FLASHNOTE

14 October 2016

China Economic Spotlight

ECONOMICS
ASIA
CHINA

How to achieve high economic growth without a

housing boom Chongqing has the answer
Chongqings stable property market and booming economy
are both products of bold reforms made over the last decade
Its enlightened household registration and land supply
systems have accelerated the pace of urbanisation
while the citys housing policy provides subsidised rental
accommodation for large numbers of migrant workers

Ma Xiaoping
China Economist
The HongKong and Shanghai Banking Corporation Limited
Xiaopingma@hsbc.com.cn
8610-5999-8232
Qu Hongbin
Chief Economist, Greater China
The HongKong and Shanghai Banking Corporation Limited
hongbinqu@hsbc.com.hk
852-2822-2025

The Chongqing model. During Chinas National Day holiday earlier this month,
more than 20 local governments rushed out new measures in an effort to curb rising
property prices. No such efforts were needed in Chongqing, Chinas largest urban
centre which is home to 30m people. Property prices in the giant municipality on the
Yangtze River in south-western China have increased only 12% in the last five years
despite the economy growing at double digit rates for more than a decade.
This report looks at how Chongqing, the worlds leading production base for
computers and automobiles, has achieved this enviable state of affairs. The answer
is that, unlike other major cities in China, Chongqing has ample land supply and
housing stock. But this has only been made possible by the introduction of a series of
reforms, including:
Household registration: In September 2015 the local government started providing
people living in rural areas with the same social welfare benefits and services as
urban residents. Chongqing has one of the highest urbanization ratios in the country
and it is urbanization that is one of the main drivers of economic growth.
Land reform: A decade-old exchange system (dipiao) allows land in remote villages
to be converted for farming use and a corresponding amount of farmland near towns
to be used for urban expansion. This fairly compensates the farmer and generates
income for the local government, which sells the land to property developers at
competitive prices. Urbanisation is the winner and land costs are kept reasonable.
Housing supply: Chongqing has a two-tier system. It provides subsidised rental
housing for more disadvantaged parts of the population such as migrant workers. It
also releases a steady supply of land for commercial housing, which has helped keep
property prices steady.
These measures, combined with preferential tax treatment for business start-ups,
have attracted migrant workers, boosted consumption and supported Chongqings
impressive economic growth. At a time of soaring property prices and slower growth,
local governments in other parts of China should take note.

Disclosures & Disclaimer

This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.

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ECONOMICS ASIA
14 October 2016

Chongqings solution
Chinas National Day holiday was a busy time for officials at more than a dozen local governments,
which rushed out measures aimed at curbing property prices. From increasing down payments to
imposing more purchasing restrictions on non-residents, most of the policies were aimed at the
demand side. The goal is to prevent real estate prices from rising further rather than suck the air out
of what some fear is becoming a housing bubble (see Table 2 at end).
These new measures were not necessary in Chongqing, the huge municipality on the Yangtze
River in south-western China. The property market there has been relatively stable despite
robust GDP growth, which has increased in double digits since 2002 and was the strongest in
the country last year (11%). This can provide insights for other local governments.
An ample supply of both land supply (20,000 hectares, the largest in China) and housing stock
(14 months) explain why property prices in Chongqing have increased only 12% over the past
five years. Whats the secret of the citys success? We believe bold reforms in household
registration and the land supply system in the past decade have played a major role. We also
think that the steady property market is only part of Chongqings growth story.
The benefits of reform
Chongqing has been used to trial a number of different reforms in western China. They include:
1) a pilot scheme to better coordinate rural and urban development (
); 2) making the city a transport hub for Chinas Western Development Campaign (
) and the Yangtze River Economic Belt; 3) the railroad connecting China and Europe ().
Chongqing is also a hub city for Beijings One Belt, One Road initiative. The result has been
strong growth in urbanisation and industrialisation over the past decade. But we think the real
drivers have been changes in the following areas:

Household registration system reform

In September 2015 the city announced that it would provide people living in rural areas with the
same welfare benefits and social services as urban residents. Those employed in the main city
area for more than five years or in suburbs or counties for more than three years were entitled
to be urban residents. Some 3m people are enjoying the new benefits. Chongqings
urbanisation ratio reached 60.9% in 2015, up from 43.5% 10 years ago and ahead of the
national level of 56.1%. This makes the city a model of the hukou (household registration)
system reform initiated by previous Premier Wen Jiabao.

Chart 1 Double-digit growth

18

Chart 2.without a housing boom

%yr

150

16

140

14

130

12

120

10

110

100

90

6
2000 2002 2004 2006 2008 2010 2012 2014
Beijing
Guangdong
National
Source: CEIC, HSBC

Index, PY=100

Shanghai
Chongqing

80
11

12
13
Beijing
Guangzhou

Source: CEIC, HSBC

14

15
16
Shanghai
Chongqing

ECONOMICS ASIA
14 October 2016

Chart 3 Strong fixed asset investment

40

Chart 4. and ample land supply

25

%yr

30

20

20

15

10

10

0
2004

2006

2008

2010

2012

2014

-10

squre meters, mn

5
0

Beijing
Guangdong
Source: CEIC, HSBC

Shanghai
Chongqing

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Beijing
Shanghai
Chongqing
Source: CEIC, HSBC

The commitment to provide unified social security and services has involved huge investment in
infrastructure and public housing. But this is familiar territory for Chongqing, where fixed asset
investment has always been high, growing at an average of 25% in the past 10 years,
compared to the national average of 22.6% (chart 3). Investment has played an important part
in the citys development, with capital formations share of GDP at 54% in 2014 (the latest
available) vs. 47% at the national level. As a side effect, the citys local government has one of
the highest debt burdens 70% of GDP according to the State Audit Office in 2013 although
this fell slightly to 67% in 2015.

Land reform to give villagers better compensation for land sales

One reason the property market has been so stable is the ample supply of land (20,000
hectares reserve). This, in turn, has allowed the citys decade-old land ticket (dipiao)
experiment to flourish. Farmers can sell the dipiao they get for their village land, receiving 85%
of the sale price, with the remaining 15% going towards village management costs. The
government then uses the corresponding land nearby city boundary for urban expansion (chart
5). The average price of village land on Chongqings land exchange in 2015 was RMB200,000
per mu (or RMB3m per hectare). This process allows migrant workers to settle in the city or
even start a new business.

ECONOMICS ASIA
14 October 2016

Chart 5. Dipiao transactions stabilized at around 1,300 hectare in the past 3 years
60000

300,000

50000

250,000

40000

200,000

30000
150,000

20000

100,000

10000
0

50,000
2008

2009

2010

2011

Transaction volumn, mu (LHS)

2012

2013

2014

2015

Average price, yuan/mu

Source: Chongqing Land Exchange, HSBC

Note: 15 mu = 1 hectare

The dipiao mechanism is

benefiting all three parties
including local government,
property developer and
farmers.

The next step involves the housing developers, which need to buy dipiao from the government
in order to access urban land quotas. The price paid by developers averaged RMB2m per mu
(RMB30m per hectare) in 2015, the equivalent of RMB3,000 a square metre, far below the
national average of RMB4,300 per sqm. The difference between the farmers compensation
(RMB3m per hectare) and the developers payment (RMB30m per hectare) goes to the local
government. After nine years, the dipiao mechanism is benefiting all three parties: it provides
funding for local governments to build infrastructure and provide public services; the property
developers acquire land at a lower cost; the farmers who get better compensation for their land.
Revenue from land sales usually represents more than 60% of a local governments fiscal revenue.
Chongqing is no different. The key to success is to create the right balance between generating
fiscal revenue and maintaining the competitiveness of the city or region. Higher revenue from land
sales can be a double-edged sword at it increases land and property prices that can drive talent
away. Land acquisition costs usually represent >60% of a price of a property.
Chongqings local government has done a good job by releasing land reserves at a steady pace. At
the same time it has set a target of maintaining growth in property investment at around 20% y-o-y
and keeping affordability levels at 6-7 years of total annual income. Speculation is not welcome. A
down payment for a second house for local residents is as high as 60% of the asking price, while
non-residents are not allowed to buy a second house in Chongqing.

A two-tier housing supply

system to meet different
housing needs

Public housing for migrant workers

Chongqing is the biggest municipality in China, with a population of 30.1m compared with
Shanghais 24.2m and Beijings 21.7m; 18.4m live in urban areas. Housing demand goes hand
in hand with the acceleration of urbanisation, so in addition to a steady increase in land supply,
Chongqing has set up a two-tier housing supply system to meet different housing needs. It
works like this:
1) The government provides land and subsidies for public housing, aiming to cover the more
disadvantaged parts of the population, including college graduate students, migrant workers
and poorer households with per capita housing area less than 15 sqm. These people can rent
public housing cheaply (RMB10 per sqm per month) and after five years they can buy the
apartment at cost price. This type of housing cannot be sold on the open market but the local
government can buy it back. Chongqings target for 2010-15 was to build 40m sqm of public

ECONOMICS ASIA
14 October 2016

rental housing. As of the end of last year, the city had built 31m sqm, providing housing for more
than 3m people.
2) The city has steadily increased the commercial housing supply to meet the needs of the other
60-70% of the population. Helped by the steady pace of land supply, which has outpaced
Beijing and Shanghai 4-6x in the past five years, Chongqings residential property supply
increased by an average of 32m sqm during the same period (Table 1), while property prices
rose only 12% y-o-y, compared with Beijings 44% and Shanghais 59%.

Table 1. Two tier housing supply

Square meters, m
2015
2014
2013
2012
2011
2010

Public housing
6.9
0.2
7.9
6.9
9.4
5.1

Commercial housing
31.9
27.7
38.04
39.9
28.26
26.3

Source:Chongqing Statistics Bureau, HSBC

Preferential tax treatment for industrial development

Besides maintaining a stable property market, Chongqings growth story is also about
developing industry and creating jobs. Chongqing introduced a 15% corporate tax rate in 2003,
when Beijing started the Western China Development Campaign. Back then, the national
corporate tax was 33% (it has since fallen to 25%). The local government has since extended
this preferential rate from 2010 to 2020, which has helped Chongqing to attract more private
and foreign investment in the industrial sector. The city is now the worlds leading computer
manufacturer and automobile production base. The two industries contribute 55% of
Chongqings industrial production and total employment in the industrial sector is 5.5m. Neweconomy industries like new energy, new materials, high-end transportation equipment and
biomedical business, represented 30% of Chongqings economy in 2015 (Peoples Daily, 17
June 2016).
Other important policy initiatives include tax deductions and subsidies for micro enterprises as
well as incentives to encourage people to start their own business. The local government
provides a RMB30,000-50,000 subsidy for people who start a business with a registered capital
of RMB100,000 as well as RMB150,000 in tax deductions from day one. The aim is to create
1m jobs in the next three years.

Conclusion
Only through reforms can the
economy achieve a
sustainable growth target.

The success of Chongqing in being able to maintain a stable property market while enjoying
rapid economic growth lies in its ample land supply and two-tier housing supply system. Both
are the result of reforms to the household registration (hukou) and land acquisition (dipiao)
systems in the past 10 years.
The State Council recently announced changes to the hukou system to help 100m migrants
settle in cities in order to expand urbanisation from 56.1% in 2015 to 60% by 2020. This shows
that Beijing wants to promote the Chongqing model. For many local governments, the key to
success is having forward looking policies to develop the property market. Only through reforms
can the economy achieve a sustainable growth target.

ECONOMICS ASIA
14 October 2016

Table 2. Local governments macro prudential policies for the property market
Home buyers' eligibility
Beijing

Shanghai
Guangzhou

Shenzhen

Tianjin
Suzhou

Wuxi

Chengdu
Zhengzhou
Jinan
Hefei

Wuhan
Nanjing

Xiamen
Foshan
Nanning
Zhuhai

Nanchang

Keep the tight restrictions on home purchases Down payment requirements are: 35% for first home buyers,
50% for second home buyers (ordinary residential flats)
40% for first home buyers and 70% for second home
buyers (non-ordinary residential flats)
Keep the current tight restrictions on home
1. Tighter regulations on real estate developers' funding
purchases
sources and promotion 2. Increase land supply for
residential flats
Keep the tight restrictions on home purchases Down payment requirements: 30% for first home buyers or
second home buyers who have cleared their mortgage
loans; 70% for second home buyers and 100% for third
home buyers
1. Single adult (including divorced) with Shenzhen
Down payment requirements: 30% for first home buyers
hukou only eligible to buy one flat without existing mortgage loans record, 50% for first home
buyers with mortgage loans, and 70% for 2nd home buyers
2. Non-hukou holders need to pay more than 5
years of social security contributions to be eligible
1.No second home purchases for hukou holders in
At least 40% down payment requirement for first home
the central urban area and Wuqing district
buyers without Tianjin hukou
1. Hukou holders with three flats are not allowed to
Down payment requirements: 30% for first home buyers
buy additional property without existing mortgage loans, 50% for first homebuyers
without flats but have mortgage loans, 80% for homebuyers
with 1 flat and mortgage loans, and 100% for third home
buyers
2.Non-hukou holders who already have 1 or more
flats are not allowed to buy
Real estate developers are not allowed to sell
1. No new flats can be sold to non-hukou holders who
multiple flats to the same buyers
already have one flat.
2. Down payment requirements: 20% for the 1st home
buyers and 40% for second (and above) home buyers
Residents can only buy one flat in certain districts
Down payment requirements: 30% for first home buyers,
and 40% for second home buyers
Residents who already own 2 flats are not allowed Down payment requirements: 30% for first home buyers and
to buy flats with less than 180 sqm floor space
40% for second home buyers
1. Hukou holders with 3 flats and more are not 1. Down payment requirements raised to 30% for first home
allowed to buy more homes
buyers and 40% for second home buyers.
2. Non-hukou holders can only buy 1 flat
2.Reduce the quota for housing funds mortgage loans
1.Residents with 2 flats and more are not eligible 1. Down payment requirement for first home buyers without
to make further purchases
mortgage loans are 30%, 40% for second home buyers
without mortgage loans and 50% for second home buyers
with mortgage loans
2.Non-hukou holders need to pay more than 1 2.No housing funds mortgage loans allowed to third home
year of social security contributions to gain
buyers
eligibility
Residents are entitled to buy 2 flats at most
Down payment requirements are 25% for the first home
buyers and 50% for second home buyers
1. Single adult (including divorced) with Nanjing
Down payment requirements: 30% for first home buyers
hukou can only buy 1 flat without existing mortgage rules , 50% for first home buyer
with existing mortgage loans, 80% for home buyers already
have one flat but have not cleared their mortgage loans, and
100% for home buyers with 2 and more flats
2. Non-hukou holders need to provide a record of
at least one year of social security contributions
Flats with floor space range of 145-180sqm added At least 60% down payment requirement for home buyers
to list of purchase restrictions
who still have unpaid mortgage loans
Real estate developers have to obtain pre-sale
licences
Pre-sale transaction prices must not exceed the
price that the real estate developer registered with
the local government
No flats sold to hukou holders who already have 2
flats, and non-hukou holders are only allowed to
buy one flat with floor space below 140sqm
No new flats can be sold to residents who already
At least 30% down payment requirement for first home
have 1 flat
buyers

Source: HSBC, media reports

Down payment requirements and additional rules

ECONOMICS ASIA
14 October 2016

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report:Ma Xiaoping and Qu Hongbin
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