1 Beijing plans housing pension fund to tackle another looming property crisis
New housing pension fund?
Aug. 23
Dong Jianguo, vice minister of the PRC Ministry of Housing and Urban-Rural Development, said at a State Council Information Office press conference that the ministry is exploring the establishment of a system for house inspections, housing pension funds, and housing insurance. He added that the aim is to build a long-term mechanism for the management of housing safety throughout its entire lifecycle. Dong said pilot programs are currently being conducted in 22 cities, including Shanghai.
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Experts cited by mainland media explain that housing pension funds consist of both individual and public accounts. Individual accounts have already been established through the payment of a special maintenance fund for residential properties. The main focus of the pilot program proposed by the Ministry of Housing and Urban-Rural Development is the establishment of public accounts by local governments.
Mainland media said local governments will follow the principle of “not increasing the individual burden or diminishing individual rights” (不增加個人負擔，不減損個人權益) in exploring funding sources for housing pension fund public accounts. Potential sources include allocating a certain percentage of land transfer fees towards public accounts, as well as allocating the proceeds from the appreciation of maintenance funds, financial subsidies, and the creation of supporting financial products (i.e. comprehensive housing safety insurance, etc.).
Mainland media said the special maintenance fund for individual accounts is usually paid when residents purchase a home. The special maintenance fund has been a required fee when processing property title certificates since 2004. However, homes that were part of housing reform in 2004 and some commercial properties did not require payment towards a special maintenance fund; for commercial properties and affordable housing from around 2004, the fund base was low due to lower prices, resulting in lower balances in some communities and difficulties in fund renewal. Legally, the special maintenance fund belongs to homeowners and should be managed by the homeowners’ association, but government departments are currently managing the fund “on behalf” of homeowners. Since 2021, local governments have expanded the use of such funds from housing maintenance to include the renovation of old residential communities.
A report from the Shanghai Real Estate Science Research Institute found that the national balance of special maintenance funds for residential properties exceeds 1 trillion yuan, with cities like Shanghai, Beijing, and Hangzhou having balances in excess of 10 billion yuan.
PRC state media reported that nearly 20 percent of existing urban housing in China would be over 30 years old by the end of 2022 while nearly 80 percent of homes will become “old communities” by around 2040. This means that the scale of old housing in need of maintenance and renovation would be significant. Yan Yuejin, the deputy director of E-House China Research and Development Institute in Shanghai, told China News Service that the housing pension fund provides financial support for the comprehensive management of housing (including maintenance and renovation).
Guosheng Securities told mainland media that the market size for inspecting existing housing is about 92.4 billion yuan based on an estimated inspection price of 7 yuan per square meter, and the implementation of the housing pension fund could accelerate the increase in demand for inspections.
Aug. 25
A document allegedly detailing the “housing pension fee standards” for Pudong District in Shanghai circulated on the Chinese internet. According to the document, housing pension fees in Pudong are categorized into different levels based on the building’s floor and area. The lowest fee is for buildings with six floors or fewer at 50 yuan per square meter, while the highest fee is for buildings with more than 22 floors at 144 yuan per square meter. For example, a 144-square-meter apartment in a 33-floor building (such as those by China Evergrande) would have an annual housing pension fee of about 20,000 yuan. Housing pension fees only cover housing pension, with inspection and insurance fees being charged separately.
On the same day, the Shanghai municipal government’s official “Shanghai Rumor Debunking Platform” issued a statement on its WeChat account stating that the “housing pension fee standards” that are being circulated are false, citing information from the Shanghai Municipal Housing and Urban-Rural Development Commission and the Shanghai Real Estate Administration Bureau. Mainland media outlets later republished the statement. At the time of writing, the statement could not be found on the “Shanghai Rumor Debunking Platform.”
Disguised property tax?
Many people believe that the CCP authorities’ plan to explore the establishment of systems for house inspections, housing pension funds, and housing insurance is an effort to introduce a disguised property tax.
Some comments on Chinese social media include:
- “Shouldn’t property management companies be responsible for paying for house repairs? We pay so much in management fees every year, yet we don’t see them fixing anything!”
- “They expect us to pay pensions on property that only has 70-years of rights?”
- People are saying that the property tax has been in discussion for years without being implemented, but the housing pension fund was quickly introduced. Many feel that the housing pension fund is essentially a universal property tax on the poor.
- People say that the poor believe property taxes should only target the wealthy who own multiple homes. But now it seems that the wealthy, who reside in new luxury homes, are not required to contribute to housing pension funds. Instead, the poor who live in old and run-down homes have to make contributions to housing pension funds and pay for repairs and insurance.
Aug. 14
Mainland media reported that a resident in Shangyao Subdistrict in Nanchang City’s Xihu District complained online that the local authorities sent residents a WeChat message stating that all households must purchase housing insurance per instructions from higher authorities. The message added that the government would subsidize the insurance for three years and each household would need to pay 32.76 yuan. Residents were also asked to bring the property certificates to the local authorities to process the housing insurance.
The Shangyao Subdistrict resident expressed concern that the local authorities had not provided any relevant policy documents and suspected that this might be an unauthorized fee. The Shangyao Subdistrict authorities later responded that participation in the housing insurance scheme was “voluntary.”
Aug. 26
1. The official WeChat account of the Architectural Journal (a publication directly under the Ministry of Housing and Urban-Rural Development) published an editorial stating that the housing pension fund system, which the CCP authorities had brought up on numerous occasions since 2022, has been “seriously misunderstood” in recent days. The editorial clarified that the housing pension fund is not a property tax and the fund’s public account does not require contributions from citizens.
2. Wang Yeqiang, a researcher at the Chinese Academy of Social Sciences and director of the China Urban Economics Association’s real estate committee, explained in an interview with The Paper that a property tax is a tax on assets that residents must pay to the state for owning real estate. In contrast, the housing pension fund is a pooled account established for the future maintenance and renovation of houses, which makes the fund and property tax fundamentally different in nature.
Our take
1. There are several possible reasons why the CCP authorities are looking to establish a system for house inspections, housing pension funds, and housing insurance:
i) An increasing number of real estate in China is becoming older, and old buildings typically have issues with wall stability, roof leaks, exterior wall detachment, as well as aging facilities and equipment. In considering the negative social impact that could arise from safety issues with old buildings, Beijing would believe that it makes sense to start inspecting homes and finding ways to fund renovations and maintenance works.
Previously, the PRC was relatively lax on building safety. The CCP authorities passed a Building Law (建築法) in 1998 and the State Council enacted regulations on construction quality management (建設工程質量管理條例) in January 2000. In 2001, the CCP authorities first set a design lifespan of 50 years for the construction of ordinary houses and buildings; houses built before 2001 often had low construction standards and many failed to comply with building regulations. Yet even after the building standard was set, the actual lifespan of typical urban residences in China was around 30 to 40 years, or between 60 to 80 percent of the mandated 50 years.
During the height of China’s real estate boom, it was common for developers to cut corners and for people to complain online about the poor quality of new homes. One notorious incident occurred in June 2009 when a 13-story building in Shanghai that was completed but not yet occupied collapsed entirely; the episode gave rise to the internet term, “fragile buildings” (樓脆脆).
China also saw several major building collapse incidents in recent years, including:
- April 29, 2022: An eight-story “self-built” residential building collapsed in Changsha, the capital of Hunan Province, killing 54.
- July 23, 2023: The gymnasium of No. 34 Middle School in Heilongjiang’s Qiqihar City collapsed, causing 11 deaths and seven injuries.
- Nov. 6, 2023: A gymnasium in Heilongjiang’s Jiamusi City partially collapsed, killing three.
- May 27, 2024: A five-story building in an old community in Anhui’s Tongling City partially collapsed, resulting in five casualties.
ii) The CCP authorities likely have a funding gap to maintain old buildings and need to find ways to cover the cost.
Before 2004, various types of buildings in China (including those built by individuals and work units) were severely lacking in funds for maintenance. In 2004, Beijing mandated that homeowners make contributions to a residential special maintenance fund of about 2 percent to 3 percent of the home price when obtaining a property ownership certificate.
Data from the First National Comprehensive Risk Survey Bulletin on Natural Disasters (第一次全國自然災害綜合風險普查公報) released in May 2024 showed that there were 47.388 million urban buildings (including residential properties, schools, hospitals, malls, office buildings, and factories) covering 66.2 billion square meters under the Ministry of Housing and Urban-Rural Development. Assuming conservatively that 30 percent of those buildings are over 30 years old by the end of 2024, that means 14.21 million buildings (19.9 billion square meters) would require repairs and maintenance works of some sort. Assuming an average maintenance cost of 100 yuan per square meter, the CCP authorities would need funds approaching 2 trillion yuan.
The CCP authorities’ national balance of special maintenance funds for residential properties currently exceeds 1 trillion yuan, but a portion of it is likely to be misappropriated by local governments. Given the present balance of special maintenance funds and the estimated required amount, Beijing needs to find ways to cover the funding gap; establishing a system for house inspections, housing pension funds, and housing insurance is one way to go about addressing the funding issue.
The CCP authorities’ national balance of special maintenance funds for residential properties currently exceeds 1 trillion yuan. However, the figure is likely to be much higher. Per official data, total residential sales from 2004 to 2023 amounted to about 120 trillion yuan. Assuming an average payment rate of 2.5 percent to the residential special maintenance fund, the national balance should be around 3 trillion yuan. After factoring in a fund utilization rate of less than 10 percent per mainland media reports, the national balance should be approximately 2.7 trillion yuan. If this estimate is correct, then the CCP authorities’ plan to collect housing pension funds on top of special maintenance funds suggests that many buildings in China are now in need of repairs because they were not built up to spec (lifespan shorter than 50 years, etc.), or local governments have long since misappropriated residential special maintenance funds and now need to find new ways to raise money to pay for repair works, or both.
iii) The CCP authorities could be considering using the system for house inspections, housing pension funds, and housing insurance to allow local governments to access real estate maintenance funds and carry out works as a way to stimulate the economy. Local governments could also find ways to repurpose the funds to alleviate fiscal shortages and debt pressures.
2. The early public reaction to Beijing’s plan to establish a system for house inspections, housing pension funds, and housing insurance suggests it faces significant headwinds and risks in pressing ahead with the system.
Here are some takeaways based on the current publicly available information:
i) Homeowners in China generally believe that they are already paying a lot when buying property, including the house price, land-related fees, and the housing maintenance fund. Therefore, they are naturally unhappy about and resistant to the idea of a housing pension fund, which requires them to fork out even more money.
Homeowners also believe that maintenance issues should be the responsibility of developers, and that it is unfair for them to take responsibility for issues that arise from buildings less than 50 years old due to substandard workmanship. If anything, the CCP authorities should take responsibility for a lack of initial oversight and not holding developers accountable.
ii) The suspicious developments surrounding the document allegedly detailing the “housing pension fee standards” for Pudong District in Shanghai suggest that it could be a “trial balloon” floated by the local authorities to gauge the public’s reaction to the idea.
Meanwhile, the news that the local authorities of Shangyao Subdistrict in Nanchang City is mandating the purchase of housing insurance suggests that the CCP authorities will inevitably find a way to extract money from homeowners to fund its proposed housing endeavor. Once local authorities at different levels begin to set housing insurance quotas, the “voluntary” measure will eventually become mandatory, similar to how voluntary vaccination became mandatory during the “zero-COVID” years.
iii) According to mainland media, the CCP authorities will see that funding sources for housing pension fund public accounts will follow the principle of “not increasing the individual burden or diminishing individual rights.” Also, potential funding sources could come from land transfer fees, returns on maintenance fund investments, and financial subsidies from local governments.
Given the CCP authorities’ fiscal shortfalls, however, it is questionable whether local governments are able to secure funding for housing pension fund public accounts with the halving of land transfer revenue amid the property downturn and often misuse of government-managed special maintenance funds. Also, the CCP authorities should have directly announced the share or scale of its contributions to public accounts if it truly did not need individual contributions from homeowners. Finally, the CCP authorities are not transparent about why there is a need for large-scale collection of funds for housing pensions given that special maintenance funds for residential properties are “bountifully” in excess of 1 trillion yuan.
iv) The CCP authorities have not provided clear explanations on how it plans to implement “housing inspections” (particularly the frequency of inspections and fee standards) or “housing insurance” (particularly how to apply for insurance and fee standards). With the CCP’s track record on nebulous policies and measures, the implementation of housing inspections and insurance is almost certainly the beginning of arbitrary fee collection and the creation of another source of social grievance during a time when Beijing is striving for social stability.
v) The CCP authorities could potentially reappropriate more funds from implementing a housing pension fund than through implementing a property tax. Assuming that the residential area in China is about 60 percent (floor area of about 40 billion square meters) of the 47.388 million urban buildings tallied by the Ministry of Housing and Urban-Rural Development and the housing pension fee nationwide amounts to about 30 yuan per square meter per year (a conservative estimate), local governments could potentially collect around 1.2 trillion yuan in housing pension funds annually. This amount likely far exceeds what could be collected from a property tax on the wealthy.
Of course, there is no guarantee that local governments will actually use the collected funds for housing maintenance. If so, Chinese residents will believe more firmly that the CCP authorities are looking to collect a disguised property tax and are again squeezing the less well-off in society.
vi) The introduction of a housing pension fund could make older homes less valuable as future property valuations will inevitably account for the age of buildings, maintenance costs, and insurance fees. A vicious cycle of growing regional disparities between the rich and poor could emerge as older homes become increasingly less valuable and affordable mainly to the less well-off, contributing to growing social unrest and dissatisfaction towards the CCP regime in China.
2 Sluggish local bond sales and shrinking fiscal revenue bode ill for China’s growth prospects
Local gov’t bond sales sluggish
Aug. 26
Mainland media reported a person-in-charge from the PRC Ministry of Finance saying that the Ministry will collaborate with relevant departments to guide and urge local governments to “further accelerate the issuance and utilization of special bonds, enhance the efficiency of special bond funds, stimulate effective investment, and make quick and concrete progress on projects (推動盡快形成實體工作量).”
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Local government bond issuance totaled 4.2 trillion yuan in the first seven months of 2024. Of this:
- 1.7749 trillion yuan of new special bonds were issued, a decrease of 722.2 billion yuan from a year ago. The new special bonds issued accounted for 45.5 percent of the annual quota, as compared to 65.7 percent of the quota issued in the first seven months of 2023.
- 371 billion yuan of new general bonds were issued, a decrease of 102.5 billion yuan from the previous year.
- 2.0577 trillion yuan of refinancing bonds were issued, an increase of 41.1 billion yuan from the same period in 2023.
Fiscal revenue continues to shrink
Aug. 26
The Ministry of Finance released fiscal revenue and expenditure data for the January-July 2024 period.
- The national general public budget revenue decreased by 2.6 percent year-on-year to reach 13.6 trillion yuan, with a comparable growth rate of 1.2 percent. The national general public budget expenditure increased by 2.5 percent year-on-year to 15.5 trillion yuan. The fiscal deficit expanded by 61.1 percent year-on-year to 1.98 trillion yuan.
- The national tax revenue decreased by 5.4 percent year-on-year to reach 1.11 trillion yuan. Non-tax revenue increased by 12 percent year-on-year to reach 2.4 trillion yuan.
- Domestic value-added tax decreased by 5.2 percent year-on-year to reach 4.1 trillion yuan.
- Domestic consumption tax increased by 5.5 percent year-on-year to reach 1 trillion yuan.
- Corporate income tax decreased by 5.4 percent year-on-year to reach 3 trillion yuan.
- Personal income tax decreased by 5.5 percent year-on-year to reach 852.9 billion yuan.
- Revenue from the sale of state-owned land use rights decreased by 22.3 percent year-on-year to reach 1.8 trillion yuan. Related expenditures on the sale of state-owned land use rights decreased by 8.9 percent year-on-year to reach 2.5 trillion yuan.
Local gov’ts banned from borrowing to invest in non-profitable projects
Aug. 26
The Ministry of Finance, Ministry of Housing and Urban-Rural Development, and four other departments jointly issued trial administrative measures for municipal infrastructure assets (市政基础设施资产管理办法 [试行]). The measures will take effect on Sept. 1, 2024.
The measures stipulate that municipal infrastructure assets built with government investment must strictly follow basic construction approval procedures in accordance with the law, must secure funding sources, must strengthen budget constraints, and must prevent government debt risks. The measures also strictly prohibit the illegal or improper bond issuance for municipal infrastructure assets that are not profitable or have insufficient returns, as well as prohibit the increasing of implicit debt.
Our take
1. The sluggish pace of local government bond sales will affect China’s overall economic growth for the year since credit and social financing are primarily supported by the government. Official data shows that government investment has been driving post-pandemic economic growth while private investment has significantly dropped off:
- In July 2024, nearly 90 percent of newly added social financing (770 billion yuan) was made up of government-issued bonds (690 billion yuan).
- National fixed asset investment from January to July 2024 grew by 3.6 percent year-on-year on a comparable basis to 28.7 trillion yuan, but the absolute growth rate was just 0.6 percent. During the same period, private fixed asset investment (14.7 trillion yuan) showed no growth from the previous year on a comparable basis, but declined by 1.54 percent in absolute terms. For July alone, the absolute value of private fixed asset investment (2 trillion yuan) dropped by 4.82 percent from a year ago, and decreased by about 24.53 percent from July 2020 when the pandemic was ongoing.
We previously estimated that China’s actual GDP growth for 2023 was negative 4.7 percent, and not positive 5.2 percent as claimed by the CCP authorities. The official fiscal revenue and local debt issuance data for the first seven months of 2024 suggest that China’s actual annual economic growth rate is unlikely to hit Beijing’s target of about 5 percent. If anything, China is likely to see negative growth; however, the CCP will almost certainly manipulate the official data and claim “victory.”
2. We see two likely reasons for the sluggish pace of local government bond issuance.
First, local governments are likely having a tough time finding profitable projects to invest in amid China’s broader economic slowdown. This phenomenon will become even more pronounced with the Ministry of Finance and other departments prohibiting local governments from issuing bonds to invest in municipal infrastructure assets that are not profitable or have insufficient returns.
Second, banks could be becoming more cautious about financing local government bonds as they struggle with shrinking net interest margins and a credit crunch. According to data from the Ministry of Finance, over 70 percent of funds raised from the sale of new special bonds in the first seven months of 2024 were invested in “municipal and industrial park infrastructure,” “transportation infrastructure,” and “public services,” or projects that typically generate poor returns.
