Housing and the Chinese middle class

I have thought for a while that China’s privatization of urban housing is one of the most important and least understood events in its modern economic history. The entry into the World Trade Organization in 2001 has been exhaustively studied and its effects are still being vigorously debated today. The downsizing of state-owned enterprises in the late 1990s has also been repeatedly dissected and analyzed.

Housing privatization, which like SOE reform had its high-water mark around 1998-2003, has received much less attention. Which is strange, because the launch of a private housing market not only created the Chinese business cycle as we know it–basically all of China’s booms and busts over the past two decades have been driven by housing–but created the major source of private household wealth. So it seems obvious to me that housing reform deserves a comprehensive economic and social history, which I have not yet seen.

I dug into Luigi Tomba’s 2014 book The Government Next Door: Neighborhood Politics in Urban China in hopes of getting closer to that. He seemed to immediately grasp the central role of housing in the transformation of urban Chinese from socialist functionaries to a prosperous bourgeoisie. In the introduction he recalls how his initial fieldwork in Beijing in the early 2000s looking for a “middle class,” he found that

Most of the young people I was talking to did not fit the image of the wealthy entrepreneurs that dominate the mainstream portrait of a glamorous Chinese middle class often presented by the international media. Rather, they seemed to be, in large part, professionals and public employees whose housing careers often owed much to their position “within the system” of public employment.

That initial insight led Tomba to start to piece together the complicated story of just who got housing and how. Still, this book is not a complete account of housing reform, nor does it claim to be. Only one chapter of his book is really about housing reform, and most of the rest is too heavy on political-science jargon and too light on detailed history for my taste. But it does contain some important insights on how housing works in China, particularly its political implications:

Housing privatization, which began with a massive transfer of housing stock from public to private hands in the 1980s and 1990s, has provided an opportunity to engineer a middle class systematically, through selective incentives and subsidization. It also built on the converging interests of local governments and developers in selling and developing their land, which remains the main source of income for urban governments to balance their budgets and finance infrastructural projects. These policies have inevitably favored those who had already been privileged by the unequal redistribution of housing in the socialist period because of their employment in the public sector. The resulting boost for a property-holding middle class went therefore mostly toward employees and families actively employed in the public sector, who became the first large cohort of Chinese homeowners during the housing reform of the late 1990s.

The key point here is that housing privatization replicated and amplified, rather than overturning, the pattern of inequality inherited from the planned economy. In that system, there was little inequality in wages or money income, but there was greater inequality in living standards, because housing and consumer goods were preferentially allocated to those with higher political status. The combination of SOE downsizing and housing privatization did remove some socialist foundations, particularly the ironclad guarantee of a job and housing for urban residents. But reform replaced them with something that would prove much more valuable over the longer term: privileged access to assets that were rapidly appreciating in value. So rather than weakening political support for the Chinese government, housing reform bolstered and broadened it:

China’s long-term processes of privatization and reform have, in fact, worked to reinforce, rather than reduce, the legitimacy of the authoritarian rulers, as the state and its policies are perceived by the weakest groups as the last line of defense against the deregulation of the market and by the middle classes as the guarantors of newly acquired “rights.” …

It is increasingly becoming clear that the political apparatus of the socialist hierarchical state is still in place; after more than three decades of marketization, there is little sign of the system that would successfully supplant it. Its role in defining the practices of power is still overwhelming, although perhaps more fragmented and not felt as directly by some of its citizens as in the years of mass campaigns and class struggle.

So China’s housing privatization, in addition to being one of the largest transfers of wealth in history, may also have been one of the most successful political strategies.

7 Comments

  1. Housing privatization has been a huge wealth transfer and a benefit to economic growth and social stability. I’ve not seen a book documenting the history either, although I would start with Fulong Wu. Citations here https://scholar.google.com/citations?user=zUU16qEAAAAJ&hl=en . But we should be careful in using the word privatization – in China it does not mean what it would mean in the US, anymore than an SOE is a private business. The caveats are numerous. Andrew knows all this, but a couple of comments for the blog reader. To start, all land except for farmer land is owned by the state. What buyers receive are use rights, akin to a long term lease. In the last few years, some places – like Wenzhou – are having to deal with the end of the term for use rights, and what that will entail. Privatization is not accompanied by any of the neighborhood effects that we associate with private housing – concern for common areas, concerns for cleanliness of the neighborhood. There are residential community boards, composed of residents elected by the whole, but those boards have none of the power or resources that we would think of for condominium boards or community associations. And the government retains the power, as a landlord, to terminate a buyer’s use rights at any time – hence some of the fights over land taking for public projects. Compensation for such termination is not commensurate with market prices. Housing privatization has been a great boon, as Andrew points out, particularly for government and SOE employees, and there is a much larger share of housing “ownership” in China than in the US. Just as with other terms, we need to be careful about definitions across the Pacific.

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  2. My personal experience with housing privatization was that you have to pay a government official a lot of money and then pay the government itself a little money, but then you get use rights which you can sell for far more than you paid. All of this was explained to me poorly through translation by family (in laws). It sounded pretty dumb and like a bribe but fits in with the narrative above. Was it actually a bribe?

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    1. As in the US, policies can differ by province and city. There is a tax usually paid by the buyer. Some fees, like a real estate agent fee, could be split between seller and buyer. In Hangzhou, the full agent fee is paid by the buyer. Cynically, if inlaws thought they could hoodwink a foreigner and get some money as a result, that is possible. Rising prices have been one of the relatively secure ways to make money.

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  3. I agree with you, Andrew, but please read my first book, Leftover Women: The Resurgence of Inequality in China (Zed 2014), based on my PhD thesis on gender and China’s housing market. I delve deeply into all these issues and hope more people do follow-up research and also credit the work I have done.

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