Fanshen: Will The Wind-Up Of Evergrande Ultimately Lead To Government Ownership Of Housing?

In 1950, the new People’s Republic continued a brutal program of land reform started during the Civil War in which perhaps 2-3 million people were murdered as “landlords.” A key goal of the movement was to capture land and redistribute it to landless peasants. Then Mao’s government in 1952 started the collectivization drive that put all land in the hands of the government (and led to policies that arguably triggered the famine of 1959-62).

The private housing market began in China in 1998, when State-Owned Enterprises were permitted to sell their housing to their employees. Before that, urban people were assigned housing by their employers. This was an epically huge asset transfer from government to its citizens. Rural housing was not even counted in government statistics.

The sell-off was a bonanza for SOEs, which dumped liabilities and earned cash so that they could eventually turn (more or less) profitable. It also started China on a two-decade housing fever fueled by excess debt, tidal waves of liquidity pumped into SOEs, the misdirection of investment by SOE banks, and the trapped nature of the Renminbi.

The land reform was the genesis of a critical divide in Chinese life today: that between urban and rural populations. Starting in the 1950s, populations were designated “rural” or “urban,” a status that was inherited, and rural-urban migration was blocked. The Maoist government focused all social services on the cities and viewed rural areas as little more than suppliers of food to the cities.

Even now in China, residence permits are designated “urban” or “rural,” with separate rules applying to the two types. Urban residents get better access to education, healthcare, and social benefits like pension. Naturally, rural people want to be urban.

That goes for public officials in rural areas as well. Getting an area designated “urban” conveys all sorts of benefits to public officials in terms of compensation, prominence, and personal power.

The principal engine of urbanization over the last decade has been urbanization in situ, meaning changing the designation of a particular area. Qualifying to be “urban” requires that localities jump through several hoops, including population density, proportion of the population working in “urban” jobs, type of infrastructure, etc.

The attractiveness of the urban brass ring means local officials and residents alike have keen incentive to sell farmland to a developer who will build high-rises on the land to accommodate a much larger number of people and who will also build out facilities such as pedestrian malls and kindergartens—whether or not these facilities are appropriate to the area. Everybody wins: the locality sells land and gets free infrastructure. The former farmers get cash windfalls, nice new apartments, and they no longer have to do back-breaking work in the fields. Local elite-owned construction and material companies rake in windfall profits. The developer makes a nice profit.

Less of a winner is the national economy. A town that two years ago grew lemons may not have been wealthy, but it at least produced lemons. After “urbanization,” there are high rises, a bunch of former farmers pushing brooms around, and no lemons. Since a steel mill and a construction company were very busy building the high rise, the devastation to the area is not immediately evident. What is clear is that, since there are fewer lemon groves, every year, you have to build another high rise to stand in for the productivity you’ve lost. Those high rises have to be financed. Nothing in China can default, so this just keeps going on, and on, and on, until you have jaw-dropping debt and ghost cities of a scale never seen before.

The Chinese Communist Party has honed the bait-and-switch to an art. The collectivization was one such event, where peasants were recruited into the attack on landlords with the promise that they would receive their fair share of land. Then the land was handed to government “collectives,” owned in some theoretical sense by the peasants but in reality owned by the biggest landlord of all—the Communist Party. This party led by a self-proclaimed champion of the peasantry, Mao Zedong, made rural people into serfs in their own country, unable to travel or seek jobs outside of their localities.

Despite the massive build-out of commercial housing stock, this has never really changed in China. People can live outside of their hometowns now, but they cannot seek public services there, and the cities that have built so much housing and claimed to be attracting buyers from other cities in reality are unwilling or unable to accommodate the social needs of these new populations.

Now, as Evergrande and a slew of other developers teeter and threaten to topple under the pile of debt created by this over-build, analysts widely expect the government to deploy its overweening power to carve up and re-assign assets, repay debts from its own resources, and force local developers to take over unfinished projects.

For once, the task may simply be too big for the financial and bureaucratic resources available to the government. The Chinese press contains news that Evergrande sought restructuring last winter. Around 150 developers went bankrupt in the first half. More than a dozen property bonds have defaulted. But facing these events, the Chinese government is a deer in the headlights, unable to react, perhaps because of fragmentation of responsibility, perhaps because the developers have powerful protection.

As property prices and transactions fall all around the country, it becomes evident that the piecemeal strategies of the past are no longer working to stall or delay a reckoning, much less resolve the underlying issue. What the party does in these situations is launch campaigns. The bigger the problem, the more sweeping the directives.

Among the more imaginable steps would be a piecemeal sweep of assets by the government for cash to soften the blow for urban families. At whatever cost, that would bring ownership of housing stock into government hands, not even SOE hands perhaps as before the turn of this century. One can imagine a retreat in which the government, directly, through local housing bureaus, or new provincial and central asset holders or via SOEs, was once again the sole owner and manager of housing stock. Perhaps that is what Xi’s robustly promoted goal of “common prosperity” will look like.