities for the state and employers. 19

Therefore, after the initial enthusiasm of marketization, reform to push for private ownership was put on hold. Radical reform measures were forced to be replaced by slower changes. A large amount of effort was devoted to using intermediate changes to send strong messages to the public that welfare housing would end, and if they did not move to the private sector as soon as possible, it would be even less worthwhile in the future. By year-end 1990, 24 percent of residential houses were privatised, 7 percentage points growth from 1983. However, the higher private ownership rate was not really driven by the emerging housing market, but rather by the heavy subsidies. At the same time, employers had to face the challenge of reduced public fund for housing allocation. The solution they came up with was to look for money to continue housing allocation, so that the existing waiting list could be cleared off. At the same time, many employers started to sell the existing housing stock and the newly built houses to their employees at extremely low prices, in the hope that once everyone owned their house, there would be no more pressure on employer provision (Li 2001). This means that newly built houses were channelled into the pool of welfare housing. To make things worse, no rent would be paid in the future for these heavily subsidised new houses. In this sense, the reform in this period was a failure. The intention was to reduce public spending on housing provision. However, pushing for private ownership led to even more spending. There were some successes to be observed in terms of actual outcomes. After all, a private housing sector was set up. In 1998, local government was also allowed to sell the right to use land to private companies. These reforms paved the way for the 20

private sector to play a bigger role in housing supply. Nevertheless, it could only function with a lot more reforms. Separating the old and the new systems and improving affordability (1992-1998) Reform measures in this period were more cautious than that in the previous period. To prevent newly built houses from being given away at too low prices, in October 1991, a new policy was issued to require new houses being treated differently from the old ones (xinfang xinbanfa; laofang laobanfa). At the same time, in the public housing sector, the rent level of public housing was increased to cover the actual costs of maintenance, management and depreciation. The goal was that by 2000, tenants of public houses would have to pay for maintenance and management, housing depreciation, interest for state investment and the property tax. Ideally, in the future, all houses would be commodities and public rentals would include more elements such as land usage fees, developers insurance premium developers mark-up. In other words, the gap between public and private rental houses would shrink or even disappear. In practice, however, increasing the rent of public housing was not very easy, mainly because the resistance from the tenants. In the public housing allocation period, people at higher positions were allocated larger houses. When the rent level was raised, they suffered the first as the income gaps between the senior and junior employees were not yet sufficient to cover the difference in house size. Under public pressure, the announced schedule for raising rent was delayed repeatedly. Meanwhile, on the front of privatisation, selling existing public houses became heated. One only needed to pay the price varied according to house size. Other factors, such as quality and location, were not taken into account. However, when they sold the houses in the private market, all the factors would count. This means that public 21

house owners with good location and good quality houses, usually people with higher position and greater power, would receive a windfall gain because of the privatisation (Zhao and Sai 2008). Therefore, they became very interested in buying the houses rather than waiting for the rent to increase and erode their wealth and income. Soon, subsidised ownership became so popular that policy makers started to worry that the heavy discounts would cause serious losses of state assets, and they banned subsidised sales in 1992 (Wang, 2003, p179). This period marks the beginning of the first housing boom after the Communist came into power. From the second half of 1992 to early 1993, the housing boom reached many cities. The number of real estate developers increased dramatically. Land sales were active and prices were rocketing. In southern provinces, land and housing speculation was rampant. This happened in the context of relaxed control over real estate development, devolving power of approving construction projects to local governments and the enthusiasm of banks to lend money to real estate developers. Facing the overheated market, the state decided to regulate the market more closely and tighten up money supply (Chai, 2008). With the difficulties in raising public housing rent and the control of selling public housing, the housing reform was literally put on hold. In July 1994, a new round of housing reform was initiated. The new policy set out to make houses jointly paid by the state, employers and individuals. A social insurance scheme and housing finance were tested in some cities and rolled out to the whole country. Both employers and employees would contribute to a Housing Provident Fund (HPF). Individuals could take money out of HPF or borrow against it at favourable terms. This system was modelled against the Singaporean housing system. To encourage private ownership, all public housing, unless specified, was allowed to be sold to households. The idea was to make high-income households pay market price (shichang jia), middle and low-income households pay the cost 22

price (chengben jia), and poorer households pay the lowest price, i.e. standard price (biaozhun jia). At the same time, in the public rental sector, tenants of new houses would have to pay new rents which was much higher than the old rents. The targeted rent level as announced by the Central Government was that by 2000, an average income household would have to spend 15 percent of the household income on rent. The intention behind the combination of these two sets of policies regarding homeownership and higher rental level was clear: to make public rental less attractive and create a sense of urgency for people to shift to private market. As a result, from 1994 to 1996 half of the newly built houses were sold to individuals. In 1995, the Housing Project for Low Income Households (Anju Project) was introduced in order to help low and mid-low income groups to buy houses. It was considered part of the social security schemes. The targeted group was the people suffering from housing difficulties. By the end of 1997, about 6.5 million people benefited from the Anju project. At the same time, the other major reforms initiated in this period also helped the progress in housing reform, the most important being wage and labour market reforms. With some preliminary changes in the 1980s, major wage and labour market reforms were launched in the 1990s. As a result, the private sector started to develop and moved on to become the most important employers in China, and the growth in average income accelerated in the second half of the 1990s (Yueh 2004). The emerging private labour market means that some workers might have to return the allocated houses to their employers before they could break free from public sector jobs. However, they would soon find that they needed to acquire houses in the market. There were, for a while, labour flowing back to the public sector after realising that their higher salaries in the private sector could not make up for the loss from giving up the housing benefit and other social welfare (Li and Sen, 2003). These 23

changes allowed urban skilled workers to bargain with private employers to increase their salary level. As we can see in Figure 8, wage level in the private sector increased much faster than the wage level in the other sectors and was well above that in the public sector at the end of 1998. This trend was reversed when the 1998 housing reform stopped housing allocation to public sector employees. Figure 7. Number of Employed Persons at Year-End in Urban and Rural Areas (1978-2008) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 State-owned Units Collective- owned Units Others Data Source: China Statistics Bureau, China Statistics Yearbook, various issues since 1978. Figure 8. Average Wage of Staff and Workers (1978-2008) 24

35000 30000 25000 20000 15000 10000 5000 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Total Urban Collective -owned Units State- owned Units Units of Other Types of Ownership Data Source: China Statistics Bureau, China Statistics Yearbook, various issues since 1978. Whether the reform in this period succeeded according to its original goals is not very clear. It had made some institutional changes that had left important marks on the housing system until these days. Firstly, the social insurance system though regarded by many people to be insufficient to play a big part in home purchasing when it was originated (Lee 2000; Li 2001) and people were not keen to borrow against this account, it should be one of the most important institutional setups. There is disagreement on whether people should be helped by the state to save money for housing at all. However, we need to take into account of the strong resistance to private housing at the beginning of the reform. Setting up the fund helped to develop a culture of saving money regularly for home buying. Up to the end of 2008, 7.7 million people had contributed to HPF. The total amount paid into the fund in the year 2008 was 4.47 billion yuan. The total amount accumulated overtime has reached 20.7 billion yuan. So far, about 41.47 percent has been used to assist people to buy houses (Ministry of Housing and Rural-Urban Construction, 2009). We 25

cannot claim that it is a successful scheme in terms of participation and the level of usage. However, its potential to function as a supplement (when needed) cannot be neglected. Secondly, the housing project for low-income households (Anju Project) was replaced by the Economical and Comfortable Housing Project (Jingji Shiyong Fang) in 1998. The latter enjoyed fewer subsidies. This policy suggested that the state wanted to stop people from depending on heavy state subsidies. The outcomes were not as planned. The incremental reform in this period helped to build up the anticipation that the doomsday would indeed come soon. For the individuals, it was rational to seize as much benefit from the state as possible before it was gone (Li and Gong, 2003). Employers, being the grass-root level policy implementers, wished to clear off the existing waiting list before moved on to the next stage. As a result, they became the largest homebuyer in the private market (White 1996). However, this turns out to be self-defeating. The housing boom led to soaring prices of construction materials, which increased the costs for construction. Further sales of houses at discount rates by employers meant greater lost of public resources. During this period, housing reformers also had to cope with the consequences of reforms in other sectors, such as land, finance and real estate. Market transition in these sectors unleashed a series of rational responses from the private sector that could destabilise the economy. The state was forced to adjust its position and regulate the markets by tightening budgets and carrying out macro control. In this sense, housing is no longer an area that was restricted by other reforms. It also started to have an impact on the overall economic performance. Pushing further towards marketisation (1998-2005) 26

Nineteen ninety-eight marked the end of employer housing allocation and the beginning of diversified housing supply and protection. It was a continuation of the earlier reforms but more in depth and at a larger scale. In 1998, The State Council Notice No. 23 reiterated the government s determination to push forward urban housing reform. The key feature of this set of reforms was to replace housing asset allocation (shiwu fenfang) with housing cash allocation (huobi fenfang). According to the new regulation, employers should stop allocating houses directly to their employees. Employees should instead buy houses in the market. Houseless households(wufang hu)or households living below the officially set minimum standard could receive one-off or monthly cash benefits to help with home-buying. The amount was subject to their status at work and current housing conditions. In addition, for the first time in the reform, the state put the Economical and Affordable Housing (Jingji Shiyong Fang) i.e. houses built with state initiatives and sold to middle or lower-middle income households at prices below market level on the agenda. The aim was to stop housing allocation directly and set up a housing supply system, in which the state only helps the lowest income groups and higher income groups were expected to buy in the market with/without subsidies. In this way, a multi-dimensional housing supply system was established on paper. It included three key sectors: cheap rental, subsidised ownership (Jingji Shiyong Fang) and private ownership. In practice, the system was steered towards making the private sector the dominant housing supplier. Jingji Shiyong Fang, according to its original idea should be able to cover a large proportion of urban residents. However, the supply was very limited. Between 1999 and 2008, about 4.5 million flats under the Jingji Shiyong Fang scheme (60-100 sq. 27

m. each) were built 6. This was equivalent to about 1.1 percent of the total number of urban households. Figure 9. Number of Flats of Residential Buildings Completed by Enterprises for Real Estate Development 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Villas, High-grade Apartments Economically Affordable Housing Other private houses Data Source: China Statistics Bureau, 2010, China Statistics Yearbook, Table 5-42. In 2003, a sense of uncertainty about housing reform emerged. Although the Central Government wanted to continue to provide public rental housing to the urban poor, local governments stopped it completely. People from the middle-income groups began to realise that the eligibility criteria and house size could be manipulated so that the middle-income groups would be priced out of the scheme. Higher income groups and well connected people, if could prove that they suffered from housing difficulties, would be able to apply for the subsidised housing (Yang and Shen 2008). 6 What the most frequently quoted data are the total square metres completed in a certain period. However, this data cannot really reflect the actual housing supply as the house size can vary greatly. Therefore, we prefer to use the number of houses constructed. Given that one household is only entitled to one economical and comfortable flat, we can obtain a much better understanding of how many households actually benefited from this housing scheme. 28

The public concerns over the potential of favouring well-to-do families and fraudulent practices never stopped. To make sure the direction of the reform would not be reversed, the state published a policy stressing that the majority of families should rely on the private market rather than the state subsidies to acquire their housing. The result was clear, as shown in Figure 9, from 2003 to 2005, subsidised houses played am even smaller role than before. As discussed earlier, the housing outcomes for this period have several characteristics. Housing inequality became more serious. Income has become a sorting factor of different neighbourhoods. The well-to-dos moved into newly built, good quality and gated communities (Wu 2005). Dilapidated, older or peri-urban neighbourhoods often housed people who were not able to escape the trap of poverty or migrants (Wu 2007; Wu and Huang 2007). At the same time, households benefited from the previous system were able to enjoyed the advantage of using the older houses to finance the purchase the new ones (Chen, Guo and Wu; Li and Li 2006). What is more, starting from 2003, urban labour market was opened to ruralurban migrant workers. They came to cities without much savings and often work in low income jobs. However, they were not entitled to the housing benefits that urban citizens could enjoy and usually lived in poor housing conditions (Li 2006; Wu 2004b). However, these outcomes do not mean that the reformers had not achieved their goals in this period. In 1998, affected by the economic crises in Southeast Asia, the export of China suffered. To maintain economic growth, the Chinese government used both monetary and fiscal policies to boost domestic demand. The banking system also faced less tight credit control (Xiao, 2010). At the same time, the Central Government set growth targets and urged local governments to find new growth engines for the economy. Many local governments responded to this stimulus and treated housing, mostly private housing as the key area for new sources of growth (Li 29

100 million yuan and Piachaud 2006). This was in line with the determination to push for further housing privatisation stated in 2003. As shown in Figure 10, starting from 2003, private houses as a share of the total housing supply indeed grew faster than before. Figure 10. Total Investment in Residential Buildings 30000 25000 20000 15000 10000 5000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Urban Area Urban Real Estate Development A U-turn? (2006- ) Starting from 2006, a greater consensus emerged that even if people s income increased, it was not possible for all urban households to be able to afford houses in the private market. The intention to force through full privatisation was unrealistic (Wu 2007). At the same time, in a broader context, the Hu-Wen regime started to emphasise on social development and social harmony. In 2007, the focus of public housing schemes was on providing affordable housing for low-income urban households and rural to urban migrants. The policies in this period have several elements. 30