For the purpose of curbing the excessive rise of housing prices, the Chinese government came forward in 2010 with a series of macro regulation and control measures including implementation of a property-purchasing limitation policy in some cities. It has also put into execution corresponding financial policies including tighter control of lending to real estate development projects and stricter conditions on mortgage loans. This is the first time when China has brought its real estate market under the tightest control after having left it to market regulation for nearly 20 years. It has done so for three purposes: to curb the too fast rise of housing prices, to smoothen social contradictions, and to adjust its distorted industrial structure.
To be fair and just, the Chinese economy has kept growing at a high speed for nearly 10 years mainly due to massive fixed asset investment, of which more than 30 per cent has gone to the real estate sector. Increasing investment in the real estate industry has fueled the prosperity of at least 80 other industries and sectors. Driving up both housing and land prices, such investment has played the role of a ‘twin engine’ powering China’s GDP growth and normal growth of wealth. Land development has become a part of the China Model, and growing housing and land prices have given birth to a special rich class and different interest groups. In early 2008 before the global financial crisis broke out, the Chinese government already realized that the constant rise of housing prices would pose a problem in wealth distribution, especially the disappearance of the middle class and the desperation of the low-income groups. Immediately, it inaugurated a series of corresponding policies and tried to rein in land credits. The outbreak of the world financial crisis later in the year, however, forced the Chinese government back into its tradition of spurring growth through investment. In 2009, it initiated a 10 trillion yuan stimulus program. The money was not totally channeled, however, into the real economy. Instead, large amounts of it flowed into the land and the housing markets, only to send housing prices soaring.
With the advent of the political cycle peculiar to China, the new central government to take office soon would hate to be kept in the land and housing predicaments that have been haunting its predecessor all the time. Under China’s current arrangement of the political structure, however, the new government has already begun to take a part in the decision-making process, a practice different from previous cases of government power transition. The inauguration of the property-purchasing limitation policy and the try-out of the property tax in 2010, and the construction of government-funded affordable housing across the country, in particular, are precisely steps signifying the departure of the new government from the traditional development model, and the outcome of the gaming between different political interests at the central level. To be frank, China’s real estate-based interest group stands for the special interest groups in the old era. It started during the rule of China’s third-generation political core, and survived and kept on during the tenure of the fourth-generation central leadership. Viewed from the internal and external objective environments, the influence of this interest group will surely fall off gradually once the fifth-generation leaders take office because, from a political angle, continuous care for this interest group will mean a tremendous cost for China’s political stability. Also, maintenance of the excessive interest enjoyed by this group will endanger the rule of the Communist Party of China. This is why we see China’s regulation and control of land development as a move not only involving its economic growth model but also closely related to its political needs and structure of political interests. Once the real estate-based interest group becomes a public enemy of the Chinese society, the cost for keeping it will get really big.
Unlike the central government and for their different angles of vision, local governments have got more closely entangled with land development interest groups. Viewed from the ‘public’ interest of local governments, they earned land transfer fees totaling 2.3 trillion yuan in 2011, accounting for about 55 per cent of their financial and tax revenues in the year. Under the arrangements established in the tax structure reform in 1994, local governments do not enjoy a taxing power equal to their responsibility over public affairs. They have to fund a big array of local development projects with the revenues from land transfers. In other words, they have grown excessively dependent on land transfers to enrich their coffers. In this sense, property-purchasing limitation cuts directly into the interest of local governments.
Viewed from the ‘private’ interest of local governments, their officials keep immediate control of every link of land development. As a result, many officials have become personally involved in different interest links and got the biggest benefits from land development and wealth accumulation in terms of the number and location of the apartments under their ownership. For this reason, they would try out all kinds of policies to loosen property-purchasing limits, an actual act of comprehensive reflection of local interests.
Starting from 2011, 11 Chinese cities have followed each other in an attempt to loosen the limits in one way or another. Since the current regulation and control over land development embodies the mindset of the coming government, however, no official from the present government dreaming for a place in the new government is likely to support the loosening. Also, some officials currently serving in local governments may rise into position in the new central decision-making body. As a result, officials with future political interest will stand by the current policy on property regulation and control, while those without will obviously get no real say on this issue. The central government property policy will be kept, therefore, in its original tune.
This is a departure from China’s political tradition. When the first-generation leaders ruled the country, there was absolutely no official daring to challenge any policy initiated by the central government. With the evolution of its political structure, China has seen its politics entering an era of gaming between different interests. The weakening of political authority has resulted in the gaming of interests between the central government and local governments. The outcome of the gaming, however, will fall under one fundamental principle: no threat to the country’s political and social stability. Under this prerequisite, it is necessary to weigh the balance between the real estate sector’s spur to and lasting adverse impact on the growth of the national economy. As has been seen clearly by all, an extremely clear signal was given at the annual session of the National People’s Congress in March: substantial lowering of the country’s GDP growth rate to 7.5 per cent. This is definitely bad news for the real estate-based interest group, who has now come to the realization that it is no longer as important as it was before, or put it in another way, that economic growth rate, a key weight they used to exploit against government policies, is not of any great importance now.
A clear understanding of the changed situation may be their wisest choice. What is certain is that this group, which hitched a ride in the 2009 stimulus program, will never as lucky in 2012. The pressure from public opinion and common social consensus will gradually bring its income to an average social level. If local government can reap even more from property taxes than from land transfers in the future, this group may turn its weapon around for an opportunistic counterattack.
To sum up, the opportunistic action taken by the Chinese government in 2008 against the background of the world financial crisis started a new round of property investment fever, for which the Chinese authorities have already paid a tremendous credit cost. The nationwide regulation and control over the real estate industry initiated by the Chinese authorities in 2010, meanwhile, will be a last-chance test of their creditability. Should these regulation and control efforts end in failure, that is, a strong rebound of property prices due to loosening of these regulation and control efforts before any real cooling down of the property market and noticeable fall in housing prices, the Chinese government will no longer win public acknowledgement of any of its policies in the future, while local forces will all start to go their own ways, a result that will seriously jeopardize the legality of the Chinese government now in office and that should have been seen most clearly by the team coming into power soon. For the latter, steady and stable development in the coming decade will be the real focus of its attention. It is highly unlikely for the team to see any inner interest polarization in this regard.
Yu Nanping is Professor with the Institute of International Relations and Regional Development Studies, East China Normal University