China faces a hefty bill for its ambitious urban redevelopment program and Premier Li Keqiang is acutely aware of that.
In the past couple of weeks, his government announced an urban development fund backed by tax breaks and other incentives to attract private capital. On the government’s side, the China Development Bank (CDB) has been mandated to issue bonds and raise funds from the postal savings system and other financial institutions.
The exact cost of the project — rehabilitating shantytowns, clearing land for redevelopment and compensating displaced residents — will not be known for a while. What is certain is that the government has already poured billions into it.
About 72.3 billion yuan (US$11.64 billion) was spent by the central government last year alone, 5.9 billion yuan more than in 2012. Meanwhile, the Beijing municipal government plans to invest 794.4 billion yuan to renovate all temporary housing zones, known as “panghu villages”, in five years, but since most of these neighborhoods are near the city center, there are huge difficulties in tearing down old structures and building new ones.
The colossal demand for funds is where the challenge lies. The Hong Kong Economic Journal’s EJ Tactic column examines its implications.
Last year, China completed the rehabilitation of 12.6 million temporary housing units and expects to finish work on another 4.7 million houses this year and 15 million next year, Ministry of Housing and Urban-Rural Development Vice Minister Qi Ji said. Another 10 million units will be redeveloped in 2020 when the government expects to move 100 million people out of such temporary housing.
During a recent meeting chaired by Premier Li, the State Council recognized the enormity of the challenge. It concluded that securing funding is key to speeding up the redevelopment program. At the same time, it reached out to private commercial banks, social security funds and insurance companies to help in the fundraising effort.
If anyone thought it was beginning to look like a market-driven exercise, they would not be far wrong.
Fiscal funding alone is not enough. A lack of secure credit is also a problem, not to mention tight liquidity in the market.
And considering that CDB itself grapples with a cash crunch from time to time, Premier Li directed the lender to create a special unit to handle redevelopment-related funding matters. He went on to pitch the idea to pension funds, insurers and the postal savings system.
Still, some experts think that approach is hardly ideal. They are encouraging the government to let market forces play a role in the process by allowing project financing companies to invest in the project using bank loans. Residents can also invest their removal compensation.
The idea is to ease the fiscal burden on the government and put it in a better position to recoup its investment when income from related property development projects kicks in.
However, treating urban redevelopment as a business proposition does not guarantee profit. Private investors and residents who might be inclined to bet their compensation on an uncertain outcome are likely to think twice before parting with their money.
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