McKinsey: Why was affordable housing issue a policy priority in Huangshi?
Xie Chengxiang: China is urbanizing very rapidly. The number of city dwellers is rising in tandem, which means more living spaces are needed. China started its market reform of the housing industry 15 years ago. This greatly energized the housing market, but it also led to a surge in housing prices that exceeded what many medium- to low-wage earners in urban areas could afford.
About the author
Xie Chengxiang is deputy mayor of Huangshi of Hubei province. Previously, he was the director of the Central Geological Exploration Fund Management Center. He holds a master's degree from China University of Geosciences. Eadie Chen is the director of strategic engagement, Urban China Initiative.
In recent years, the housing issue has become the most stringent problem affecting people’s lives in China. It is also a serious problem threatening social stability and economic development. This challenge looms especially large in Huangshi. We have been feeling pressure from both the central government and local residents to take action.
In its heyday as a mining city, Huangshi experienced prosperity and development. However, as resources were exhausted and the reform of state-owned enterprises took hold, many mining enterprises went bankrupt or were restructured, and a large number of workers were laid off. Many of those workers ended up in makeshift houses. These houses gradually evolved into the current shantytowns, similar to the slums in other countries.
Meanwhile, as the industrialization and urbanization process picks up speed, new urban residents, such as rural migrant workers and newly employed college students, have emerged in large numbers. This rapidly rising urban population has further intensified the housing problem in Huangshi.
Statistics show that in Huangshi, there are 164 shantytowns occupying an area of about two million square meters. They are inhabited by more than 12,000 households, over 80 percent of which are low income.
Infrastructure and public services in these shantytowns are very poor and the crime rate is much higher than in other areas. These slum settlements also widen the gap between rich and poor in the city.
Many residents living in these shantytowns are unhappy and are demanding access to low-cost housing. For example, in recent years, at the annual National People’s Congress and Chinese People’s Political Consultative Conference (the two highest-level annual conferences to review government performance and set agendas for the new year), we have received a lot of proposals calling for us to do something about the lack of housing. Because China has had several decades of fast growth, both central and local governments have developed healthy fiscal profiles. We are financially capable of resolving this problem.
The central government has been driving home a message to the local governments that more effort is needed to improve the living conditions and well-being of the people. These efforts are also a new engine for China’s domestic consumption and economic growth.
The State Council decided to build 36 million units of affordable housing throughout China between 2011 and 2015. The units will be available to 20 percent of the country’s urban households by 2015. The central government also set targets for local governments. The Ministry of Housing and Urban-Rural Development and the China Development Bank named Huangshi a pilot city for the construction of public rental housing. So we are feeling pressure from both the top levels of government and the grassroots to take action.
McKinsey: What are the biggest challenges?
Xie Chengxiang: Getting the initial funds to start the program was the first challenge. We set up a state-owned company called Zhongbang Urban Housing Investment Co., Ltd. (Zhongbang literally means “a city for the mass” in Chinese) to act as the financing and management platform.
The Huangshi city government injected the funds earmarked for the public-housing program—totaling 135 million yuan ($21.4 million)—into Zhongbang along with the 6,000 mu (4 million square meters) of land that had been set aside. The city also offered some tax and fee exemptions to Zhongbang. Using these funds and assets as collateral, Zhongbang was able to borrow from China Development Bank, which, as a bank charged with financing public-policy efforts, offers loans at below-market rates.
Zhongbang’s registered capital has increased from the initial 135 million yuan ($21.4 million) to 500 million yuan ($80 million); total assets have increased from 200 million yuan ($32 million) to 2 billion yuan ($320 million), with 650 million yuan ($103 million) raised in total. With this package of funding sources, the public-housing program was successfully launched using Zhongbang’s platform.
Then we faced the challenge of how to make the program financially sustainable. Again, we worked out a package solution. First, tenants are allowed to buy housing property by installment, based on their income. This accelerated the recycling of funds. The selling price is usually set at half the market price.
We also allowed Zhongbang to manage the commercial-development projects, mainly retail businesses, in the public-housing zones. This will generate extra revenues for Zhongbang.
Adding together the favorable bank loans, the rental revenues, and the central and local government subsidies, Zhongbang can operate the program in an almost self-renewing and sustainable way, though capital challenges still exist.
Finally, we had to ensure a fair distribution of the units and create effective supervision. Luckily, Huangshi has a relatively small floating population. This makes it easier for us to align with banks and tax offices to collect individual financial data. We have been updating the information network to make sure that the lower-cost houses are distributed to those who are in real need. We also use community groups and the Internet as supervising devices. We always make public the list of people receiving subsidized housing. In addition, the qualification of tenants will be reviewed every two years to make sure that those who are no longer low income either move out or pay market prices.
More important, we have adopted a system to separate rent from subsidy. Tenants actually pay market-level rents, but they receive various government subsidies according to their income levels. Once they are no longer qualified to receive subsidies, they will have to pay the market price on their own.
McKinsey: What are your metrics for measuring success?
Xie Chengxiang: Ultimately, the measurement should be whether the people in the city feel better about their living conditions, whether they gain more confidence in the local government, whether the central government acknowledges our achievements, and whether the improved situation will help local economic development and investments.
Since 2009, Huangshi has constructed 18,730 units of affordable houses for public rental. They cover 1.03 million square meters, transforming the 16,312 households occupying 570,000 square meters in various shantytowns and significantly alleviating the housing difficulty facing urban families. This is ten times more than the total affordable houses that were built in Huangshi in the ten years leading up to 2009. We can say that we have achieved an interim success.
According to the public-rental-housing construction plan, Huangshi will create 45,000 more units of public rental homes covering 2.4 million square meters in the next five years. The units will be divided into 46 subprojects with a total investment of 5.9 billion yuan ($940 million).
The housing will be available to all citizens without access to housing including residents requiring resettlement after the razing of shantytowns and other substandard housing. Thus, through our innovative housing program, Huangshi struck a balance between economic development and social development, as well as between current investments and future benefits.