China’s plan to build 36 million units of affordable housing during the 12th Five-Year Plan has been viewed as an important pillar of economic growth for the next several years, a tool to dampen price increases in the private housing market, as well as a major enhancement of social welfare.
Original announcements suggested a front-loading of construction within the 2011-2015 period, with 10 million units to be started in 2011. The rapid increase in construction starts – from just 34 percent in late May to 86.8 percent end August of this year’s targeted 10 million units – has raised many questions about the degree to which this surge in starts is translating into construction activity.
Since the surge in housing starts occurred over a few months, there is reason to suppose that some construction projects may have only started in a very basic sense. The threshold for what degree of progress constitutes a “start” appears to be imprecise. By the same token, definitional issues might later emerge with the classification of “completed” housing.
It is not unusual for the statistics to indicate construction starts loaded into the back half of the year, since local governments must first complete preparatory work, such as allocating land and compensating resettled residents.
According to the Ministry of Construction, the country aims to finish at least one third of this year’s newly-started affordable housing projects nationwide, with the remaining projects having at least started by the end of October. In total, the central government has pledged to complete over 4 million units by the end of the year.
Considering the magnitude of official plans for affordable housing and the fact that construction material requirements for both private housing and affordable housing are similar, the expectation has been that affordable housing construction might shore up real estate investment in the event of a slowdown in the private housing market.
In fact, Chinese real estate investment has grown strongly in the first seven months of the year, but this has been driven by strong levels of investment in the private housing market, while data for economic housing (the only segment of affordable housing for which monthly data are available) shows only 5.7 percent year on year nominal growth in the first eight months of 2011.
In order for construction targets to be met, considerable changes must occur in the funding aspects of the program. Funding has always been the biggest hurdle to meeting affordable housing targets. Of the estimated 1.3 trillion-1.4 trillion yuan ($208 billion) needed for affordable housing in 2011, only 500 billion yuan in contributions are slated to come from various levels of government.
New avenues of funding for affordable housing have been introduced in 2011, however, the pace is still slow. A substantial increase in contributions from insurance funds, the Housing Provident Fund, affordable housing financing vehicles, and/or governmental sources will be needed to meet the full-year budget.
On its part, the central government has shown no softening in its resolve to boost the supply of affordable housing across the nation. Premier Wen Jiabao recently urged regional governments with budget shortfalls to raise the proportion of income from land sales and bond financing that is directed at affordable housing construction. Banks will be allowed to lend directly to qualified local government financing vehicles for the purpose of building public-rental housing projects.
All affordable housing projects must begin construction before the end of October, and local governments have been pressed to step up monitoring. Since most of this year’s starts are being recorded between June and August, the pace of construction should pick up noticeably in the remaining months of 2011.
Jing Ulrich is the Managing Director and Chairman of Global Markets, China, at J.P. Morgan. Educated at Harvard and Stanford Universities, she advises the world’s largest asset management companies, pension and sovereign wealth funds. She was ranked as one of Fortune Magazine's 50 Most Powerful Global Businesswomen in 2009 and 2010 and one of Forbes magazine’s 100 Most Powerful Women in the World for 2010. FinanceAsia also named Ms Ulrich one of the Top 20 Women in Finance.