China scraps pounds 1 workers' flats

ZHANG PENG and his family sit in their modest three-roomed Peking apartment, waiting for a revolution in Chinese housing to hit. Their home is neither fancy nor spacious, but at pounds 1 a month in rent, it is certainly cheap - less than 1 per cent of their monthly income. Not for much longer, however: China's 300 million urban dwellers are about to discover why the rest of the world is so obsessed with property prices.

Like most Chinese workers employed by the state, 38-year-old Mr Zhang was brought up to expect heavily-subsidised state housing for life. But China's socialist housing system is now set to go the way of most of Mao Tse-tung's legacy. From the beginning of July, a new class of property owners and landlords will be created through a radical reform of urban housing which makes Margaret Thatcher's "right to buy" council house sales in 1980s Britain look modest.

"People need to adapt to the concept that a house, like food and clothing, is also a kind of commodity which should be bought by families," the official China Daily declared recently. After 1 July, China's state work units, or danweis, will simply stop providing cheap housing. Rents on existing housing will quadruple, and occupants of danwei apartments will be encouraged - in many cases virtually forced - to buy their properties, albeit at below-market prices.

"We are going to have to use all our savings," said Mr Zhang's wife, 33-year-old Chen Xuchen. "We have not received any official notice, but people from the neighbourhood committee came to the apartment to tell us this news."

China's housing revolution is taking place at a difficult time. Unemployment is soaring as state factories lay off thousand of workers, and economic growth has slowed to its lowest rate for eight years, partly due to the rest of Asia's economic woes. So how is a normal Chinese family planning to cope with the planned upheaval to their housing and finances? Mr Zhang, after years of virtually free accommodation, now finds himself expected to invest several years' salary in a house.

China's leaders are terrified of anything which could threaten social stability, especially after events in Indonesia, and know that job losses and housing reforms are potential sparks for malcontents. Security is already tight in Peking ahead of this week's ninth anniversary of the Tiananmen Square massacre.

Sorting out public housing policy in China is like unscrambling an omelette. In theory, Chinese state workers are allocated housing by their work units, but it is rarely that straightforward. Mr Zhang has spent 18 years working for the Peking underground railway company, but his cash-strapped danwei only gives housing to employees over the age of 40. So the Zhangs actually live in a flat owned by the Peking Construction Bureau, the work unit to which Mr Zhang's father belongs.

As in so many instances in reforming China, the housing revolution is proving a lottery in which the lucky get very rich and the unlucky are left in horrible homes. "The Construction Bureau will sell this land and whoever buys it must find us new homes, which we will buy at below market prices," said Ms Chen. They expect to be offered a flat in south Peking for between 100,000 and 200,000 yuan (pounds 7,500-pounds 5,000), offering an instant profit, as the market price is about twice that. Mr Zhang earns pounds 74 a month, and Ms Chen makes at least the same as a private chauffeur for a foreign firm. But as well as using their savings, the family will have to borrow money from the banks, which are scrambling to develop a mortgage market in time.

It is a huge change for the family, but they are the lucky ones. The Construction Bureau has also offered Mr Zhang's father the chance to buy a new centrally-located three-bedroom flat for about pounds 5,500, probably one-tenth the real value. Will they be tempted to sell quickly and bag the profits? "The policy is not clear yet; we probably cannot sell it for about five to 10 years," said Mr Zhang senior. "But we can rent it out secretly." Many families have similar plans, and the landlord - demonised in Communist mythology - is about to make a major comeback.

The government's hope is that creating a commercial housing market will help boost the ailing economy. Getting people's savings into circulation is one of the main reasons Zhu Rongji, the new prime minister, launched the housing reforms. Economic growth fell to 7.2 per cent in the first quarter, the lowest since 1990, and the housing sector is supposed to come to the rescue.

This being China, no new policy can be introduced without corrupt officials spotting a way to siphon off state funds. The reform is supposed to free state units from the expense of providing housing. But at a real estate exhibition in Peking last weekend, where dozens of property development companies were selling new high-rise apartments, it was state enterprises and ministries that were snapping them up.

"Before 1 July, state units still have the last opportunity to buy homes for their employees," said Dai Jiangong, of the China Real Estate Index System. "After they buy them, they distribute them to their employees at much lower prices." As usual, the senior cadres with the right connections will get the best deals. Not even China's tough new prime minister foresaw that scam.