Can China Turn Its Property Glut Into Affordable Housing?

Welcome to Foreign Policy’s China Brief.

The highlights this week: China weighs a plan to repurpose unsold inventory for affordable housing, a stabbing attack in the northeastern city of Jilin draws social media attention, and two judges resign amid a restrictive environment in Hong Kong.

A Plan for China’s Housing Glut?

China currently has 3.6 billion square feet—or roughly 5.5 million homes—of unsold housing inventory due to the collapse of its property bubble. A tentative state plan is emerging for local governments, including that of Beijing, to buy property and convert much of it to subsidized housing. Nationwide, that could raise the percentage of affordable housing from just 5 percent of China’s stock to 30 percent.

Unfortunately, affordable housing projects in China do not have a good record. A crash program to build 36 million homes and spend some $200 billion in a few years in the 2010s led to large-scale corruption, with government audits showing $1.27 billion stolen from the program in 2013 and $1.6 billion in 2014—figures that are likely considerable underestimates. In 2017, more than 1,000 officials were punished for stealing from the program.

Meanwhile, housing became drastically more unaffordable in the 2010s, especially in China’s big cities. It didn’t help that local governments kept demolishing unauthorized housing that migrants depended on. Prices soared ahead of incomes as the property bubble inflated. Even when affordable housing was built, it was often distributed to the well-connected rather than the needy, including officials and their families.

Another common dodge was for developers to get the money and permits to build affordable housing and then switch most of it to conventional commercial use upon launch, only retaining a small number of affordable residential units.

One underlying problem is the hukou system—the residence permits that still governs Chinese urban life. Residents need a hukou specific to the city they live in to be eligible for benefits such as health care, pensions, education, and affordable housing. The gap between urban and rural hukou is vast: An old age pension, for example, nets someone $410 a month in the city and just $25 in the countryside.

The more than 295 million migrant workers in China do not have urban hukou; they are also in the most vulnerable housing situation. It’s a vicious cycle: In many cities, one route to acquire a hukou is to purchase property. (The property crisis has made it a little easier to get an urban hukou, but the threshold is still high.)

The obvious fix is to reform the hukou system while also expanding affordable housing—an agenda that some government officials support but has largely stalled. Both efforts run into the same problem: the NIMBYism of current stakeholders. The wealth of China’s urban upper-middle class is tied up in property, and their access to relatively good health care and schools depends on keeping others out.

It’s the same socioeconomic class that makes up the majority of government administrators and the Chinese Communist Party (CCP) leadership, creating an illiberal elite that restrains the party from implementing new policies.

Underpinning all of this is the question of who pays. China’s local governments are broke, not least because land sales to real estate developers previously made up 30 percent of their revenue. Expanding affordable housing could cost as much as $280 billion a year. The fight over who bears the cost and who gets blamed if the project fails could mean that policy change takes years to materialize.

What We’re Following

Jilin stabbing attack. Four U.S. college instructors visiting and teaching China were stabbed in what seems to be a seemingly random act of violence in a park in the northeastern city of Jilin. The instructors were part of a two-week exchange program organized by Cornell College in Iowa, where they work; their injuries were serious but not life-threatening. A 55-year-old man was arrested.

The incident drew attention on Chinese social media thanks to a dramatic video of three of the victims lying injured on the ground. Online commentators blamed the attack on an atmosphere of paranoia about foreigners. Random knife attacks are more common in China than shooting sprees but still have deadly consequences, such as an attack at a kindergarten last July as well as two attacks in May.

Chinese authorities were slow to respond, taking more than a day to officially acknowledge the attack. The issue is politically sensitive, as Chinese President Xi Jinping has called for more educational exchanges with the United States. In the wake of the COVID-19 pandemic and amid U.S.-China tensions, there are just 700 U.S. students in China today. (Xi also briefly stayed in Iowa in 1985, a visit he often refers to.)

Rule of law in Hong Kong. Jonathan Sumption, one of two British judges who resigned from Hong Kong’s Court of Final Appeal last week, wrote that the rule of law in the city is “in grave danger” thanks to the draconian security law passed in 2020, which has been used to crack down on free speech. “Hong Kong, once a vibrant and politically diverse community is slowly becoming a totalitarian state,” Sumption wrote in the Financial Times.

Meanwhile, economist Stephen Roach, a longtime enthusiast of Chinese development who has become a critic of Xi, visited the city for the first time since declaring “Hong Kong is over” in February, prompting a round of criticism from the Hong Kong government. The city’s rule of law is a sensitive issue because its role as a business hub depends on the idea that its jurisdiction isn’t as politically risky as that of the mainland.

Tech and Business

Chip investment. The U.S. CHIPS and Science Act spurred massive investment—including from abroad—in computer and electronics manufacturing in the United States, according to a report from the Peterson Institute for International Economics. Since the act was introduced in 2021, investment has increased from an annual average of $6 billion to more than $128 billion as of March. South Korea responded with similar legislation, the K-Chips Act, in March.

U.S. sanctions officials, however, are increasingly concerned about the loopholes China is using to maintain access to advanced U.S. semiconductors, prompting upcoming restrictions. Some firms are using cloud computing to evade restraints, but some major Chinese companies, such as Huawei, are complaining that they can no longer get the chips they need.

“Hellscape” plan. Adm. Samuel Paparo, the new head of U.S. Indo-Pacific Command, said in interview this week that the United States has a plan to turn the Taiwan Strait into a “hellscape” by flooding it with unmanned submarines, drones, and surface ships in the event of a Chinese invasion, buying Washington time for a stronger response. This may be a bluff intended to deter Beijing: Paparo referred to “classified capabilities” but was short on details.

It’s unclear if the United States has anywhere near the capability to produce the number of drones needed for such a scenario. China currently dominates the global drone market, with a single firm, DJI, producing an astonishing 70 percent of the world’s civilian drones. (Those relatively cheap drones have played an important part in Russia’s war in Ukraine.)

U.S. dependence on DJI drones has proved a problem after bans on the company’s equipment at the state level. Now, it looks as though a countrywide ban on DJI drones may come into place—but without any funding as of yet to help create a competitive U.S. equivalent.

FP’s Most Read This Week

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• America’s Israel Policy Is Stuck in the 1990s by Steven A. Cook

A Bit of Culture

This week, China celebrated the annual Dragon Boat Festival. One origin story of the festival is that it commemorates the death of a virtuous official who fell out with a king during the Zhou dynasty. Amid his own self-imposed exile, the 17th-century essayist Zhang Dai (1597-1684) wrote Dream Memories, a collection of 124 short essays recalling the dream-like days of wealth and privilege that ended with the fall of the Ming dynasty in 1644.

Here, Zhang describes the Dragon Boat Festival in the Ming’s secondary capital of Nanjing, probably based on a visit in 1638.—Brendan O’Kane

Excerpt from Dream Memories
By Zhang Dai

The houses that lined the Qinhuai River, being convenient for purposes of lodging, socializing, and venery, were exorbitantly expensive, but any would-be lodger would seldom find one vacant. The sound of flutes and drums drifted back and forth from painted pleasure boats until it surrounded the listener. Outside each room was a balcony, appointed with vermillion balustrades and intricately carved openwork windows, bamboo blinds, and gauze canopies.

On a summer’s night, after bathing, one could sit out casually in the moonlight as a jasmine-scented breeze wafted over the balconies on both banks, perfuming the girls beneath all the more richly. The girls, dressed in light silk trousers, all carried round fans, and they loosened their hair and let it down with a beguiling languor.

Every year at the Dragon Boat Festival, the girls of Nanjing flocked to the banks of the river, jostling to see the lantern boats. Merrymakers in little covered boats gathered by the hundreds, each boat’s canopy bedecked with lines of ram’s-horn lanterns strung bow to stern from one boat to another, a dozen long. The boats rose and fell, coiled and uncoiled, writhing and undulating like fiery dragons or flaming sea serpents, shooting gouts of flame and water all around them.

A clangor of gongs and cymbals emanated from within and zithers and pipes and feasting songs enough to make the river boil. The girls leaned out over the railings, laughing uproariously as the riot of sights and sounds drew their gazes helplessly here and there. The music wore out by midnight, and the lanterns burned low, and the crowds of people gradually dispersed, scattering like the stars in the sky.