Cablegate: Shanghai Officials Seeking to Resolve Property Bubble

VZCZCXRO4692
RR RUEHCN RUEHGH
DE RUEHGH #0022/01 0220446
ZNR UUUUU ZZH
R 220446Z JAN 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8493
INFO RUEHBJ/AMEMBASSY BEIJING 3260
RUEHCN/AMCONSUL CHENGDU 2353
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0810
RUEHHK/AMCONSUL HONG KONG 2525
RUEHLO/AMEMBASSY LONDON 0060
RUEHML/AMEMBASSY MANILA 0148
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 0039
RUEHUL/AMEMBASSY SEOUL 0650
RUEHSH/AMCONSUL SHENYANG 2344
RUEHGP/AMEMBASSY SINGAPORE 0312
RUEHIN/AIT TAIPEI 2142
RUEHKO/AMEMBASSY TOKYO 0861
RUEHGH/AMCONSUL SHANGHAI 9160

UNCLAS SECTION 01 OF 03 SHANGHAI 000022

SENSITIVE
SIPDIS

DEPT FOR EAP/CM
NSC FOR MEDEIROS, LOI, SHRIER
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
TREASURY FOR IMFP -- SOBEL/CUSHMAN
STATE PASS CEA FOR BLOCK
STATE PASS CFTC FOR OIA/GORLICK
MANILA FOR ADB USED
PARIS FOR US/OECD

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: SHANGHAI OFFICIALS SEEKING TO RESOLVE PROPERTY BUBBLE

REF: 09 SHANGHAI 492

1. (SBU) Summary: Shanghai housing officials say that the city
is in the middle of a property market bubble. But rather than
directly intervene to cool off the market, they instead are
pushing to increase subsidized rentals for the poor and low-cost
housing for low- and middle-income families. They hope this
will reduce social tensions over rising property prices while
showing responsiveness to Central Government edicts. End
Summary.

======================================
Shanghai Property Market in a "Bubble"
======================================

2. (SBU) The Shanghai real estate sector has already reached a
"bubble" stage, and the Shanghai municipal government is looking
into ways to cool it, Liu Haisheng, Deputy Director of the
Shanghai Municipal Urban-Rural Development and Transportation
Commission told Consul General Beatrice Camp and visiting
EconMinCoun on January 19. He said the best evidence for this
was that at the end of 2009, buyers were bidding higher prices
for plots of undeveloped land than it would cost to purchase
adjoining plots with finished housing. Shanghai Party Secretary
Yu Zhengsheng has also described the property market situation
as a bubble, said Liu. (Note: Yu has not been publicly quoted
as saying "bubble," but he has been openly critical of the lack
of affordable housing in recent weeks. Perhaps Liu is referring
to internal comments made by Yu. End note.)

============================================= ==
Government Plans to Increase Affordable Housing
============================================= ==

3. (SBU) The Central Government wants to avoid interfering too
much in the housing market, said Liu, but has mandated each city
to provide affordable housing and thereby avoid social unrest.
Shanghai in 2008 set a goal of creating affordable housing for
10 percent of Shanghai households by 2012, said Liu. The
housing will fall into two categories:

a) Low-rent housing (lian zu fang) for 120,000 households.
These will be reserved for families with the lowest incomes --
the cutoff was originally RMB500 per month (approximately
US$70), but is being raised to RMB960 per month (approximately
US$140), said Liu. Under the program, the families need pay
only 5 percent of their income on rent, and will be either
placed in government-constructed housing or subsidized to live
in existing housing. By yearend 2009, 62,000 units were either
in the market or under construction, and due to limited supply
there is a waiting list from which families are picked by
lottery.

b) Economically appropriate housing (jingji shiyong fang) for
300,000 households. Households currently living in apartments
less than 15 square meters, with monthly incomes of less than
RMB2,300 (approximately US$340), and assets less than RMB70,000
(approximately US$10,250) are eligible to apply. Since land is
expensive, said Liu, under this program new couples could expect
to receive assistance for the purchase of a home of 40 to 60
square meters, for a subsidized cost of RMB250,000 to RMB350,000
(approximately US$36,600 to US$51,260). However, this program
is moving forward slowly, as the method for income verification
and other procedures is complicated, said Liu. At present, only
two of Shanghai's 18 districts, are undergoing trials. The city
hopes to expand this to all districts by year end, said Liu.

SHANGHAI 00000022 002 OF 003

============================================= ===
Housing to be a Hot Topic at Shanghai's Lianghui
============================================= ===

4. (SBU) Despite the Shanghai municipal government's resolve to
increase affordable housing, Liu hinted at continuing
controversy over how the plans should be implemented. He
predicted that this would be a "hot topic" at the upcoming Two
Meetings (lianghui), the Shanghai Municipal People's Congress
and the Shanghai People's Political Consultative Congress. One
area lacking consensus is how to keep housing prices down.
Another is how to carry out the economically appropriate housing
program -- some argue that the government should not intervene
in the market, while others are pushing for the government to do
more, said Liu.

5. (SBU) In advance of the national Two Meetings in March,
Central Government leaders have also been interested in
Shanghai's housing policies, said Liu. Liu briefed Premier Wen
Jiabao on the subject when Wen was in Shanghai November 28-29,
2009, and President Hu Jintao also took note of these policies
on his visit on January 15. (Note: For more on the quick steps
Party Secretary Yu has taken to align Shanghai with national
measures to cool the property sector, see reftel. End note.)

==========================================
Other Measures to Cool the Property Market
==========================================

6. (SBU) In addition to increasing the amount of subsidized
housing, Liu pointed to other measures Shanghai will emphasize
in carrying out the so-called 11 Articles (shiyi tiao) on real
estate controls recently issued by the State Council. (Note:
According to Chinese media reports, the State Council General
Office on January 10 issued a "Circular on Promoting Smooth and
Healthy Development in the Real Estate Industry," which has 11
articles -- thus its shorthand name. End note.) For example,
Liu cited the policy in the 11 Articles that banks should be
encouraged to better differentiate between mortgage borrowers
who will live in the house and those seeking to make an
investment, implying fewer loans should extended to investors.
Liu also pointed to policy in the 11 Articles encouraging local
governments to put more land on the market, saying Shanghai
would do so in the hope of reducing land prices.

7. (SBU) Liu said that Shanghai officials are still considering
the implications of the omission of the phrase "upgrading
housing" from the encouraged housing promotion measures in the
11 Articles. Originally, housing purchase benefits covered both
first-time house purchasers and households "upgrading" from
subpar housing, which meant housing that was below the average
size in a specific city, explained Liu. While the Central
Government is now "recommending" in the circular that banks not
extend loans for upgrades, said Liu, banks have their own
motivation to write new mortgages, since they are competing for
market share in this low-risk business. Therefore, said Liu, it
is not clear what the impact of this change in language will be.

=================================
Interested in Property Tax Policy
=================================

8. (SBU) Liu expressed several times his interest in U.S.
experience with property tax, and the Consul General referred
him for further background to the Public Affairs Section's
Information Resource Center. (Comment: Liu did not specify

SHANGHAI 00000022 003 OF 003

whether Chinese officials are pushing forward with plans for a
property tax. However, speculation in the Chinese press has
centered on the benefits of a property tax for decreasing
property speculation, since it would increase the carrying costs
of real estate investments. Liu's strong interest suggests the
Shanghai municipal government, at least, is internally
considering related policy options. End comment.)

============================================= ================
Chinese Demand For Housing Higher Than Western Models Predict
============================================= ================

9. (SBU) China's housing demand does not fit Western economic
models, said Liu, and therefore he cautioned against comparisons
with the U.S. real estate bubble. For one, Chinese families
have always invested their wealth in housing, said Liu -- take
rural areas, where farmers have built and rebuilt their houses
since the Communist Revolution in 1949, with many now on their
third reconstruction. Similarly, in cities, the value of homes
in the rental market is much lower than for similar houses for
sale, since Chinese families prefer owning a home. In addition,
given inflation expectations, many families are buying homes now
for their children's use in the future, said Liu.

10. (SBU) Shanghai's real estate sector, in turn, is different
than elsewhere in China, said Liu. First, there is a greater
foreign presence, with preliminary statistics showing that
overseas buyers -- including those from Hong Kong -- accounting
for 2 percent of housing purchases in 2009. In addition, there
are more buyers from other provinces in China, estimated at 20
percent of purchases in 2009. Thus, nearly one-quarter of
Shanghai housing demand comes from outside Shanghai.

=======
Comment
=======

11. (SBU) Consulate Shanghai's meeting with the local
Urban-Rural Construction and Transportation Commission confirmed
our earlier observations that the Shanghai leadership is moving
quickly to defuse popular tensions over high housing prices (see
reftel). However, the interests of the district and
municipal-level governments in keeping land prices high and
filling their own coffers -- by restricting the flow of land
onto the market -- remain more aligned with local land
developers, who are bidding high prices as they seek to increase
their land reserves. Banks, too, seem likely to continue
feeding the real estate boom through lending to real estate
investors, since banks have so far seen almost no defaults on
mortgage repayments. As a result, Shanghai's policies may
eventually provide more housing for low- and middle-income
families, but by themselves will probably do little to deflate
the property bubble.

12. (SBU) EconMinCoun has cleared on this cable.
CAMP

© Scoop Media