In the middle of China’s eastern city of Wenzhou sits a vast demolition site that is famous for the speed at which homes were turned to rubble.

It took just 18 days to level this area – equivalent to 16 football fields – that used to be the bustling Heng Du village, home to many of the city’s low-skilled workers.

With up to 13 excavators working at any one time, it set the benchmark for demolitions across the city and spawned a new phrase for construction crews; as bosses demanded areas were levelled at “Heng Du speed”.

Wenzhou’s growing patchwork of demolition sites is mirrored in cities across China as local governments replace old-style villages with modern developments. Increasingly, as part of this urban upgrade, they are handing over cash subsidies to former residents so they can buy new homes. And these compensation schemes – which financial services company UBS estimates were worth more than 900 billion yuan ($171 billion) last year — are China’s secret economic weapon.

They have propped up the country’s housing market – a key driver of economic growth – at a time when many pundits were forecasting a sharp slow-down. China’s economy grew a better-than-expected 6.9 per cent in the first half, defying the doomsayers and providing welcome news for businesses across Australia, which rely heavily on the Chinese market.

UBS says the housing subsidies, most of which are in smaller, regional cities, contributed to 40 per cent of total residential sales growth in 2016 and around 50 per cent in the first half of this year.

Shanty town renovations are not new in China. An extensive program was rolled out as part of the government stimulus package in response to the global financial crisis.

However, the change is in the increasing use of subsidies so that residents can buy existing homes rather than be relocated to low-cost public housing. Subsidies can take the form of a cash payment or a coupon that the property developer can then cash in with the local government. This is a form of compensation for those residents who have had their homes demolished and doesn’t need to be paid back.

So the result is a new category of cashed-up buyers looking for a place to live, which has the direct impact of reducing the number of unsold properties on the market as well as indirectly boosting sentiment and prices.

Shanty town renovations are not new in China. An extensive program was rolled out as part of the government stimulus ...
Shanty town renovations are not new in China. An extensive program was rolled out as part of the government stimulus package in response to the global financial crisis. Lisa Murray

“We estimate that subsidised residential sales may have grown by 20 to 25 per cent,” in the first half of this year compared to the same period a year ago, UBS economists Ning Zhang and Tao Wang said in a report released on Monday.

The government support for the housing market comes at a crucial time for President Xi Jinping and China’s ruling Communist Party, which has prioritised economic and political stability ahead of a high-stakes meeting later this year. Mr Xi is almost certainly expected to return as General Party Secretary for a second five-year term but other positions will be reshuffled at the National Party Congress, typically held in October or November, as senior officials retire.

The new leadership team will be faced with a challenging economic outlook as China’s debt to GDP ratio is forecast by the International Monetary Fund to rise to nearly 300 per cent by 2022. At the same time, some of the recent growth drivers will be difficult to sustain and that includes property sales. Economists and analysts note the boost from housing subsidies will fade over the next 18 months as the shanty town renovation program winds down.

AFR Weekend travelled this week to Wenzhou, a city renowned for its thriving private sector, in an effort to look behind China’s better-than-expected economic statistics so far this year.

Wenzhou’s economy has rebounded from a financial crisis in 2011, when a speculative frenzy on the property market and a complicated web of corporate debt arrangements resulted in investments going bad and over-leveraged local businessmen abandoning their firms. Property prices more than quadrupled in the five years to 2011 rising to over 34,000 yuan a square metre, before tumbling to less than 20,000 yuan three years later during the downturn.

Wenzhou’s economic growth sunk as low as 5 per cent in the first half of 2012 as the government worked through the city’s debt problems but it has since recovered, accelerating to 8.4 per cent in the first half of this year, outperforming the country as a whole.

Rather than talk about the resurgence in manufacturing or a pick-up in exports driving the turnaround, locally-based economists and property analysts were quick to cite subsidy schemes and shanty town renovations as a key buttress for the city’s economy in recent months.

“The large-scale demolitions and rebuilding has boosted economic growth in the first half,” says Zhou Dewen, who heads up the Wenzhou Council for the promotion of small and medium-sized enterprises.

A residential apartment building in  Guangdong Province. Subsidies are allowing Wenzhou and other Chinese cities to run ...
A residential apartment building in Guangdong Province. Subsidies are allowing Wenzhou and other Chinese cities to run down their property inventory levels after hundreds of thousands of apartments were built over the past decade. Brent Lewin

Chen Hao, who has a consulting firm Wenzhou Best Union Real Estate Company, explains that “across three downtown areas, they are demolishing 30,000 apartments, which is several dozen million square metres.”

In one downtown area, Lu Cheng district, the subsidy per household was reported in the local press as being about 2.3 million yuan for a 70-square-metre apartment. More recently, in a district about an hour away from the city centre, in Xiashatang, residents were given a whopping 10 million yuan to buy a new home, according to media reports in June.

The additional demand resulting from these subsidies has boosted prices. Chen says the average price for property in downtown Wenzhou is back up to 30,000 yuan a square metre. By comparison, the average urban income in the city is just under 48,000 yuan a year.

Importantly, the government’s housing subsidies are allowing Wenzhou and other Chinese cities to run down their inventory levels, which have been hanging over the property market after hundreds of thousands of apartments were built over the past decade to cash in on the real estate boom. It used to be that the government would provide residents, who were having their homes demolished as part of the shanty town renovations, access to newly-built low-income housing. However the subsidy schemes mean those residents can now buy homes from the existing properties available.

In Wenzhou, the subsidy program really ramped up last August, when the government announced the China Development Bank ...
In Wenzhou, the subsidy program really ramped up last August, when the government announced the China Development Bank had agreed to extend it a 121 billion yuan loan to support a raft of projects, including shanty town renovations. Lisa Murray

Chen points out Wenzhou’s downtown area has only a three-month housing stock pile. For the whole of the city, he says it is a still-reasonable seven months. That is down from more than four years in mid-2014.

The improved sentiment in the housing market also encourages more construction, which is good for Australian commodity exports, like iron ore. Governments are also redeveloping the demolition sites replacing the old-style housing with modern residential and commercial building or in some cases parks and public recreation areas.

A local steel trader told AFR Weekend his sales were up between 20 and 30 per cent this year, helped by more demand for construction materials and higher prices.

UBS says the share of shanty town renovations across China that are using “monetised subsidy schemes” has risen from about 10 per cent in 2014 to 49 per cent last year.

In 2015, schemes like this absorbed 150 million square metres of residential housing stock, rising to 250 million square metres last year, UBS estimates.

In Wenzhou, the program really ramped up last August, when the government announced the China Development Bank had agreed to extend it a 120 billion yuan loan to support a raft of projects, including shanty town renovations.

Not everyone in Wenzhou is happy about the demolitions.

Hang Wenli, a taxi driver from Anhui province who sends money home to his family every month, is furious. He used to pay about $100 a month in rent but that is set to double due to a shortage of low-rent housing following all of the demolitions.

“Many of my friends have already left and now I’m going to have to go too,” he says.

However, for China’s economy, the schemes have provided a boost to the property market at a crucial time.

After runaway house price increases in major cities like Beijing, Shanghai and Shenzhen, those governments were forced to introduce new purchase restrictions in a bid to take some heat out of the market. This prompted some concern there would be a property downturn this year, but while sales growth in major cities have decelerated, sales in smaller, regional cities have jumped sharply.

Analysts rank China’s cities in tiers according to economic development and size. Wenzhou is generally considered to be a tier-3 city. UBS says property sales growth in tier 1 and 2 cities in the first half decelerated to 4.2 per cent. However, sales in tier 3 and 4 cities jumped 24.5 per cent.

All up, that left sales nationwide 16 per cent higher in the first half, while lower tier cities accounted for 45 per cent of overall real estate investment.

However, sales are already slowing as the impact of the schemes fade. Property sales growth slowed to 2 per cent in July, according to the latest figures.

The shanty town renovation program was first rolled out after the global financial crisis, with the government resettling 21 million families by the end of 2014. It has been extended through until 2020, but the annual target for new low-cost housing or subsidised homes has been reduced.

UBS economists expect property sales and construction will outperform expectations this year but slow in 2018.

“Given the strength in property sales so far, we upgrade 2017 property sales growth to 8 to 10 per cent, from 6 to 8 per cent previously,” they said in their report.

“We expect sales not to grow in 2018, and they might even drop slightly as the market turns. New starts and construction should be supported in the coming months by earlier sales strength and decline in inventories, but are expected to slow in 2018.”

by Lisa Murray
Financial Review

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