Shanty town revamp not enough to prop up slowing China economy

Premier Li Keqiang is pinning hopes on a programme he initiated a decade ago to ensure the target of 7.5 per cent economic growth is reached this year, but economists are worried.

They said despite rising state investment, lack of alternative funding would crimp the Premier's efforts to rebuild shanty towns, part of his mini-stimulus measures to shore up the world's No2 economy.

And money poured into rebuilding shanty towns this year will not be enough to counter a slowdown in the country's headline real estate investment, according to their best estimates.

"Shanty town redevelopment may involve 600 billion yuan (HK$754 billion) of investment this year," said Liu Yuhong, a researcher at the State Information Centre in Beijing. "Considering its affect on other sectors, the impact on economic growth is not small."

She and fellow researcher Zhang Qianrong estimated that increasing investment in shanty town redevelopment would add 0.21 percentage points to China's gross domestic product growth this year.

However, a deceleration in real estate investment growth will shave 0.75 percentage points off GDP growth this year, according to an estimate by Societe Generale chief China economist Yao Wei.

"Therefore, policy easing will most likely continue, but the scope is increasingly limited," Yao said.

China aims to build 4.7 million new homes to accommodate shanty town dwellers this year. A report by the Economy & Nation Weekly, run by Xinhua, said last week that the housing ministry was studying the practice by some cities of buying existing homes to house shanty town residents, instead of building new homes.

Such a move will not only ease the acute housing oversupply and help revive the real estate market, but may also relieve the government's burden.

China's budget for its affordable housing programme, which includes shanty town redevelopment and other housing schemes for the poor, rose to 198 billion yuan this year, up from 7.2 billion yuan in 2007.

The appointment of Chen Zhenggao, a former governor of Liaoning province, as the new housing minister in June, is widely seen as one of Li's steps to beef up the shanty town scheme.

Their political careers overlapped in the northeastern industrial base where Li started his pioneering work on revamping shanty towns in 2004. Now as the premier, Li can do more.

He announced at a cabinet meeting in April the establishment of a special arm under China Development Bank, which can issue bonds to commercial banks, insurers, pension funds and other investors.

The bank made its first shanty town redevelopment loan in 2005 and the outstanding amount is 573.5 billion yuan. In the first half of this year it extended 219.5 billion yuan worth of these loans, accounting for 70 per cent of funding demand for the scheme during the period.

The above two sources accounted for about 95 per cent of China's overall investment in shanty town redevelopment.

Liu is concerned how local governments are going to repay the bank's loans, despite favourable terms, as most of these projects barely break even.

While removing people from shanty towns, local governments often rebuild a new town from scratch to accommodate them, which involves huge investment in infrastructure, education and medical facilities.

"The government will make big moves in the future," she said. "But financing is a problem."

While funding is seemingly short, misuse is widespread, at 7.8 billion yuan last year, according to a report by the National Audit Office.