MENG XIAOSU CREATED a storm in Hong Kong when he proposed a radical solution to the overhang of subsidised housing with a plan to turn 20,000 vacant Home Ownership Scheme (HOS) flats into rental apartments for mainland tourists. Hard-hit local hoteliers, who endured the Sars outbreak, reacted with horror to the plan by the chairman and chief executive of China National Real Estate Development Group Corp (CRED), the nation's largest property company. However, the less than warm welcome has done little to dent Mr Meng's enthusiasm for the project. He reckons his plan is founded in simple but timeless market economics that Hong Kong would do well to take note of. 'The well-being of any market is when there are people who want to buy ... The worst scenario is when no one wants to buy like in Hong Kong,' Mr Meng said. Stop-start government policies have badly dented buyer confidence in a property market that has seen price falls of more than 60 per cent in the past six years. While confidence has improved in recent months, prompting an increase in buying activity, Mr Meng believes Hong Kong needs a radical solution to the oversupply of subsidised housing. 'Hong Kong has an oversupply and cannot sell,' he said. His solution is simple and infused by the notion of economic integration with the mainland. Only by effectively 'exporting flats to China can the excess be digested', he said. If successful, the HOS project would mark CRED's entry into the Hong Kong property market and represent an important link in its national timeshare holiday accommodation alliance, allowing mainland tourists to stay in the HOS flats-turned-guesthouses for between one and four weeks. Mr Meng's plan is based on a belief that integration between the Hong Kong and mainland economies is inevitable. He appears more than a little bemused at the negative reaction his plan has prompted among residents who have expressed anger at the cannibalisation of a scheme that was intended to provide affordable, low-cost housing to aspiring home-owners. Yet if the breezy self-confidence on display during this interview is anything to go by, Mr Meng seems sure of his project's ultimate success. As a vehicle directly controlled by the State Council, CRED has serious political clout, as apparently does its boss, whose career has taken him to the centre of power in Beijing. 'I shared offices with Premier Wen Jiabao and we ate together from the same canteen,' Mr Meng, 54, recalled with a smile. He was the secretary to then-vice-premier Wan Li from 1983 to 1988, before serving as the vice-director in the secretariat of the general office of the National People's Congress from 1988 to 1990. He rose through the ranks to become director of China's National Import and Export Products Inspection Bureau, a position he held between 1991 and 1992. During this time, Mr Wen became deputy director of the central government's general office in 1985, rising to the position of director in 1986. Mr Wen went on to become an alternate member of the central government's secretariat. By 1992, he was already an alternate member of the Politburo of the Communist Party. Making use of high-level connections, as a result of his Zhongnanhai days, is not something Mr Meng seeks to hide in making the pitch for his company. His career has been intimately tied with convulsive change in mainland property ownership and the birth of a vibrant public housing market. In 1992, he said he warned the State Council of overbuilding in the country, which drove inflation to 6.4 per cent that year, compared with current levels of between 0.4 per cent and 1.8 per cent. The following summer, the central government imposed austerity measures that sent property prices into a downward spin, prompting a halt to much poorly planned construction. Yet by 1996, Mr Meng was arguing in Beijing for a reversal of policy, with a recommendation that banks be encouraged to launch home mortgages. The response was initially lacklustre, with banks wary of the risks such a new form of dispersed lending promised. 'The then construction minister asked me to go talk to the banks,' Mr Meng said. By 1998, the pieces were falling into place for a sustained boom in private home building. Generous housing subsidies were scrapped for government employees, providing the trigger for the urban middle class to embrace property ownership. The impact has been remarkable, changing the lives and consumption patterns of huge numbers of people. By 2001, China Construction Bank, the nation's leading housing lender, had outstanding mortgage loans of 300 billion yuan. For cautious bankers unsure of the risks they were taking, the growth of home ownership has proved a huge boon. While rust-belt industries remain a huge drain on the banking system, mortgage defaults are estimated to be only 0.2 per cent. Growth prospects are huge, as only a fraction of the 481 million urban residents own properties. So great has the rush to build been that fears of an emerging bubble have spooked policymakers. The People's Bank of China and the Construction Ministry have imposed constraints on lending to the construction sector and a tightening of bank reserve requirements was implemented in large part to slow down building. Beijing is rightly cautious of triggering another boom-bust cycle, with the consequences of a prolonged downturn in prices likely to be more damaging than they were more than a decade ago. In a recent report, Morgan Stanley wrote that 'the cracks are already appearing in demand', raising the question of how long the annual increase and new investments in many cities can continue to be absorbed. 'Guangdong is already suffering, with Beijing showing early signs of demand not managing to keep pace with supply,' it said, adding that prices had stagnated. However, such concerns are not shared by Mr Meng, who argues that domestic demand offers long-term growth. 'Overall, the situation is not severe, maybe in certain cities it is,' he said. 'It's up to various local governments to make the adjustments.' Instead, he said the nation had ample room for growth, as average living space per person stood at only 21.4 sq metres, compared with 30 sq metres in Singapore and 28 sq metres in Taiwan. 'I'd insist that the fourth consumption wave is far from over,' Mr Meng said, referring to China's consumption waves that started in the early 1980s when the country introduced economic reforms. Consumer must-have items then were watches, sewing machines and bicycles. Now, people aspired to buying a flat and a car, he said. Hence, CRED is building 80,000 flats a year, or double Hong Kong's supply of 37,000 for this year, with the volume expected to remain high in the coming years. The property giant was established in 1981 during the early years of economic liberalisation, when not many officials fully understood the workings of a property market. 'We developed the philosophy of Chinese real estate,' said Mr Meng. Today, CRED boasts assets worth 60 billion yuan, with sales topping 13.6 billion yuan last year. It also controls 340 subsidiaries and units in 200 mainland cities. Because of its formidable backing from the central government, the company's HOS proposal is inevitably being read by many in Hong Kong as another attempt by the central government to boost Hong Kong's economy. However, the idea of an effective bailout of the troubled local property sector is one Mr Meng is quick to rule out. 'We are a company so it's not [for us] to save the market,' he said. 'We have our theories and we don't invest blindly.' Putting on his public relations hat, Mr Meng, who once worked as journalist at the communist mouthpiece People's Daily, said: 'It's giving back something to Hong Kong from which we have received so much and learnt so much.' Biography Meng Xiaosu was born in Suzhou, Jiangsu province, in 1949. During the Cultural Revolution he worked in a car factory before gaining entry into Peking University, where he gained a PhD in economics in 1996. He served as secretary to vice-premier Wan Li from 1983 to 1988. That year he became vice-director in the secretariat of the National People's Congress' general office. From 1991 to 1992, he served as director of China's National Import and Export Products Inspection Bureau. He was appointed chairman and chief executive officer of China National Real Estate Development Group in 2000.