Meng Xiaosu on China's real estate policy conundrum: too little socialism
The former housing SOE leader and thought leader on housing reform advocates a massive increase in the supply of government-subsidized housing.
Meng Xiaosu is the former head of the National Housing Reform research group in 1998 and former chairman of China National Real Estate Development Group Corporation. He was among the first to advocate for positioning the property market as a new engine of economic growth and for introducing mortgage financing in China. Meng also pioneered the introduction of REITs in China.
The following is a translation of the housing sector veteran's conversation with an editor of Zhenghe Island, a Chinese network platform for elites. Meng commented on the press conference on October 17, where senior officials from the Ministry of Housing and Urban-Rural Development, Ministry of Finance, Ministry of Natural Resources, People's Bank of China, and National Financial Regulatory Administration discussed measures to ensure stable and healthy real estate development. The key announcement from the press conference was that by the end of this year, approved loans for "whitelisted" projects—eligible real estate projects recommended by local authorities to financial institutions for support—will exceed 4 trillion yuan.
Key points from Meng's remarks include:
The implementation of past government directives, including scaling up government-subsidized housing and establishing a new real estate model, has been markedly insufficient, desensitizing the market to new policy initiatives.
The current target of constructing 8.7 million housing units over the 14th Five-Year Plan falls far short. Meng advocates for constructing 10 million units annually to meet actual demand, recommending a 1 trillion yuan annual investment from the central and local governments, potentially bolstered by bank loans.
China's perceived property bubble is a misconception. The issue lies with a severe shortage of government-subsidized housing that has forced middle-income buyers into the private market, inflating prices.
Meng supports a dual-track housing system similar to Singapore and Hong Kong, with market-based housing for well-to-do buyers and government-subsidized housing for public needs. This would make housing affordable for working-class families, driving increased employment and industry growth.
Lastly, Meng attributes ineffective housing policies and local government financial challenges to rigid thinking among local governments. To stabilize local finances, he proposes three new tax revenue sources: taxing illegal "small-property" houses built on collectively-owned rural land sold to urban residents, converting vacant commercial land for residential use, and generating revenue from government-subsidized housing construction by stimulating related industries.
4万亿！怎么看？
4 Trillion Yuan! What's the Take?
I. 4 Trillion Yuan Invested, But Why the Tepid Response?
Q: The response to the press conference across the entire real estate sector has been mild, and stocks even started to decline. Why do you think the market reacted this way? Is it because the policy's impact was insufficient or fell short of expectations?
Meng Xiaosu: The press conference was clear-purposed and had a very strong lineup involving five major government departments—all mobilized to prevent further declines in the real estate market, stabilize it, and ensure policy alignment. It's good . I've been hoping for adjustments to real estate and real estate financial policies for many years. It's fair to say that the Chinese government has finally made a significant step forward.
The stock market has its own peculiarities. Recently, the Chinese government has rolled out numerous efforts to stimulate the stock market, only leading to brief upticks before further declines. Instead of describing it as a bull or bear market, I find the foreign metaphor of a "dog market" particularly fitting for China's current stock market situation.
A "dog market" means that the stock market is like a dog that never strays far. Even after briefly chasing a thrown bone, it will always return to its owner. Here, the "owner" symbolizes the real economy, particularly publicly-traded companies. In a sluggish economy where core industries lack momentum and the performance of listed companies remains weak, the stock market will always predictably return to core economic realities much like the dog.
This metaphor applies to the real estate sector within the stock market as well. China's real estate sector does not respond sensitively to policy adjustments. Furthermore, real estate regulations have consistently discouraged home purchases over the years, dampening people's responsiveness to policy shifts.
Q: So, the potential impact of a policy cannot be judged based on short-term market fluctuations.
Meng Xiaosu: Indeed, focusing on the short term in the stock market, particularly with real estate stocks, is unwise. The same applies to the freshly announced policies—they are unlikely to yield immediate results.
Since last year, the Chinese government has emphasized "scaling up the construction and supply of government-subsidized housing." But has this actually happened? Has the policy been implemented? Not to date. Similarly, the Chinese government has repeatedly called for "a new development model for real estate" for over three years now. Has this model been established? Again, no.
While the stance of these five departments is encouraging, I am still anticipating the full implementation of these favorable policies. Only with complete execution can they deliver meaningful, positive effects on the overall economy, society, and listed companies, including those in the real estate sector.
II. 10 Million Units of Affordable Housing Annually, Solving Supply Issues in 10 Years
Q: Let's take a look at some data regarding the current real estate sector. Last year, properties in 50 major Chinese cities had a rent-to-price ratio of 1:615, meaning renting would take approximately 52 years to recoup the cost of purchasing a home. By contrast, the international norm for the rent-to-price ratio is around 1:200 to 1:300, indicating a significant gap. Some within the real estate industry have noted that China's low rent-to-price ratio suggests excessively high home prices and considerable potential for price declines. What is your view on this?
Meng Xiaosu: First, the "rent-to-price ratio" is not a scientific metric for this analysis. Specifically, the Chinese government has consistently advocated for a dual-track housing system that includes both market-based housing and government-subsidized housing. However, it is unclear which category this "rent-to-price ratio" is derived from—government-subsidized rental housing or privately owned rental housing.
For privately owned housing, the rent-to-price ratio is indeed low. My calculations showed that it stands at 1% in first-tier cities, 2% in second-tier cities, and 3% in third-tier cities. When home prices increase in first-tier cities, the ratio has fallen to below 1%. This reflects the state of the apartment rental market.
Government-subsidized rental housing, however, tells a different story. Due to the limited availability of such housing in recent years, people often apply the rent-to-price ratio for market-based apartment rentals to gauge this sector, overlooking the fact that government-subsidized housing should have its own distinct rent-to-price ratio.
Q: Why is it acceptable for market-based housing to have a lower rent-to-price ratio?
Meng Xiaosu: It's because market-based rental housing serves a different demographic—it's typically rented by white-collar and relatively affluent families, not by working-class families. In fact, if you compare the income levels of working-class families to the rental prices of high-end housing, the conclusion is even starker — they can't afford to rent at all.
I have long advocated for developing government-subsidized housing, specifically for subsidized sale and rental units. The scarcity of these two forms of government-subsidized housing has fostered a misconception in academic circles: when people talk about real estate, they think of market-based or even luxury housing by default.
Encouraging working-class people to rent high-end, market-based housing is unwise. Without access to public rental or government-subsidized housing, renting becomes prohibitively expensive for them. This creates a situation where rents are unaffordable for tenants, while the low rent-to-price ratio discourages landlords from leasing their properties.
Consider the public rental housing REITs introduced in several pilot cities. Their annual returns have reached 4-5%, indicating a rent-to-price ratio of approximately 1:20 to 1:25—a range that aligns with a reasonable margin.
This highlights the significance of the Chinese government's promotion of a "market + government-subsidized" dual-track housing model. Before this new model is fully established, people should actively contribute to its development, rather than relying on outdated perspectives to interpret the evolving market and policy landscape.
Q: From a market perspective, why is the international standard rent-to-price ratio higher than the actual ratio observed in China? After all, the international standard is also based on market-driven housing rather than solely on government-subsidized housing.
Meng Xiaosu: When comparing China with other countries, it's essential first to consider whether China's housing system is equally mature. China's housing reform began only 26 years ago, and the housing system still requires significant development, particularly in government-subsidized housing, where the country has lagged for years.
China's dual-track housing system—combining market-based and government-subsidized housing—draws inspiration from developed capitalist countries. For instance, during the British colonial period, the Hong Kong government mandated that half of Hong Kong's families should have access to government-subsidized housing, which included both saleable Home Ownership Scheme (HOS) units and public rental housing (PRH) units. These affordable options are significantly cheaper than purely market-based housing. However, the main issue in Hong Kong is that government-subsidized housing units are very small, with public rental units averaging only 15 square meters.
Singapore also implemented a dual-track housing system early on, and today, 87% of Singaporean families live in subsidized apartments. This system has helped maintain relatively reasonable rental prices.
Now that the Chinese government has called for increased government-subsidized housing construction, I believe making up for lost time is essential. The current question is whether there is a genuine commitment to allocating substantial construction funds. With plans to increase government bond issuance, investment priorities should be considered carefully. While some infrastructure projects are viable, they often entail long return periods.
Some infrastructure projects are feasible but have long payback periods. Among these, government-subsidized housing offers the quickest return, particularly subsidized sale units. Such housing also serves as an essential urban living infrastructure, and with government-led investment, the funds could be recouped within approximately two years.
Since the state allocates land for government-subsidized housing sale units directly rather than through a bidding process and exempts them from urban infrastructure fees, the prices of these units are roughly one-third of market prices in major cities, making them affordable for working-class families. However, China has long under-invested in establishing a dual-track housing system, resulting in limited progress. For example, China continues to emphasize targets like "8.7 million units during the 14th Five-Year Plan (2021-2025)" and "1.7 million units this year," but these figures are far too low to meet the actual demand.
Calculations based on the current population of registered urban households might suggest adequate government-subsidized housing provision. However, it is crucial to consider that in recent years—and notably in the Resolution of the Third Plenary Session of the 20th Central Committee of the Communist Party of China (CPC)—the government has emphasized providing social security, housing support, and primary education based on the total resident population in urban areas.
This calls for a recalculation. China's urban resident population currently stands at 930 million, compared to 680 million registered urban households, resulting in an additional 250 million residents, or approximately 100 million families. Besides these 100 million urban families, there is also a rising demand from young families emerging from the registered population. Given this level of demand, is the current government-subsidized housing supply even close to sufficient? A target of providing 100 million units in the coming years would be more aligned with actual needs, yet only 8.7 million units are being built every five years.
The 14th Five-Year Plan was proposed in 2020 and implemented in 2021, but the central government's push for increased government-subsidized housing only began in 2023. This raises the question: has "coverage as needed" indeed been achieved, as some claim, or is the State Council correct in its statement last year highlighting “the prominent issue of insufficient government-subsidized housing supply”? Which perspective reflects reality?
I believe the State Council's assessment is correct: insufficient government-subsidized housing supply is a prominent issue. To address this, it is essential to implement the "Three Major Projects" in line with central government directives—focusing on government-subsidized housing, redevelopment of rundown localities in cities, and dual-use public infrastructure capable of accommodating emergency needs—with government-subsidized housing construction taking the lead and development proceeding at an accelerated pace.
Consider the goal of providing 100 million affordable housing units. At the current pace of just 8.7 million units every five years, it would take over 60 years to meet this target. By then, even our grandchildren would be retired, and the affordable housing supply would still fall short.
Condensing this workload into a 10-year timeframe would require building 10 million units annually instead of 8.7 million units every five years. Only at this pace could the supply of government-subsidized housing meet market demand.
Moreover, the market-based housing sector is experiencing a sharp contraction, leaving construction companies without projects and related industries in a slump. Many working-class families still have unmet housing needs, and effective demand remains untapped. Investing in government-subsidized housing construction at this time would address the housing needs of these working-class families and stimulate various related industries and boost employment.
I propose that the central government invest 500 billion yuan annually into government-subsidized housing. Should the budget be insufficient, government bonds could cover the shortfall. Additionally, local governments should contribute an additional 500 billion yuan to reach 1 trillion yuan. Combined with bank loans, this amount could rise to 5 trillion yuan—enough to provide 10 million units of affordable housing annually. Once these units are sold, the investment can be recouped.
At that stage, eligible families could be placed in a queue with a clear timeline for when they can expect their government-subsidized housing, as seen in Singapore, where residents are registered well in advance.
I noticed that the Minister of Housing and Urban-Rural Development recently mentioned linking pro-birth population policies with government-subsidized housing policies, which is absolutely correct. The government could establish a baseline area for government-subsidized housing for typical working-class families, adding extra square meters for each additional child. For families with a second child, further square footage could be allocated.
Government-subsidized housing is the strongest incentive for working-class families, addressing population-related issues. Unlike direct childbirth subsidies, this approach doesn’t require additional government spending and could prove even more effective.
I believe government-subsidized housing construction has not truly begun yet; there's still hesitation, and this is the biggest issue.
III. Render to the Market the Things that are the Market's, and to the Government the Things that are the Government's
Q: You mentioned that the pace of building 8.7 million units over five years is relatively slow. What's the primary reason for this? Is there concern that it might affect the market-based housing sector, and consequently impact bank loans?
Meng Xiaosu: The main reason is the neglect of government-subsidized housing. After the marketization reform of the housing sector, many people believed that market-based housing was ideal and could solve all housing issues. They thought developers could a central role, and that relying on them alone could make housing affordable.
Policies promoting small apartments and price reductions were essentially efforts to shift the government's responsibility for housing security onto developers. The "small apartment policy" assumed that by cutting luxury into smaller pieces, people could afford it, without realizing that ordinary citizens aren't looking for steak and lobster—they need accessible essentials like bread and pasta. The priority should be to provide cost-effective, affordable housing.
This mindset persists, and as a result, investment in government-subsidized housing remains minimal, failing to meet the needs of a large working-class population.
Now, the Politburo has emphasized the need to address public concerns and adjust purchase restriction policies. I believe this shift in the approach to purchase restrictions is essential. Policies such as purchase limits, price limits, and sale restrictions should be entirely redirected to government-subsidized housing, and all purchase restrictions on market-based housing should be lifted.
Q: So, render to the Market the things that are the Market's, and to the Government the things that are the Government's.
Meng Xiaosu: Render to the market market-based housing, and to the government government-subsidized housing. These issues are primarily ones of mindset, not a lack of resources in China.
Local governments should allocate some land for government-subsidized housing, and the cost of government-subsidized housing construction already factors in relocation expenses—there's just no land sales involved. Indeed, the government doesn't make money from land sales here, but it wasn't supposed to in the first place. Besides, the government still collects other taxes. Planning, investment, and land supply for government-subsidized housing are primarily government-led; however, from the bidding stage onward, projects operate according to market principles, with companies following standard market rules.
Construction stimulates a whole range of industries—steel, cement, brown goods and white goods, renovations, and after-sales services. Which industry wouldn't see a boost? As soon as businesses are active, jobs are created, and tax revenue flows back to the government. This revenue can then be reinvested in expanding affordable housing or directed toward urban development and management.
Without substantial investment in government-subsidized housing, this entire industrial chain remains stagnant. Development in this sector has already slowed significantly; when a project department closes, 20 employees lose their jobs. Even more critically, an estimated 1,500 migrant workers are left without work—and they aren’t even included in official unemployment statistics, leaving them without a voice.
This is why I repeatedly advocate for government-subsidized housing construction. When market-based housing development slows, government-subsidized projects should swiftly step in to fill the gap.
Q: Hopefully, this will meet public housing needs, boost employment, and perhaps even have a positive effect on birth rates.
Meng Xiaosu: Exactly, when you think it through, the benefits are clear.
The original Urban Real Estate Administration Law of China implied allocating land specifically for government-subsidized housing. Although the government does not profit from these land sales, tax revenue can still increase through the economic activities generated by the businesses involved.
Returning to my earlier calculation: if 5 trillion yuan could be invested annually in affordable housing, this amount would circulate through construction companies, raw materials, energy, and parts suppliers. Couldn't at least 20% in taxes be collected from all this economic activity?
Selling government-subsidized housing wouldn’t be difficult. With that 20% tax revenue, the central government's 500 billion investment would be recouped, as would the 500 billion invested by local governments. Additionally, the taxes would generate an extra 1 trillion yuan each year. Isn't this a straightforward equation? Why not initiate large-scale government-subsidized housing construction now? It aligns perfectly with society's expectations.
Currently, most of those paying attention to this issue online are young people, particularly young families and new urban residents—the very groups that should benefit from government-subsidized housing. Yet, if asked where their government-subsidized housing is, too many would answer that they don’t know.
Some local governments claim they've built plenty of government-subsidized housing. However, upon closer examination—where was this housing built, and who was it intended for?—they often struggle to provide clear answers.
Building housing exclusively for civil servants is not enough; the needs of working-class families and the broader proletariat must also be addressed. Calculations should be based on the total resident population, not just the registered household population—that's the difference between requiring only 1.7 million units annually versus 10 million.
The quality of government-subsidized housing should not be compromised; all units should be well-built, though they do not need to be overly large. Oversized units would consume excessive resources, limiting the government’s ability to provide enough subsidized housing on a large scale. Families desiring larger homes can turn to the market-based housing sector.
In this way, the construction of government-subsidized housing will have an economic ripple effect on related industries, no less than those generated by market-based housing. Now is the time to start. Government-subsidized housing provides tangible public benefits by ensuring housing security for low-income groups and ordinary families. It could even provide these families with future wealth. If thoughtfully designed, supportive policies could address both the declining birth rate and job creation, further driving economic growth and employment.
The concept of "employment generating employment," introduced by Professor Li Yining [senior professor at Peking University and founding dean of its Guanghua School of Management], illustrates how job creation fuels further economic activity. When construction workers have stable jobs and income, urban life regains vitality. These workers require meals and may even dine out, enabling shuttered restaurants to reopen.
IV. The Fear of a Crisis Creates the Crisis Itself
Q: Current policy seems to be centered on stabilizing housing prices to prevent a potential collapse that could lead to reduced consumer spending and even issues with bank loans. Essentially, this approach acts as a "policy intervention" to counterbalance market forces. Do you believe price stabilization is achievable, and what direction do you anticipate for the real estate market?
Meng Xiaosu: Housing prices should indeed be stable, a goal the central government has reiterated for years with its call to "stabilize housing prices and expectations." Yet, stability has not been achieved, and over the past two years, housing prices have been on the decline—a trend I had foreseen.
The data from September still show weak performance. If this downward trend does not improve in October, as the Ministry of Housing and Urban-Rural Development hopes, annual market-based housing sales could end up around 9 trillion yuan—a sharp decline from 18.1 trillion yuan in 2021, with drops of 5 trillion in 2022 and 6.5 trillion in 2023. Could we be looking at a "halving" in sales this year?
China's GDP in recent years has been around 114-120 trillion yuan. If housing sales alone drop by 9 trillion yuan this year, it will drag down GDP, demanding substantial efforts to sustain a 5% growth rate.
The fact is when housing prices become unstable and decline, people's purchasing power shrinks, and funds originally intended for housing end up in bank deposits.
Given the current situation, the government's directive for the market-based housing sector to "stop declining and stabilize" reflects a clear understanding of the economic landscape.
I had been waiting for relevant departments to make such a statement, and, after a period of preparation, they finally have. Now, it's a matter of implementation at the local level. One reason the market hasn't responded swiftly is that people have grown somewhat desensitized to such statements.
However, I'm optimistic because I see policy overall moving in a positive direction. For over 20 years, I have advocated for government-subsidized housing construction, and it's gradually gaining acceptance. Now, I hope that after these ideas are accepted, they’re put into action—not just talked about without follow-through.
Q: Following Japan's real estate bubble, numerous policies were also implemented with substantial efforts to stabilize the market. Now, examining indicators such as demographics, per capita income, and the rent-to-price ratio in China's real estate market, it appears that the market may continue to face considerable downward pressure. What's your perspective?
Meng Xiaosu: To truly understand China’s real estate market and policies, including whether a bubble exists, starting with the missing dual-track housing system is essential.
The situation is akin to a comedy where a dentist removes the healthy teeth instead of the bad ones, creating a bigger problem. The real issue in China's real estate lies in years of neglect in government-subsidized housing construction, which has fueled dissatisfaction among middle-income families. This frustration then became misdirected to the market-based housing sector. The market-based housing itself didn't have much of a problem or a significant bubble. However, fear of rising prices led to unnecessary complications.
In the film The Wandering Earth 2, there's a line: "The fear of a crisis creates the crisis itself." Some people constantly worry about a housing bubble, fueling anxiety among leaders and the public by drawing comparisons to the real estate bubbles in Japan and the United States.
Now, do we still see a bubble in the U.S. real estate market? U.S. housing prices have been rising for 13 years, continuously driving economic growth. Japan's real estate bubble is also a thing of the past. Over the last six years, Japanese housing prices have averaged a 7% annual increase, and the Nikkei indexes continue to reach new highs. The "Lost Decades" are over, and Japanese youth have regained confidence in their future.
Turning to the recent "white list" policy [in which city governments recommend residential projects suitable for financial support to banks ("whitelisted" projects) and work closely with financial institutions to meet these projects' financing needs]. This measure was introduced primarily because banks have shown reluctance to lend to real estate projects, necessitating an administrative guarantee. The Ministry of Housing and Urban-Rural Development, along with the National Financial Regulatory Administration, stepped in to provide this assurance. This move signals a fundamental shift in the authorities' view of the real estate market.
The National Financial Regulatory Administration director stated that conditions are now suitable for bringing all housing development loans onto the “white list.” Moving forward, any project meeting the criteria will be managed under this list, with an emphasis on "all eligible projects should be included," "all eligible loans should be granted," and "as soon as possible." But if every eligible housing development loan is included, what purpose does the list serve? It's like placing all students on an "outstanding student list"—rendering it somewhat redundant.
I see this "white list" as a temporary, administrative measure to pull banks out of the "blacklist" phase—a bridge encouraging banks to return to regular lending gradually. The long-term goal remains for commercial banks to resume their standard loan practices, guided by individual project assessments.
Q: So, with a shift in the mindset, the government is correcting past policies to let the market work more freely.
Meng Xiaosu: From today’s perspective, was the market-based housing market itself truly problematic, or was it a flawed market judgment that created the perception of a bubble? Years of insufficient government-subsidized housing development led people to place their expectations for affordable housing onto properties intended for sale. Critics argued that ordinary citizens lacked the purchasing power for these homes, even though these properties were not designed to be low-cost options. Subsequently, purchase restrictions limited wealthier buyers, and price suppression measures ultimately led to price declines, further deterring potential buyers.
I think it's time to reflect on the past policies that suppressed real estate. After such setbacks, now is the perfect opportunity to gain a deeper understanding to avoid similar mistakes in future real estate policies and economic development.
V. New Policies: Where Do We Go From Here?
Q: The new policy includes a plan for China to complete the renovation of an additional 1 million units in urban villages and dilapidated housing through measures such as providing monetary compensation to affected residents. China implemented a similar policy in 2015, which, though well-intentioned, had unintended consequences. While the aim was to reduce surplus unsold housing, developers used the opportunity to borrow more, which increased inventory and drove up prices. Additionally, people pooled their subsidies to buy homes in cities, which further pushed up prices, leaving even more people unable to afford a home.
Now, this round of policies aims to address the real estate issues, stimulate the economy, and enable more people to have housing. But could there also be a risk of it going in the opposite direction during implementation?
Meng Xiaosu: The use of "housing vouchers" [certificates that allow residents whose homes were acquired by the government for urban village and dilapidated housing redevelopment to purchase designated housing within a specified range at a discount] is an effective policy. It enables displaced residents to secure housing more quickly. Although these residents may need to add some money to buy an apartment, the price is generally more favorable since resettlement funds are transferred to them, and it's faster than waiting several years for new government-subsidized housing. This measure, therefore, helps reduce some existing housing inventory.
However, the core issue remains the need for more government-subsidized housing. When China initially acquired land and redeveloped urban areas, it did not sufficiently expand government-subsidized housing. As resettlement compensations reached only a limited group, the remaining population was left to confront prohibitively high housing prices. As prices rose, property owners benefited, but those without homes grew more frustrated, widening the wealth gap.
Currently, first-time buyers—primarily new urban residents and young families—are the very groups most in need of policy support. Yet, they often bear the highest prices without the benefit of housing assistance, creating a very unfair situation.
The 2015 experience serves as a lesson. At that time, I also advocated for increasing government-subsidized housing construction, but it was not prioritized. Had the supply of government-subsidized housing been strengthened in 2015-2016, China might have avoided the subsequent downturn in related industries, rock-bottom steel prices, and the rapid price surge that led to tighter real estate controls in 2017.
The insufficient supply of government-subsidized housing has now escalated into a more pressing issue. This is why the Chinese government has issued new directives, emphasizing the urgent need to address the shortage of government-subsidized housing. Specific measures have been outlined, such as waiving land transfer fees and exempting infrastructure costs for government-subsidized housing, although land acquisition and resettlement costs still apply. Local governments do not profit from this land, nor incur a loss.
If government-subsidized housing is made widely available, the public need not worry about rising property prices, as these increases would no longer harm ordinary families. For new urban residents and young families who need policy support, government-subsidized housing provides not only security but also an opportunity for future asset appreciation.
It is essential to shift the focus of real estate to government-subsidized housing. Society as a whole should actively support government-subsidized housing construction instead of focusing solely on whether property market prices are rising or falling.
Market-based housing prices should remain stable—neither rapidly increasing nor declining. The Chinese government’s call to “stop declining and stabilize” is reasonable and is accompanied by a further directive: to foster a new development model for real estate. The State Council has formalized this as a "market-based + government-subsidized" model, making the dual-track housing system abundantly clear.
Q: Many local governments rely heavily on land transfer fees and are grappling with local government debt, creating a significant dilemma. As you mentioned, to address fiscal challenges, the government either raise taxes or issue bonds. But can the government really continue to take on new debt to cover existing debt?
Meng Xiaosu: Currently, local debt faces serious repayment risks due to the difficulty in selling land and the potential for falling land prices to undermine collateral. Local debt was originally secured against local land assets. When land prices rose, governments could negotiate with banks to increase loans based on land appreciation. But now, if land isn’t selling and prices are dropping, this becomes problematic. For this reason, many local governments prefer not to sell land at all rather than sell at lower prices, as much of their debt is backed by this collateral.
The recent challenges in the real estate market have placed substantial financial pressure on local governments, as property developers have largely stopped purchasing land. In 2021, revenue from land transfer fees in China peaked at 8.7 trillion yuan, accounting for 50% of local fiscal revenue. Over the next two years, this dropped to 5.8 trillion yuan, and reaching even 3 trillion yuan this year appears uncertain. With such a dramatic decline, how can local governments maintain their finances?
To tackle these challenges, broadening perspectives is essential to break down the barriers. In fact, potential tax revenue sources are right under the noses of local governments. I'll highlight three specific tax sources:
First tax source: introducing property tax on "small-property houses"
Due to significant delays in China's rural land use reform, many urban residents unlawfully hold "small-property houses"—housing developed on collectively owned land and sold to outside buyers. These properties have not paid land transfer fees or other related costs, lack legal certification, and do not constitute legally recognized ownership. Nevertheless, "small-property houses" have become widespread, accounting for roughly 24% of urban residential areas—about 800 million square meters or 80 million units. While these properties have not harmed the farmers who sold the land, and buyers have benefitted from favorable prices, two groups have been disadvantaged:
1. The government's finances—these properties enjoy the benefits of urban infrastructure and services without paying.
2. Law-abiding residents—they must pay high prices for homes, while those unafraid of "breaking the law" get cheaper housing.
Some people mistakenly believe that "small-property houses" refer to farmers' homes, but they do not. Farmers' legitimate homes are officially called “homestead and associated buildings” and should not be confused with urban residents' illegally held "small-property houses."
Given the severe tax revenue shortfalls facing local governments, taxing these "small-property houses" could provide a viable solution. Land transfer fees could be collected over several years, allowing these properties to align with proper real estate gradually. This approach would reduce the tax burden on residents and provide a steady revenue source for local governments. Additionally, it would grant legal recognition to "small-property houses," significantly enhancing their market value.
For example, consider a “small-property” house valued at 2 million yuan, compared to a nearby market-based property valued at 4 million yuan. If a property tax is imposed on this small-property home and it gains legal status, its value would then align more closely with market-based properties. Using an international property tax rate of 2% to 3% (averaging 2.5%), taxing these 800 million square meters of small-property homes could generate 2 trillion yuan in annual local tax revenue. After a decade, this rate could be lowered to match the standard tax rate for large-property homes. Thus, this approach can effectively address a longstanding issue.
In my view, implementing a property tax beginning with "small-property houses" would serve as a practical property tax trial. Meanwhile, property tax should not yet be applied to standard, legally held large-property homes of urban residents. Nor should it apply to farmers' lawful homestead buildings, consistent with the 2021 decision of the Standing Committee of the National People's Congress, which requires the State Council to conduct property tax pilot projects.
Second tax source: converting commercial land to residential use
The need for converting commercial land into residential areas is not due to an oversupply of commercial buildings by real estate companies, but rather due to local governments' missteps in land use approvals. Local governments assumed that approving more commercial land would attract businesses and provide steady tax revenue yearly, while residential land would yield only a one-time payment. This is a misconception.
Due to real estate control policies, there are restrictions on the provision of residential land, so local governments have allocated much land for commercial use to ensure they collect land transfer fees. For example, since Beijing's real estate control began in 2011, commercial and residential land supply has become imbalanced. Typically, a residential area requires 7% commercial and 8% service facilities—totaling 15%, not exceeding 20%. However, in 2011, the ratio of commercial to residential land approvals in Beijing reached 100:100 and increased to 100:154 by 2016, with commercial land outpacing residential land by 54%. This has led to an oversupply of malls and office buildings, causing significant vacancy rates.
Addressing this issue requires a flexible approach. Does land approved for commercial use years ago still need to be developed as a mall or office building? Why can't the government proactively convert it into residential use? A classic example of commercial-to-residential conversion is New York's Trump Tower. Originally, the Manhattan Bank, an office building, became unnecessary after a bank merger, so it was converted into residences as "40 Wall Street." Later, Trump acquired naming rights, renaming it Trump Tower.
In China, there are no technical obstacles to converting commercial properties into residential ones; rather, the challenge lies in the rigid thinking of some local governments, which prevents practical adjustments. According to estimates by experts, if Shanghai could convert 10 million square meters of vacant office space into residential units, with a price differential of 30,000 yuan per square meter, this could yield 300 billion yuan in revenue. If cities across China adopt this approach, it could generate over a trillion yuan in land-related income yearly.
The priority now is to stabilize local finances, ensuring that governments can maintain operations, pay wages, and fund public welfare. Just because new land isn't selling doesn't mean there's no potential for land-based revenue. Converting commercial properties into residential use leverages existing land inventory rather than relying on new land sales, creating a model that could generate substantial annual income for around ten years. This approach would provide a transitional buffer for local government reform. By the end of this period, property taxes and other tax sources should be widely established, giving local governments a stable revenue foundation.
Third tax source: government-subsidized housing development
Besides the above two sources, there is a third source of revenue—government-subsidized housing construction. Although government-subsidized housing doesn't generate land transfer fees, it stimulates over 180 related industries, creating jobs and various tax revenues.
Government-subsidized housing involves multiple tax points from numerous enterprises: construction companies, material suppliers, energy providers, and increased purchases of home decor, appliances, and furniture all generate tax revenue. Additionally, employment growth from these industries boosts personal income tax.
If government-subsidized housing were to receive 1 trillion yuan annually in investments from central and local governments, supplemented by bank loans, not only would the principal be easy to recoup, but it would also generate approximately 1 trillion yuan in annual tax revenue. This approach would reduce reliance on excessive "non-tax revenue" sources [such as penalties and confiscations], preserve government credibility, protect the investment environment, ease residents' concerns over property taxes, and stabilize local finances—an all-around win.
I am confident in China's robust intrinsic growth potential. Within ten years, China can anticipate economic recovery and will be able to implement new policies tailored to new circumstances.
I have advocated government-subsidized housing construction for over 20 years, promoted the removal of purchase restrictions for more than a decade, and promoted REITs for 19 years. Now, these efforts are bearing fruit, with recognition and support. Recent policy signals indicate that China is addressing the pressing issues affecting its economy and implementing measures to resolve them. I look forward to seeing these policies implemented, bringing stability and growth to the Chinese economy.
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