TITLE: BACKGROUND ON THE CURRENT CHINA HOUSING SITUATION

SUBJECT COUNTRY(IES): CHINA

POST OF ORIGIN: BEIJING

SERIES: INTERNATIONAL MARKET INSIGHT

ITA INDUSTRY CODE: CON

DATE OF REPORT: 4/14/99

DELETION DATE: 9/14/00

AUTHOR: THESSALONIKA T BENNY

APPROVING OFFICER: WILLIAM ZARIT

NUMBER OF PAGES: 9

I. SUMMARY

In July of 1998, President Clinton, recognizing both the need in China, and the ability to provide high quality goods and services from the United States, expressed his support of a cooperative approach between our two countries in the realm of affordable housing. It is this initiative that has sparked interest by many US firms to enter into or expand their business dealings in the Chinese housing market. Products covered include building materials, especially energy-efficient, environmentally-friendly products, as well as decorative goods and furnishings.

US providers of goods and services for the Chinese housing market should be aware of some background and market parameters before they get started. This report a first step in obtaining the information necessary to form a business or marketing plan for this potentially large housing market.

BACKGROUND FOR THE PROPOSED HOUSING REFORM -

By transferring ownership of housing from the government to the citizenry, China intends to stimulate domestic demand for housing, while at the same time using the inflows of cash to jump-start the "deflationary" economy. In addition, the new home mortgage market will help the banking industry expand into new territory. Assumedly an area with less risk than some of their current commercial portfolios may have.

Home ownership had been introduced in the early 1990's, but with little success. The issues of the past have by-and-large been dealt with, allowing this attempt at housing reform to actually go forward. There are still a few conditions that are stalling the process, but the effort has received greater interest than in the past due to government reforms.

Most Chinese people don't have money to buy their own homes. The Chinese banking network has stepped in to try to fill this critical gap, but currently is unable to supply the necessary financing to

those who need it most. The central bank (The People's Bank of China) has ordered all commercial banks to "channel no less than 15% of their new loans to residential housing." They have done this, but have restricted the payback period to less than 20 years, and in some cases it is less than ten years.

The mortgage market is in its infancy, and looking to the United States and other countries to guide their efforts to develop a more responsive financing partner for the housing reform. Fannie Mae and the US Treasury have both made trips to China to assess the situation and begin to provide assistance. US firms have also offered technical assistance in anticipation of these markets opening up to foreign companies.

THE CURRENT HOUSING SITUATION -

According to the State Statistical Bureau, (SSB) for seventeen percent of the urban families in China, living space consists of less than 30 square meters. Another seventeen percent averages between 31 and 40 square meters of living space. Twenty-one percent averages between 41 and 50; 20% between 51-60, and 17% averages 61-80 square meters. Only eight percent average over 80 square meters of living space per family.

Although not confirmed by other sources, SSB's surveys state that 33% of the country's urban families own their own houses; 49% rent from their work units, and the remainder rent from other sources. Information was not available as to geographical location of the 33% contrasted with the 67% of rentals. Information from non-Chinese governmental sources indicate that the 33% rate of ownership optimistically high.

One of the key elements of the existing housing situation that Americans find incredulous is the amount each family currently pays for rent. In most cases, the monthly rent paid to the government has been less than $10.00 per family, often much less than that amount. Contrast that amount with a mortgage to be paid back over a maximum 20 year period of from 40,000 to 70,000 RMB ($4,837 to $8,464) depending upon the city and other factors, and it is easy to see why there is reluctance by Chinese citizens to buy their own homes.

Chinese personal savings is high, but for most families the gap is too wide between savings and purchase price. Keeping in mind that the average monthly income in 1997 (most recent figures available) for an urban dweller is 1,150 RMB, it becomes quite clear that housing reform will be difficult to enact without incentives and a more customer-oriented mortgage market.

CHINESE GOVERNMENT AGENCIES INVOLVED -

Ministry of Construction

Ministry of Foreign Trade and Economic Cooperation

Housing and Real Estate Dept. of the MOC (was the Housing

Reform Office of the State Council)

State Development and Planning Commission

People's Bank of China

Ministry of Finance

HOUSING REFORM -

Housing Reform was initiated in March, 1998 by Premier Zhu Rongji. At last attempt the initial proposal was not yet available to the public. However, the Minister of Construction has given the Commerce Department general guidelines. The key elements, provided to us in an unofficial document are listed in the Attachment. Generally, this ruling outlines the priorities of, and methods used in housing reform. High quality, low cost, energy-efficient, environmentally-friendly, well-managed housing is the goal of housing reform.

CONSTRUCTION LAW -

November 1, 1997 - new law on construction projects, including new housing construction. The main chapters of this law cover:

General Principles;

Construction Permits, (permits for construction projects and Occupational Qualifications);

Issuing a Contract (general provisions, solicitation of bids, contract issuing);

Supervision and Management of Construction Projects;

Management of Construction Safety;

Quality Control;

Legal Responsibilities;

Supplementary Provisions.

For more detailed information on the Construction Law, please see the subsequent IMI titled the Construction Law of the People's Republic of China.

MARKET SIZE -

Reading through the myriad of statistics and housing market indicators the actual size of the market appears fluid and even contradictory at times. However there are a few external reports that take into account some to the reasons for the seemingly conflicting data provided by the Chinese government sources.

According to the Chinese Economic Quarterly, the housing market was given a "somewhat perverse boost" in the first half of 1998 because work units were scrambling to buy apartments prior to the July 1 cutoff date for the allocation of free state housing. It stated that "the last chance to be housed at the state's expense saw frenzied activity in some state sector dominated" cities. This same report continues by placing doubt on these numbers being sustained in the long run.

A government survey indicated that 83% of urban residents wish to buy houses, but are unable to do so due to the high costs. Apartment prices "remain unaffordable to most people", and with state purchasers pulling out to the market, it is expected that "real estate activity" will "decline rather than increase" at least for the second half of 1998. We have seen this played out in lower fees for both commercial and residential real estate in the December 1998 - April 1999 time frame in Beijing.

In contradiction to the above, there is a government report that states "a total of 70 million square meters of commodity houses stayed idle, including 38.8 million sq. m. of ordinary residential houses." These idle properties are mostly those purchased in anticipation of a cutoff of government housing and/or poorly planned urban developments, like housing put into locations without access to transportation, schools, shopping, health care and other community necessities. The Chinese have recognized the need for better urban planning and have asked to learn from mistakes the US made in the 60's on this topic. The Department of Housing and Urban Development has agreed to assist.

MARKET FEATURES -

Similar to the United States, where you will find stucco dwellings in the Southwest, wood-framed homes in the Pacific Northwest, and brick or stone in the mid-Atlantic states, China also has regional preferences. In Beijing and Tianjin nearly 1/3 of all houses are 2-room and 1-hall suites. In Shanghai 1-room and 2-room suites account for 1/3 of housing; less than 15% of housing has halls. In Guangzhou, over 2/3 have halls; 2-room and 1-hall suites account for 37% of the total.

In Shanghai, the Municipal Construction Commission is looking at new building codes, replacing old materials with more environmentally-friendly and energy efficient ones. As an example, they are looking to meet the standard of Japan, Germany an Austria, which use plastic doors and windows, which are more energy-efficient, airtight, watertight and sound insulating, not to mention less corrosive than steel ones. Other regions are not as progressive in this area.

In Guangzhou, housing rent fees are increasing for those who do not purchase their housing. It is anticipated that these levels will rise to market levels over time. This trend is expected in other markets as well. Meantime, these rent increases are designed to "invigorate the residential housing market" according to the Chinese government.

HOUSING FINANCING -

To make Housing Reform more likely, the Central Bank of China has issued a decree to all commercial banks compelling them to issue new home mortgages. These mortgages can have a payback period of no longer than 20 years. For payback periods longer than one year, the interest rate will not be fixed.

Even with the flexible interest rates, banks are reluctant to provide 20 year loans, due to immediate need for replacement inflows. Currently there is no form of mortgage securitization available in China, despite clear justification for it. The banking and financial leaders within China's government have begun pushing for reforms that would enable loan securitization to occur, but concede that it would take at least until 2002 for this to happen.

Chinese home buyers are therefore more likely to use their savings than loans to make their home purchases. Chinese save a greater percentage of their income than many of their foreign counterparts, primarily due to low housing and other fixed costs of living. From 1991 to May of 1998 the Industrial and Commercial Bank of China experienced a tripling of "housing savings deposits", reaching a figure of 72.7 billion yuan. This was after earlier attempts by the government to enact housing reform.

IV. CONTACT INFORMATION

For more information on the US-Chinese Housing Initiative or the above-described housing demonstration projects, please contact Mr. Chris Twarok or Ms. Susan Lusi in the Trade Development Office of Basic Industries in Washington, DC, or Ms. Thessalonika Benny at the US Embassy in Beijing.

The Commercial Section of the U.S. Embassy in Beijing, part of the worldwide network of the U.S. & Foreign Commercial Service, helps U.S. firms export their goods and services to China. To accomplish this mission we conduct a number of services on behalf of the U.S. Department of Commerce (USDOC), including our Gold Key Service, which includes arranging meetings with potential Chinese distributors, agents, or joint venture partners. For information on the Gold Key or other USDOC services, contact the U.S.-based Export Assistance Center nearest you, or contact us at 86/10/6532-6924, fax: 86/10/6532-3297, or email: OBeijing@cs.doc.gov. We are also on the web at www.usembassy-china.org.cn.

Attachment.

China's Housing Reform Policy

To further strengthen its housing reform efforts, the Chinese government has put forward the following housing policies:

Establishing a new urban housing system adapted to the 'socialist market economic system' and the specific national situation of China; steadily promoting housing commercialization and socialization; reforming the traditional housing allotment scheme, stopping the housing property allotment from July 1998, and gradually carrying out a housing capitalization allotment system based on a "selling but not renting principle."

Comprehensively promoting and perfecting the public accumulated fund system for housing, raising the return rate of the fund. Opening and assuring individual accumulated funds for a housing account. Ensuring a submitting rate of not below 5% of the individual and unit public accumulated fund for housing by the end of 1999. This fund will mainly serve in securing personal loans to purchase housing.

Consummating the urban housing supply system. The government will establish an urban economically affordable and multi-level housing supply system, and put forward a varied housing supply policy targeted at families of different income levels.

Adjusting housing investment structure. The government will adopt an advocating policy to encourage the development of affordable housing. Affordable housing is required to reflect the characteristics of being economical and adaptable, and to be constructed within the bounds of regulated standards.

Consolidating housing pricing management. Newly built affordable housing should be priced under government guidance. The government-set price is in compliance with a principle of "covering the cost and ensuring a marginal profit." The government stresses that the selling price of the affordable houses should reflect the capabilities of the low and medium-level income families, so that they will be willing and able to purchase their new homes.

Strengthening the housing quality control and real estate property management. The government advocates a housing quality assurance certification system. Also under quality assurance are utilities, a spare parts quality warranty system and a housing quality assurance system.

Developing housing finance and expanding housing financial services. Housing commercialization should proceed under the support of housing finance. In order to ensure the effectiveness of housing loans, a housing property rights mortgage registration system should be continually improved. In terms of granting construction loans, banks will give priority to granting loans to the construction and development of the affordable housing; restriction over personal housing purchasing will gradually be eliminated.

In June 1998, the government announced a Personal Housing Loan Management Regulation, which put forward provisions in correspondence to different aspects of personal housing loans, including target, condition, process, validity limit, interest rates, mortgage, property pledge and assurance, housing insurance, mortgaged property and property disposal.

Cultivating and regulating a housing market and promoting the present public housing reform. The government requires public housing rental reform based on considerations of workers' income levels. Present home prices should also be subject to the government's regulation. Present public housing should be priced at cost, and be linked with the price of affordable housing. A thorough census of the housing conditions is going to be conducted on the urban workers' families. A personal housing file will be created. Violations to the housing reform policy should be strictly redressed.

Realizing the significance of the technological advancement in developing the housing market. In the past ten years, China's urban residential districts' experimental construction work has proved successful, reported by the government. Residential districts with various features have solved housing problems suffered by a big part of the city residents. In addition, the famous Well-Being Residence Building Project has undergone correspondent verifications in the perspective of housing design. Construction materials have also utilized new technologies, which not only enhance the scientific and technical content of the housing products, but also raise the energy-saving standards of the housing. Hence, construction quality of residential housing can be assured. For instance, garbage disposal technology, water-saving technology, energy-saving technology, solar power or other new technologies, together with modern telecommunication and intelligence technologies and so on, are going to be further promoted in residential housing construction.

Setting overall quality improvement of the social residential building is the key point in future work. The government will take its next measure directed at housing commercialization and market orientation, satisfying its people's great demand for housing quantity and quality. Main housing quality problems include the following points:

Malfunctions

Safety and durability

Comfort

Adaptability

Housing commercialization will maintain its significance as a mainstay in China's urban housing development.

Source: Department of Foreign Affairs Office, Ministry of Construction Industry, September 4, 1998