BEIJING--With land development a major pillar of economic growth, China finds itself at a turning point.
Ordinary Chinese are desperate to become house owners, but tens of millions are locked out of the market because of high prices.
Responding to public anger, the Chinese government has begun to take steps to make property more accessible to the masses.
This has dealt a body blow to local governments, which have depended on land deals to generate revenue. They are now in financial difficulties.
On March 5, at the opening of the National People’s Congress in Beijing, Premier Wen Jiabao referred to the "hidden risk" inherent in debts chalked up by local governments.
It was the first time for Wen to raise this issue in a policy speech to the congress. He said the central government would take steps to "strengthen risk management" so as not to exacerbate the situation.
In June 2011, the National Audit Office of China announced the gloomy picture facing local governments.
It said their debts amounted to 10.7 trillion yuan (140 trillion yen, or $1.676 trillion).
"The amount is on a manageable level," said Wen. "But I will strictly curb new borrowing (by local governments)."
In principle, local governments in China could not issue their own bonds to procure funds. Besides, tax reforms introduced in the 1990s enabled the central government to grab a bigger slice of the tax pie collected from the public.
As a result, local governments set up companies to procure funds for public works projects. The firms, known as "local financing platforms," borrowed funds from banks to finance public works projects. The borrowings now account for about half of all debts held by local governments.
After the collapse of U.S. investment bank Lehman Brothers in fall 2008, 4 trillion yuan (about 52 trillion yen) was spent on pump-priming measures in China. The funds were provided not only by the central and local governments but also by the "platform" companies. These companies actively made investments.
The upshot of this was increased money supply, leading to a sharp rise in prices of real estate--both for private homes and buildings.
The surge in prices ignited sharp complaints from ordinary Chinese finding it increasingly difficult to afford their own homes.
This led the central government to adopt fiscal tightening to decrease the money supply. By autumn 2011, property prices had started to decline.
The fall in real estate prices made it difficult for the "platform" companies to continue with ravenous land development and repay the money they had borrowed from banks.
About 40 percent of the debts incurred by local governments will reach maturity by the end of 2012. To procure funds for repayment, they will have to utilize land.
In China, land is publicly owned. Many local governments bought "land-use rights" from farmers at rock-bottom prices. They also hold similar rights on some public lands.
The coffers of local governments were topped up through the sale of those land-use rights to developers at high prices. In 2011, the revenue from such sales amounted to 3.15 trillion yuan, which is equivalent to nearly half of the Japanese government’s annual national budget.
An official of the central government noted that local authorities also created development zones and invited companies to set up factories there.
"By doing so, they earned a lot of money, which supported the country's high economic growth," the official said.
But this money-making system cannot sustain itself if real estate prices plummet. Also, land is not an unlimited commodity. There have been numerous cases of land being expropriated from farmers against their will, which has triggered widespread rioting across China in recent years.
To write this story, I visited a housing complex for low- and middle-income earners in early March. It was being constructed by the Beijing city government.
I was surrounded by two beefy men. One of them asked me what I was doing.
The men, who claimed they were janitors for the complex, expelled me from the construction site and followed me until I got in my car to drive home.
To purchase a unit in the complex, a typical family of three must meet the following conditions: have total assets of 570,000 yuan or less, an annual income not exceeding 88,000 yuan, and own no houses.
The average price of those units is about 7,000 yuan per square meter, nearly half for houses in surrounding areas.
"I was finally able to get out of a rented house," said a man who lives with two other family members in the complex.
Wen has championed construction of housing complexes for low- and middle-income earners so that they can buy property.
In 2011, construction started on a total of 10 million units. The figure for this year is 7 million units.
It is not unknown for people to falsify their applications when buying property. And, of course, others rely on their connections. In Henan province, eight executives of the Communist Party managed to purchase condominium units by lying on their applications.
Some developers got great deals on land purchases from local governments by promising to build housing complexes for low-income earners. Instead, they constructed condos for high-income earners.
Other developers suspended construction of housing complexes for low- and middle-income earners on grounds there wasn't enough profit to be made by continuing with the projects.
With regards to profits reaped from sharp rises in real estate prices, it is the same old story. Those who have benefited are local government officials with vested interests in the construction of housing complexes, developers and the super-rich who can use their money for speculative trading.
According to a questionnaire survey by the online version of People’s Daily, mouthpiece of the Communist Party, 83 percent of respondents want the central government to maintain regulations for curbing sharp rise in real estate prices.
On March 5, Wen declared, "I will keep pushing for a drop in real estate prices until they reach the appropriate level."
Even in the economic slowdown, it has become difficult to take pump-priming measures that rely on real estate development.
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