A worker builds a wall outside a new housing development in Beijing. (AP)

By Steven Mufson
Washington Post Foreign Service
Tuesday, June 2, 1998; Page A01

BEIJING—Tang Zongkun is one of China's happy homeowners. Two years ago, he dipped into his life savings and plunked down $4,225 to buy his Beijing apartment.

All around him, neighbors have been doing the same thing, and suddenly the building is looking a bit spiffier. One neighbor has installed a parquet floor. Another has put in a new bathroom. Several have fixed up their kitchens, including one family that has completely remodeled the stove, cabinets and wall tiles. "There could be a great market here," Tang said.

That's what China's leadership hopes. One of the cornerstones of this year's economic reform program is a scheme to encourage Chinese families to buy their own homes and apartments.

The Chinese government has proclaimed that free housing, once considered a right under the communist system, is in fact an unaffordable welfare benefit. On July 1 the allocation of virtually free housing by work units will cease, and 200 million to 300 million urban Chinese families will either have to buy their homes or face years of rapid rent hikes.

Though it reverses the long-standing policy of controlling people's lives through housing supplied by state-owned work units, private home ownership is now being promoted as a panacea that will take housing costs off the books of ailing state enterprises; increase labor mobility; spur the growth of a service industry of plumbers, carpenters, decorators, brokers and financiers; and introduce a new and relatively more stable form of lending business to the frail banking system.

"The most important issue in China today is housing reform," says Yukon Huang, chief representative of the World Bank in China. "It triggers reform in almost every sector of the economy."

A surprising number of Chinese have already purchased their homes. In Beijing, 420,000 state-owned apartments, or 20 percent of the total, were sold to individuals by the end of last year, according to the state-run New China News Agency. In Guangzhou, more than 85 percent of newly built houses are bought by individuals. In Shanghai, where Home Depot will soon open a store, more than half of the new housing is bought by families.

"In the 1950s and 1960s, the American dream was to own a private house and private car," says Meng Xiaosu, president of the China National Real Estate Development Group. "Now the Chinese have the Chinese dream."

Meng, a Communist Party member and a former member of the bourgeoisie-bashing Red Guards during the Great Proletarian Cultural Revolution of 1966-76, hails private home ownership as the "fourth wave" of private consumption in China. In the early 1980s, he says, just after economic reforms began, the first wave of consumption started with clocks, bicycles and sewing machines. In the late 1980s, the second wave hit as people bought black and white televisions, semiautomatic washing machines and tiny refrigerators. In the early 1990s, Meng says, came the third wave with sales of automated washing machines, air conditioners and color televisions.

How can people afford to buy houses in a country where they only earn a few hundred dollars a year? China has one of the world's highest household savings rates, and employers have been ordered to give their workers deep discounts depending on the number of years they have worked and the length of time they have lived in their homes.

Tang, for example, a retired researcher at the Chinese Academy of Social Science, and his schoolteacher wife had 76 years of work experience between them and were able to buy their apartment at an approximately 70 percent discount.

Tang feels it was owed to him. "We worked our whole lives for this house," he says. "We paid for this all our lives because our salaries were so low."

"The discount is a form of compensation to employees," says Meng, whose firm is a state-owned company that sells on behalf of state-owned work units. "What we're doing is giving people the money we should have been giving them all along. It's no loss to me. All those years we gave those people very low salaries."

But the government isn't selling houses and apartments out of the goodness of its heart. In an economy where the demand for consumer goods can't keep pace with supply, where there is a commercial real estate glut, and where exports and foreign investment are squeezed by the Asian economic crisis, China wants to breathe life into the housing market to give the economy a boost.

"This year economic growth depends on the housing construction," says Meng.

A senior government economist says the government also views private housing mortgages, virtually nonexistent now, as a way to improve credit quality at China's banks, where more than 20 percent of the loan portfolios are nonperforming.

"In the past, the banking system has provided a lot of capital to factories for production purposes," said the economist. Now much of that money can't be repaid. "Banks should issue more loans to consumers," he said. "The risk is much lower than with enterprises."

Mortgages have been issued on an experimental basis in several cities, including Suzhou, where over the past two years only one family out of several thousand defaulted on a loan. In the case of that lone default, a man had died in an accident and his survivors couldn't meet the payments on their own.

"A lot of people worried that it would be very difficult to control so many small loans," the government official said. "Now more people in the banking system are convinced."

Zhu Xiaohua is one of them. Zhu, the chairman of China Everbright, which has a banking subsidiary, says the company will start doing more mortgage lending. With inflation at zero, interest rates at 11 percent for a 15-year fixed-rate mortgage, and real estate prices depressed, Zhu says the business is appealing.

In the rush to buy, some developers are even selling apartments before they're built. Beijing Vantone Industrial Co. is building a $110 million development, a model of which sits in the lobby of its headquarters. The company plans to pave over some fish ponds close to the Summer Palace and build four tennis courts, a fountain and several apartment buildings. Customers are already lining up.

Despite the pent-up demand for private homes, both home buyers and real estate developers are finding things more complicated now than before. These days real estate developers need their own marketing arms instead of just making big deals with work-unit managers.

"Now people will be able to use their own personality about where to live and how much to pay," says Xu Li, managing director of Beijing Vantone Industrial Co. "They'll become more picky because they'll be reaching into their own pockets to pay."

For home owners in China, as elsewhere, home ownership can sometimes be more troublesome than renting. Many developers build hastily and carelessly. Renovations also pose hazards of sloppy work or workmen who return to steal.

"In some cases, workmen come and destroy your house and there's no legal recourse," says Tang, who is holding off on making any improvements to his apartment.

With more money at stake, disputes have broken out. Some work units "sell" apartments to their employees, but demand that if the apartments are being resold the employers have the right to buy the apartments back at fixed prices -- and capture any appreciation in value.

China's housing policy changes are aimed at tapping the urban population of 350 million who live, on average, in just 84 square feet of space per person, according to the New China News Agency. The agency quoted a construction ministry official as saying that housing accounts for just 7.7 percent of total household expenditures for urban Chinese, far lower than other Asian countries.

But that's still more than some people can afford. For the scores of millions of people who still don't have enough money to buy their own places, the government's policy of eliminating housing subsidies and raising rents will squeeze budgets that are already stretched to cover medical bills, tuitions and weekly food bills.

Despite the problems, more and more people are likely to buy their own places for personal rather than financial reasons.

"If you are working for a government organ and they give you an apartment, you can't do what you like," says Li Shunying, a 33-year-old Shijiazhuang native living in Beijing. "If you own your own apartment, you have more opportunity to develop your career or do a job you really like."