Cracks are starting to appear in China's drive to build low-income housing as concerns rise that a rush to meet government targets is making for shoddy construction, fears made more intense after a train crash last month highlighted the speed with which China carries out many of its infrastructure projects.
The massive state-led investment was supposed to head off social unrest as urban home prices spiraled out of reach of ordinary workers. And many economists forecast that the spending on cheap housing would cushion the impact on the Chinese economy as the government tried to deflate a bubble at the luxury end of the market.
But far from being a magic bullet, the low-income housing push is creating its own problems at a time when a stubbornly high inflation rate is constraining China's ability to spend its way out of another global downturn.
Premier Wen Jiabao rolled out grand plans in March for 36 million units of public housing as part of China's current five-year plan from 2011 to 2015. But a report by the state-run Xinhua news agency in May raised alarm bells about the plans' progress, saying construction had begun on only 30% of this year's target of 10 million units.
Since then, the push appears to have speeded up. In July, Premier Wen said construction on more than half of the 10 million targeted units had begun.
In recent weeks, several reports of shoddy workmanship on low-income housing have appeared in state media, raising concerns about safety and suggesting that the flagship project may have to proceed more slowly than expected.
“If low-income housing construction is blindly devoted to speed, then like the frequent accidents we've seen recently, problems will keep occurring…and potentially even end in tragedy,” said an article in the People's Daily, the official mouthpiece of the Chinese Communist Party, on July 27.
The article appeared just days after the July 23 high-speed train accident that killed 40 people and injured almost 200 near Wenzhou in eastern China. The accident gave rise to a wave of popular anger and accusations that the new rail network had been developed too quickly and without enough focus on quality and safety.
The People's Daily article didn't specifically mention the train crash. China has also been plagued by a spate of fatalities on major construction projects this year.
A recent statement on the website of the Ministry of Housing and Urban-Rural Development called on officials to “draw hard lessons from the July 23 Wenzhou rail accident, and ensure the safe construction and quality management of low-income housing and public works.”
The concerns surrounding the low-income housing push adds to worries over the outlook for the Chinese economy, and by extension the global economy, which is heavily dependent on China for growth. On Tuesday, China reported unexpectedly high consumer inflation of 6.5% in July, its highest level in over three years, and faster than the 6.4% year-on-year level in June.
In 2008, Beijing helped support a faltering global economy by unleashing a wave of bank lending that fueled China's construction industry─and commodity exporters everywhere. Now, with global markets buckling under concerns of a double-dip recession in the U.S. and sovereign-debt woes in Europe, China's high inflation means it can't perform a similar trick without watching prices shoot up further.
Finding the cash to fund low-income housing developments is also proving problematic, with local governments cash-strapped from their recent infrastructure building binge, and banks, already constrained in their lending, preferring to give loans to higher-margin projects.
On Tuesday, Tan Huajie, the board secretary of China Vanke Co., the country's largest property developer by market share, said that the tighter liquidity in the sector was discouraging investment. Vanke saw first-half profit rise 5.9%, a better performance that many of its peers. Analysts say Vanke's relative success compared with its peers─its first-half profit rose 5.9%─is partly due to its focus on selling small and midsize homes in China's less-developed cities, a market segment only recently affected by government restrictions on lending.
Developers are chafing at thin margins for low-income housing. Vanke President Yu Liang said that his company has started construction on more than three million square meters of public housing, but that the profit margin on those developments is only 2%. Analysts say the profit margin for developers on a typical residential development is about 30%.
Mr. Yu said Vanke would continue to contribute to the public good as long as it didn't hurt shareholders' interests.
Some analysts say that local governments are inflating the numbers of low-income housing they are bringing online by including university dormitories and refurbished older buildings.