Reform Goal: Ending Subsidies : Some Raise Roof as China Raises Rents for Housing

The man in the lobby of the Yantai City Housing Exchange Office was in no mood to hide his anger.

“You Communist Party cadres just sit in offices and get high salaries, so you can afford to pay high rents,” he half shouted at the office director.

“We workers do very heavy jobs and get only a little more pay than before, and the prices of things in the markets are getting much higher,” he continued. “After 30 years, maybe I can afford to buy an apartment. But by then, I’ll be too old. It’s pointless!”

The frustrated 39-year-old shipyard worker used to consider himself lucky to be living in an unusually spacious apartment. But his family’s good fortune turned sour in August, when their rent more than quadrupled under a reform program.

The program is aimed at turning housing--heavily subsidized ever since the 1949 Communist revolution--into a market commodity to be bought, sold or rented at prices reflecting its true cost.

The Yantai housing reform, personally endorsed by General Secretary Zhao Ziyang, head of the Chinese Communist Party, is meant to be the forerunner of changes to be implemented throughout China over the next decade.

The changes are sure to anger people like the shipyard worker. He now wants, at least, to be able to switch apartments with someone living in a smaller place, thereby reducing his rent.

Three months after registering with the housing exchange office, he still had not found anyone willing to trade. And he did not believe the center’s director, who tried to convince him that under the reforms, he might be able to buy a suitable place of his own a few years from now.

But, despite the indignation the changes have provoked, China’s reformist leaders are going ahead with their plans to eliminate one of the most fundamental welfare benefits of Chinese communism--extremely cheap urban housing--and replace it with a system similar, in many ways, to that of the United States or Western Europe.

Transition Not Easy

In a policy-setting report endorsed by the recently concluded 13th National Congress of the Chinese Communist Party, Zhao called on the nation to “energetically develop the building industry by commercializing housing, so as gradually to make this industry a major pillar of the economy.”

China’s leaders recognize that the transition will not be easy, but they believe that in the Yantai experiment, they have discovered the basic technique that will allow them to achieve this goal.

The official New China News Agency reported in September that Yantai, a bustling town on the northern side of the Shandong Peninsula, is “pioneering the nationwide reform.”

The methods used in Yantai will be tried in four other cities by the end of this year and in another dozen cities during the first half of 1988, the agency said. The reform will begin in the big cities of Beijing, Shanghai and Tianjin in 1989 or later, it added.

Raising Rents and Wages

Yantai’s reform is based on the principle of switching from the administrative allocation of housing to individual choice in the real estate market, while raising both rents and wages so that people eventually will pay prices high enough to cover the cost of new construction. As an intermediate step, subsidies will be provided in the form of housing coupons issued through work units.

The basic strategy, according to Qi Daomao, director of the Yantai City Real Estate Bureau, is to quickly create the structure of a commercialized housing market, even though subsidies cannot be eliminated immediately. Subsidies will be reduced later as wages rise, he said.

The goal of the reform, Yantai Mayor Yu Zhengsheng said, is to create a system in which “whoever builds the housing gets the benefit.”

In socialist China, this concept is revolutionary.

“Our old policy increased the difficulties of solving our housing problems,” Yu explained in a recent interview. “Various work units kept building apartments, but they couldn’t get their investment back. Once the money was spent, it was gone.

“Housing costs were not part of people’s consumption expenses, but rather were part of the nation’s investment, or part of the investment by work units. This investment could not be recovered. This was the most basic difficulty of our old housing system. Now, we’re trying to change this so that individuals pay for the investment.”

Serious Malpractices

The old system also resulted in serious malpractices in housing allotment, Yu said.

“In the past, people with power could get more space,” he said. “Because rent was very low, they could live in a very big home and it wouldn’t cost much money. Because of this, China experienced very serious, unhealthy tendencies in housing. And the reaction of the masses was very fierce.”

The belief of the angry shipyard worker that high-ranking party members could most easily cope with the reforms was based in part on this history of Communist Party cadres generally taking the best housing.

However, Yu and other Yantai officials insist that commercialized housing will bring greater fairness.

“In purchasing things that are for sale, all people are equal,” said Qi, the real estate bureau director.

Yu said that China has tried to eliminate abuses in housing allocation through investigations and regulations, but “our conclusion is that nothing is as effective as raising rents.”

“A policy that ‘if you live in a bigger place, you have to pay more’ appears to be the most effective way of controlling these unhealthy tendencies,” he said.

Yantai’s new policy affects 68,000 out of 80,000 households in the city’s urban areas, which have a population of about 300,000, Qi said. Those living in company dormitories and private housing are not yet included. The city also encompasses rural areas where another 300,000 people live, but the housing system there is already based on peasants building their own homes.

From 70 Cents to $11

On Aug. 1, the average monthly rent was raised from 0.073 yuan (2 cents) per square meter of living space to 1.17 yuan (31.5 cents) per square meter, Qi said. A typical two-room apartment is about 35 square meters (375 square feet), so the average rent jumped to about $11 dollars per month from 70 cents.

Rents also vary slightly according to the location, quality and age of the apartments.

A new 35-square-meter apartment rents for about $12 a month, or enough to cover slightly more than 80% of its real cost, Qi said. For the time being, this is as high as seems practical, but the shortfall means that apartments built for sale must also be offered for less than their real cost, and that in the future both rents and apartment prices must rise, he said.

While rents of $11 a month may still be unbelievably low by American standards, this rate is in a city where the average individual’s salary, including bonuses, is about $32 a month, and most of that is needed to pay for other living expenses. Very few families have leeway in their budgets to absorb such increases.

Housing Coupons Ease Shock

Because of this situation, during the early stages of the reform, the city is providing housing coupons to work units, which pass them on to employees at the rate of 23.5% of base salary. Base salaries average about $21 a month, so the typical worker receives about $5 worth of coupons. People who moved into apartments after Nov. 1, 1986, receive cash instead of coupons.

Most families have at least two people working, so if they live in an average size apartment, their out-of-pocket rental expenses may remain virtually unchanged for now, and if an adult child lives at home they may be able to save up coupons.

But next year, the city will start to reduce the amount of housing coupons given to work units, Yu said. Employees will receive fewer coupons, but the difference will be made up in cash that their work units must provide out of their own budgets.

Improvements in productivity are expected to cover at least part of this expense, but it may also cut into profits, Yu said. In these cases, the government will carry part of the burden because most large enterprises are taxed at a 55% rate, and any drop in profits will lead to reduced tax liability.

Coupons to Be Phased Out

Over a period of 5 to 10 years, coupons will be gradually eliminated and everyone will pay housing expenses out of their income, Yu said.

Zhong Xiuying, 55, a retired shoe factory worker, and her husband, Zhang Huaishu, 56, a truck driver, have been virtually unaffected by the initial stage of the reform, yet the new system will eventually have a significant impact on them.

Zhong and her husband lived with their children for 25 years in a traditional courtyard-style, single-story home for which they paid a never-changing rent of 70 cents a month.

But earlier this year, a watch company acquired rights to the land their home was on and tore down the old houses to build a new factory. It had to provide them with alternative housing, and they now live in a new, three-room apartment built by the Yantai City Housing Development Corp. and sold to the watch-manufacturing unit.

Until Aug. 1, Zhong, her husband and their youngest daughter, Zhang Liyan, 25, who lives at home, continued to pay 70 cents monthly rent for their new place. With the housing reform, their rent jumped to $15.50 a month. At the same time, however, their work units issued them housing coupons totaling $15.10 a month, so their out-of-pocket rental expense dropped to 40 cents a month.

Daughter to Move Out

Zhang Liyan, however, expects to marry soon and move out. When she does, she will take $4.30 of the monthly housing coupons with her. If Zhong and her husband stay in the same apartment, as they plan to, they will pay out-of-pocket expenses of $4.70 a month in the future, rather than the 70 cents they would have paid under the old system.

“I feel it won’t be much of a problem,” Zhong said. “It’s a little more, but this is a better apartment. For people who have good salaries, it’s OK to live in an apartment like this. People whose incomes aren’t so high would find it difficult to pay.”

Once the use of coupons is phased out and replaced by cash, the new system will also affect the interests of the work units involved.

Zhong’s shoe factory and her husband’s trucking unit will have to pay them an additional $10.80 a month in cash, and they will pass this money on to the watch factory, their landlord, as part of the rent. The watch factory will be able to use the money to build more housing or for some other purpose.

In the case of families who live in government-owned housing, the reform will eventually lead to the transfer of cash from the enterprises where they work to the city housing bureau, which will use the money to build more housing.

Slightly more than 30% of the housing in Yantai is government-owned, so this will eventually constitute a major source of funds for housing construction, Yu said.

Some people, such as the angry shipyard worker, are already seriously affected by the changes.

This man, in an interview before he got into the argument with the housing official, said that he, his wife and their child live in a 53-square-meter apartment, which is roughly 50% larger than the average. He earns about $33 a month, and used to pay $1.24 in rent. Under the new system, his total rent is $16.70.

He and his wife receive $8.09 worth of monthly coupons, so they should be liable to pay $8.61 in cash. This is viewed as an unreasonably large burden, however; so, in keeping with a reform policy of special subsidies when necessary, his work unit bears $2.70 of this cost. His own out-of-pocket expenses have jumped to $5.91, which he considers beyond his capacity to pay.

Wants Smaller Place

“I would like to exchange apartments, and move to a place with about 30 square meters,” he said. “I cannot afford to live in my apartment. It’s not just me. Few others can afford to live in an apartment like mine.”

But some couples with incomes in the same range as the shipbuilder have found it possible to buy apartments under the new program.

Zhang Ping, 28, an instructor at a textile school, and his wife, Wang Ailing, 28, a junior high school teacher, recently moved with their 11-month-old baby into a new 35-square-meter, two-room apartment that they bought for $2,560 under a “limited ownership” program.

Zhang’s school heavily subsidized the purchase by paying $4,717, or about 65% of the total cost, so there are restrictions on any resale of the apartment.

Zhang and his wife used savings and money borrowed from their parents to make a $755 down payment and took out a bank loan at 3% annual interest. Their combined salaries, including housing supplement, total $71 a month, and their monthly payment is $27.

Will Defer Purchases

They plan to put off almost all consumer spending until they pay back the loan, in perhaps about five years.

“It’s tight for us financially, but I feel it’s better to buy a home,” Zhang said.

“We would like to buy a television set, and then a refrigerator and a carpet for the floor,” Wang said. “But we’ll buy them after we’ve paid off the loan.”

This is exactly what the designers of the housing reform program want young people to do.

“People cannot say, ‘We have a color television, now we want a video cassette recorder, and then we want a car,’ ” Mayor Yu said. “China has not reached this level. We must draw a portion of the masses’ consumption into housing, and let them spend money to buy homes. This is the only way we can solve our housing problem.”