A CONVERSATION WITH C. Y. LEUNG
MARCH 14, 1990
ZRJ: At present, the domestic market in China is depressed. For the sake of the immediate interests of the people of Shanghai, I’m thinking of initiating three measures in its markets:
—1. Further developing the “vegetable basket” project so as to gradually modernize the production of non-staples, retail them in supermarkets, and integrate their production with marketing.
—2. Doing good urban infrastructure planning and construction centered on road transport, so as to drive the development of other industries.
—3. Reforming housing policy and expanding the construction market.
One problem that Shanghai’s people urgently need a solution for is that of housing. A great number of young and middle-aged teachers and sci-tech workers are leaving, and difficulty finding housing is one of the reasons. For the people of Shanghai, food isn’t much of an issue, but their housing is too cramped, with an entire family crowded into one small dwelling. If we were to rely solely on investments from the state for housing construction, I think Shanghai’s housing difficulties wouldn’t be solved in a span of 30 or even 50 years. Enterprises are also going through hard times and cannot come up with more money to build housing.
We could borrow from the methods Hong Kong and Singapore used to solve their housing problems: namely, to have the state, enterprises, and individuals all pitch in. Individuals could also pay something for building and buying homes in installments, the way they pay for color TVs. Withdraw short-term credit and turn it into long-term investment in residences. Shanghai has the conditions for doing so; the key is to improve performance at every step of the housing construction process and lower costs.
Moreover, in terms of China’s population as a whole, the caliber, capabilities, and technical and cultural levels of Shanghai’s people are quite high. Provided there is good leadership and a tight focus on the work, they can do anything successfully. With such a powerful weapon in hand, provided our housing policy wins the support of the people, we can start up a construction market and accelerate housing construction. At the same time, we can integrate this with the development of Pudong, use new land policies to attract foreign investment, and use differential land rates to encourage the industries and populace in the old urban areas to disperse to Pudong. I’d therefore like to ask you about the financing methods used in Hong Kong to solve its housing problems. First, let me ask [Vice Mayor Ni] Tianzeng to say a few additional words.
NTZ: Originally, the state was responsible for most of the housing construction in Shanghai, and housing was allocated. Over the past few years, enterprises gradually assumed responsibility for some of the construction, but basically no individuals did so. The original idea for housing reform was to rely mainly on individuals, but given the current circumstances, it seems that it would be difficult to completely rely on individuals to solve the housing problem—we have to rely on the state, enterprises, and individuals all pitching in. At the same time, we have to reform the present method of allocating housing, which is very difficult to manage at the moment—some housing takes less than a year to build, but it might take one to two years for it to be allocated. In addition, it’s very difficult to raise the money needed for housing construction, while it’s impossible to rely completely on investment from the state. That’s why, Mr. Leung, we’d very much like to hear your thoughts on how to get the state, enterprises, and individuals to pitch in together, how to start a virtuous cycle for the circulation of construction funds, and how to further improve investment performance.
CYL: Mayor Zhu, you’ve given me a very big topic to cover. I can only make small comments on a big topic and discuss a few personal views, starting with the question of the real estate market. In real estate elsewhere, the increase in buildings follows a definite pattern—there is basically a positive correlation with the local economic growth rate. That is the case in South Korea and Singapore, and it is also the case in Hong Kong and Taiwan. Even though the business scope of various institutions in Hong Kong has expanded very rapidly, the growth rate of office space is only 6%, and the growth rate for residences the past few years has also generally been 6%. If it exceeded 6% in any given year, it was because some offices or residences didn’t sell, and the price of housing would also decline.
In Pudong’s development, land use would consist of building offices, stores, hotels, factories, and residences. There’s a sequence in the development of these uses—generally land to be used for industry and residences is developed first. Meanwhile, the building of factories and hotels is linked to the development of industry and tourism; you should therefore create conditions that would attract outsiders to come invest, and you should make particular use of Shanghai’s industrial strengths. In building offices, stores, and hotels, the main thing is to see if there is any new demand in Shanghai. If there isn’t sufficient demand, even if you sell land to developers, it would only be “sunbathing,” or there would be no buyers for the buildings constructed. A demand for hotels and high-end residences will be created only after industry is developed, many foreign businessmen come here to invest, and there is a constant flow of people. When trade and industry develop, outside financial institutions and law firms will come, and only then will there be a demand for offices as well as commercial facilities. In other words, the sequence of real estate development is the same as that of the primary, secondary, and tertiary sectors, and their pace of development is also basically in step with each of the others.
The price of industrial land cannot be too high—it’s already not bad if you can recoup the cost of developing an industrial zone through land leases. However, the technology, employment, tax revenue, and markets such a zone generates have great value. The emphasis therefore should not be on the price of the land but rather on its social benefits.
In laying out entire swathes of land for development, you have to calculate costs and have compensated transfers after land usage is determined. Right now Pudong is basically raw land—if you develop it in large swathes, the market won’t be very good as people elsewhere very seldom lease land for development in large swathes. Pudong is so large that you should develop it piece by piece. During this process, it might be better to sell the developed land piece by piece.
I suggest that you start Pudong’s development by bringing together some industries from outside. If industry doesn’t take off, other sectors won’t develop, and Pudong won’t develop until its population and tertiary sector achieve a certain scale. Right now some industries in Taiwan want to move their investments out. They’ve already moved to Indonesia, Malaysia, and Thailand, but those places are prohibitively expensive and their labor isn’t cheap either, so for Shanghai this is a good opportunity to attract investment. I believe that Shanghai has many strengths that would allow it to compete with Indonesia, Malaysia, and Thailand.
ZRJ: Generally, one waits until a real estate market has formed before thinking about land prices, but given the current situation, in which foreigners have yet to come invest in Pudong, should we be using differential land prices? And can we have a policy that regulates land prices?
CYL: You can have differential land prices—for example, how much per square meter in Pudong and how much per square meter in Puxi. What’s more, the differential should be large, because that’s the only way to get industries in Puxi to move to Pudong. If the differential is too small, the factories will think it not worthwhile to move.
NTZ: We also have differential land prices now—for example, enterprises have to pay land-use taxes that range from RMB 0.5 to RMB 7.5 per square meter, but because the difference isn’t great, this hasn’t really been a factor when using policy to adjust prices. Half of the land-use tax collected has to be turned over to the central government’s fiscal agencies.
ZRJ: We must have a land policy in order to develop Pudong, and the precondition is that newly added land revenues generated in the course of development not be handed over to the central government—they should be retained and used for Pudong’s development. We must draft such a policy quickly and prepare to send it to central government leaders.
CYL: Reforms of the land-use system should be carried out step by step. In the past, you had uncompensated land use and now you have compensated land use—you’ve already taken a very big step. Of course the values applied in your current compensated use still don’t fully reflect the objective circumstances of the land, but you still can’t do things too quickly.
When foreign businessmen invest in Shanghai, the main thing they look at is whether they can make a profit. To them, there’s no difference between investing in Pudong and investing in Minhang—if there are no profits to be made, they won’t come. Land prices should be determined by factors like the ability to develop, how the land is used, its size, and its location. The general principle is that if this piece of land can be sold for RMB 100, then it absolutely must not be sold for RMB 99.
NTZ: The Minhang Economic and Technical Development Zone that we have now is only a little more than 2 square kilometers, and it’s almost filled up. Pudong is a larger development zone or export-processing zone, a foreign investment zone.
CYL: I should say that the several development zones in Shanghai now are very well run and the policies for these zones are also very well designed, but the strange thing is that one very seldom hears any news about them elsewhere. That’s why you must think of some ways to publicize them. For example, once you start leasing land in the Caohejing Emerging Technologies Development Zone, you should take that opportunity to publicize Shanghai’s development zones—you should announce the news and even run advertisements outside China. Coca-Cola’s products already sell very well, yet to this day they advertise daily on TV—they’re willing to spend this money. If they don’t keep putting out the publicity, the market will be taken over by someone else.
Of course there are still many other forms of publicity: you could print booklets and ask [Chinese] embassies and consulates abroad to distribute them; you could send them to institutions outside China; you could publicize the experiences and benefits of foreign businesses that have invested and built factories in the Minhang and Caohejing development zones. Companies like Xerox and 3M from the United States and Phillips from the Netherlands have invested in Shanghai, and this has had a very promotional effect elsewhere. Some public relations companies in Hong Kong are very experienced and have a lot of ways to do such work. The Hong Kong Trade Development Council has an office in Shanghai—you could ask them to advertise Shanghai’s development zones outside China and do special local half-hour TV publicity programs. Of course this would be incredibly costly, but it would certainly arouse the interest of local businessmen. You could also put up some billboards on the road from Hongqiao Airport to the city, pointing out the directions to the Minhang, Caohejing, and Hongqiao development zones. This would subtly reinforce the impressions that these three zones make on people traveling along that road and at least make them aware of these names. There’s a place called Jurong in Singapore. Although it’s very small, its name is well known because it pays a lot of attention to publicity. Actually, the several development zones in Shanghai now are larger than Jurong in Singapore and Taipo in Hong Kong.
ZRJ: Mr. Leung, what you’ve described just now are simple truths, yet we haven’t acted on them. Some of the foreign businesses that have come to invest in Shanghai are very famous outside China. After investing in the development zones and building factories there, they’ve operated cooperatively with us very successfully—we should publicize this properly. What else should Shanghai be doing to develop Pudong? When I visit Hong Kong this June, I’ll call on you to learn more. When we go to Hong Kong this time, it will be to hold a three-day symposium on Shanghai’s further opening up and on the development of Pudong. We should use two-thirds of our energy on publicizing the three development zones in Minhang, Hongqiao, and Caohejing, letting people know how many joint-venture enterprises have come, the status of their economic performance, how much profit the foreign businesses have made, and so on. If we spend only one-third of our energy publicizing Pudong’s development along with Shanghai’s determination and measures to further open up, foreign businesses will come invest and Pudong’s development can start immediately.
CYL: Second, let me discuss the housing issue. I feel that compensation for land use is primarily a technical issue, whereas selling housing is relatively complicated. It also touches on some social factors, and the key is that you have to consider both the desire of people to buy homes and their ability to do so. They must have both before they’ll buy homes. It won’t do if the people have only money, keep it all in the bank, and are unwilling to buy homes. You therefore have to arouse in them a desire to buy homes: you should publicize the responsibility of residents in solving the housing problem, as well as the benefits to the individual of buying a home.
At the moment, basically 50–60% of people’s incomes in Hong Kong and Taiwan is used for buying homes. People there have already formed a mindset of home purchasing, and they buy homes as soon as they are able to, even if they have to borrow to do so. Generally, in the first year after they borrow to buy a home, 50–60% of their income is used to repay the home purchase loan. In the second and third years, as their salaries gradually increase, the percentage used for repayment is correspondingly lower. By the fourth year, they might even sell their home to buy a better one to live in. The conditions of private housing in Hong Kong are gradually improving, and it would be impossible for the government to pay to meet all the housing needs of the people.
Shanghai cannot hope to solve its housing problem within a short period—right now most families don’t have the ability to buy a home. Singapore’s method is to use a “Provident Fund” to help people increase their ability to buy homes. I think no country can afford to pay to house all its people. You really have to promote [the idea of] buying homes to live in, so first you have to solve the problem of mindsets—people have to be willing to make their greatest effort in this regard.
ZRJ: Mindset is indeed very important. In the past, we allocated housing without compensation and also implemented a policy of low rents, so it’s very hard to change people’s mindsets. Moreover, it also wouldn’t work for us to raise rents without raising wages—that might upset even more people. There is a certain political risk in reforming housing policy, but if we don’t reform, the government won’t be able to continue allocating uncompensated housing either, so it will all depend on how we do our work. This reform will have to be very carefully handled and might even require a vote of the people.
In the future, we will consider three possibilities for housing: the first is to sell for full price; the second is to subsidize sales, giving a one-half or two-thirds discount; the third is for the state and for enterprises to contribute part of the money and for the individual to pay for a considerable portion through installment payments. In short, there won’t be any uncompensated housing allocations from the government. At the same time, we have to create a real estate market and allow homes to be sold or used as collateral.
CYL: Every few years, the Hong Kong government sells a batch of public housing to the tenants who were the original occupants. If these tenants don’t have enough money, they can borrow from the banks. The more people in a society who own real property, the more stable these societies will be, relatively speaking. Some taxicab drivers go all out to work overtime, and it’s because they want to make money to buy homes.
ZRJ: Mr. Leung, you’ve discussed many ideas today, and have done so very well. I suggest that we bring people from the Municipal Construction Commission, Planning Bureau, and other related bureaus together and ask you to give a presentation for them. In the future, Shanghai will select some people to send to Hong Kong for training, so that they may study your experiences in leasing land and developing a real estate market.