VZCZCXRO4692
RR RUEHCN RUEHGH
DE RUEHGH #0022/01 0220446
ZNR UUUUU ZZH
R 220446Z JAN 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8493
INFO RUEHBJ/AMEMBASSY BEIJING 3260
RUEHCN/AMCONSUL CHENGDU 2353
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0810
RUEHHK/AMCONSUL HONG KONG 2525
RUEHLO/AMEMBASSY LONDON 0060
RUEHML/AMEMBASSY MANILA 0148
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 0039
RUEHUL/AMEMBASSY SEOUL 0650
RUEHSH/AMCONSUL SHENYANG 2344
RUEHGP/AMEMBASSY SINGAPORE 0312
RUEHIN/AIT TAIPEI 2142
RUEHKO/AMEMBASSY TOKYO 0861
RUEHGH/AMCONSUL SHANGHAI 9160

UNCLAS SECTION 01 OF 03 SHANGHAI 000022 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS, LOI, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
PARIS FOR US/OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: SHANGHAI OFFICIALS SEEKING TO RESOLVE PROPERTY BUBBLE 
 
REF: 09 SHANGHAI 492 
 
¶1.  (SBU) Summary:  Shanghai housing officials say that the city 
is in the middle of a property market bubble.  But rather than 
directly intervene to cool off the market, they instead are 
pushing to increase subsidized rentals for the poor and low-cost 
housing for low- and middle-income families.  They hope this 
will reduce social tensions over rising property prices while 
showing responsiveness to Central Government edicts.  End 
Summary. 
 
====================================== 
Shanghai Property Market in a "Bubble" 
====================================== 
 
¶2.  (SBU) The Shanghai real estate sector has already reached a 
"bubble" stage, and the Shanghai municipal government is looking 
into ways to cool it, Liu Haisheng, Deputy Director of the 
Shanghai Municipal Urban-Rural Development and Transportation 
Commission told Consul General Beatrice Camp and visiting 
EconMinCoun on January 19.  He said the best evidence for this 
was that at the end of 2009, buyers were bidding higher prices 
for plots of undeveloped land than it would cost to purchase 
adjoining plots with finished housing.  Shanghai Party Secretary 
Yu Zhengsheng has also described the property market situation 
as a bubble, said Liu.  (Note:  Yu has not been publicly quoted 
as saying "bubble," but he has been openly critical of the lack 
of affordable housing in recent weeks.  Perhaps Liu is referring 
to internal comments made by Yu.  End note.) 
 
============================================= == 
Government Plans to Increase Affordable Housing 
============================================= == 
 
¶3.  (SBU) The Central Government wants to avoid interfering too 
much in the housing market, said Liu, but has mandated each city 
to provide affordable housing and thereby avoid social unrest. 
Shanghai in 2008 set a goal of creating affordable housing for 
10 percent of Shanghai households by 2012, said Liu.  The 
housing will fall into two categories: 
 
a) Low-rent housing (lian zu fang) for 120,000 households. 
These will be reserved for families with the lowest incomes -- 
the cutoff was originally RMB500 per month (approximately 
US$70), but is being raised to RMB960 per month (approximately 
US$140), said Liu.  Under the program, the families need pay 
only 5 percent of their income on rent, and will be either 
placed in government-constructed housing or subsidized to live 
in existing housing.  By yearend 2009, 62,000 units were either 
in the market or under construction, and due to limited supply 
there is a waiting list from which families are picked by 
lottery. 
 
b) Economically appropriate housing (jingji shiyong fang) for 
300,000 households.  Households currently living in apartments 
less than 15 square meters, with monthly incomes of less than 
RMB2,300 (approximately US$340), and assets less than RMB70,000 
(approximately US$10,250) are eligible to apply.  Since land is 
expensive, said Liu, under this program new couples could expect 
to receive assistance for the purchase of a home of 40 to 60 
square meters, for a subsidized cost of RMB250,000 to RMB350,000 
(approximately US$36,600 to US$51,260).  However, this program 
is moving forward slowly, as the method for income verification 
and other procedures is complicated, said Liu.  At present, only 
two of Shanghai's 18 districts, are undergoing trials.  The city 
hopes to expand this to all districts by year end, said Liu. 
 
 
SHANGHAI 00000022  002 OF 003 
 
 
============================================= === 
Housing to be a Hot Topic at Shanghai's Lianghui 
============================================= === 
 
¶4.  (SBU) Despite the Shanghai municipal government's resolve to 
increase affordable housing, Liu hinted at continuing 
controversy over how the plans should be implemented.  He 
predicted that this would be a "hot topic" at the upcoming Two 
Meetings (lianghui), the Shanghai Municipal People's Congress 
and the Shanghai People's Political Consultative Congress.  One 
area lacking consensus is how to keep housing prices down. 
Another is how to carry out the economically appropriate housing 
program -- some argue that the government should not intervene 
in the market, while others are pushing for the government to do 
more, said Liu. 
 
¶5.  (SBU) In advance of the national Two Meetings in March, 
Central Government leaders have also been interested in 
Shanghai's housing policies, said Liu.  Liu briefed Premier Wen 
Jiabao on the subject when Wen was in Shanghai November 28-29, 
2009, and President Hu Jintao also took note of these policies 
on his visit on January 15.  (Note:  For more on the quick steps 
Party Secretary Yu has taken to align Shanghai with national 
measures to cool the property sector, see reftel.  End note.) 
 
========================================== 
Other Measures to Cool the Property Market 
========================================== 
 
¶6.  (SBU) In addition to increasing the amount of subsidized 
housing, Liu pointed to other measures Shanghai will emphasize 
in carrying out the so-called 11 Articles (shiyi tiao) on real 
estate controls recently issued by the State Council.  (Note: 
According to Chinese media reports, the State Council General 
Office on January 10 issued a "Circular on Promoting Smooth and 
Healthy Development in the Real Estate Industry," which has 11 
articles -- thus its shorthand name.  End note.)  For example, 
Liu cited the policy in the 11 Articles that banks should be 
encouraged to better differentiate between mortgage borrowers 
who will live in the house and those seeking to make an 
investment, implying fewer loans should extended to investors. 
Liu also pointed to policy in the 11 Articles encouraging local 
governments to put more land on the market, saying Shanghai 
would do so in the hope of reducing land prices. 
 
¶7.  (SBU) Liu said that Shanghai officials are still considering 
the implications of the omission of the phrase "upgrading 
housing" from the encouraged housing promotion measures in the 
11 Articles.  Originally, housing purchase benefits covered both 
first-time house purchasers and households "upgrading" from 
subpar housing, which meant housing that was below the average 
size in a specific city, explained Liu.  While the Central 
Government is now "recommending" in the circular that banks not 
extend loans for upgrades, said Liu, banks have their own 
motivation to write new mortgages, since they are competing for 
market share in this low-risk business.  Therefore, said Liu, it 
is not clear what the impact of this change in language will be. 
 
================================= 
Interested in Property Tax Policy 
================================= 
 
¶8.  (SBU) Liu expressed several times his interest in U.S. 
experience with property tax, and the Consul General referred 
him for further background to the Public Affairs Section's 
Information Resource Center.  (Comment:  Liu did not specify 
 
SHANGHAI 00000022  003 OF 003 
 
 
whether Chinese officials are pushing forward with plans for a 
property tax.  However, speculation in the Chinese press has 
centered on the benefits of a property tax for decreasing 
property speculation, since it would increase the carrying costs 
of real estate investments.  Liu's strong interest suggests the 
Shanghai municipal government, at least, is internally 
considering related policy options.  End comment.) 
 
============================================= ================ 
Chinese Demand For Housing Higher Than Western Models Predict 
============================================= ================ 
 
¶9.  (SBU) China's housing demand does not fit Western economic 
models, said Liu, and therefore he cautioned against comparisons 
with the U.S. real estate bubble.  For one, Chinese families 
have always invested their wealth in housing, said Liu -- take 
rural areas, where farmers have built and rebuilt their houses 
since the Communist Revolution in 1949, with many now on their 
third reconstruction.  Similarly, in cities, the value of homes 
in the rental market is much lower than for similar houses for 
sale, since Chinese families prefer owning a home.  In addition, 
given inflation expectations, many families are buying homes now 
for their children's use in the future, said Liu. 
 
¶10.  (SBU) Shanghai's real estate sector, in turn, is different 
than elsewhere in China, said Liu.  First, there is a greater 
foreign presence, with preliminary statistics showing that 
overseas buyers -- including those from Hong Kong -- accounting 
for 2 percent of housing purchases in 2009.  In addition, there 
are more buyers from other provinces in China, estimated at 20 
percent of purchases in 2009.  Thus, nearly one-quarter of 
Shanghai housing demand comes from outside Shanghai. 
 
======= 
Comment 
======= 
 
¶11.  (SBU) Consulate Shanghai's meeting with the local 
Urban-Rural Construction and Transportation Commission confirmed 
our earlier observations that the Shanghai leadership is moving 
quickly to defuse popular tensions over high housing prices (see 
reftel).  However, the interests of the district and 
municipal-level governments in keeping land prices high and 
filling their own coffers -- by restricting the flow of land 
onto the market -- remain more aligned with local land 
developers, who are bidding high prices as they seek to increase 
their land reserves.  Banks, too, seem likely to continue 
feeding the real estate boom through lending to real estate 
investors, since banks have so far seen almost no defaults on 
mortgage repayments.   As a result, Shanghai's policies may 
eventually provide more housing for low- and middle-income 
families, but by themselves will probably do little to deflate 
the property bubble. 
 
¶12.  (SBU) EconMinCoun has cleared on this cable. 
CAMP