China's Structural Reform Policy: This Time Is It for Real?
Lo, Chi, The International Economy
Being the biggest saving nation in the world, China is part of the solution to the global economic imbalances that delivered the subprime crisis. In the post-crisis era, the world is watching China do its part in rebalancing its economy from relying on export and investment growth momentum to creating a bigger domestic sector. There are many skeptics doubting China's resolve and ability to deliver such an economic restructuring effort. In my view, the upcoming housing reform in China may likely be a catalyst for structuring rebalancing because things are different this time.
For the first time in many years, there is incentive on both the political and economic fronts to push China toward genuine housing reform. This was not the case in the previous housing reform efforts. The drive to build more public housing will ease social pressure, keep fixed asset investment growing, and offset a slowdown in private housing development. More crucially, acceleration in public housing development will help speed up urbanization and create a snowball effect on job and income growth and wealth accumulation. This is extremely positive for consumption and economic rebalancing.
The rebalancing process will certainly not be smooth. But the force of incentive compatibility to ensure delivery will also be strong. So the Chinese authorities will likely act more decisively. Their effort deserves the benefit of the doubt this time around.
A TOOL FOR STRUCTURAL REFORM
For thirty years, China's economic reform has focused on boosting income growth and making the economic "pie" bigger. However, it has failed to distribute wealth towards the Pareto-optimal state. This means much more can be done to reallocate the pie to make everyone happier and sustain growth at the same time. By lifting millions out of poverty from a very low base of economic development, China has only done the easy part of macroeconomic reform. Now comes the hard part. It will have to implement often painful structural reforms to sustain long-term growth and reduce social tension. Public housing programs will be a key tool to do the redistribution job as part of the economic restructuring process.
Since China's housing reform started in 1998, there have been many failed promises to deliver affordable housing to the public. The reform implemented in the late 1990s shifted most of China's home construction efforts to commercial property development. As a result, the share of commercial residential buildings to total residential buildings completed had soared from about 30 percent in 1998 to over 70 percent in 2008. However, the share of economic (that is, affordable public) housing had fallen from over 20 percent to just 5 percent during the same period. On the back of continued income growth and wealth accumulation, this means that while households' living standards have improved, the provision of basic shelter needs of general households has not caught up.
The government's stringent controls on land supply for property development to protect farmland, hence the agricultural sector, have aggravated the supply problem of new homes. Beijing insists on keeping a minimum of 1,200 billion square kilometers of farmland to secure agricultural supply. However, this policy restricts land supply to homebuilders and creates a serious housing supply problem in the cities. According to the official data, between 1999 and 2007, housing supply growth had consistently fallen short of the increase in urban households. The problem has only eased recently as Beijing wakes up to the problem and tries to encourage more economic housing construction.
Nevertheless, after all those failed promises in the past to provide better and affordable housing, this time around Beijing is more likely to deliver some real housing reform as part of the structural program to re-engineer long-term growth sustainability. The difference this time lies in incentive compatibility both on the political and economic fronts, which did not exist before. …