OREANDA-NEWS. August 21, 2013. On a summer day in July, dark clouds were seen above Liaoyuan City in Jilin: a storm was coming.  Gao Guangfu, an 81-year-old miner and his wife were sitting on a couch in their new house. Just one year earlier, Gao would be worried about his mud house whenever there was heavy rain.

Gao lives in the Hexi Xinyuan Housing Estate in Xi'an District of Liaoyuan City. This housing estate is a mining shantytown revamping project in this resource-exhausted city, with a construction area of 101,800 square meters and 1,735 units of resettlement housing.

This old miner with 36 years of working experience could hardly hide his joy: "I've been living here since I was 21, and just moved back in June." Once believing that he would have to live in his mud house for the rest of his life, he now repeatedly told the reporter, "Compared with the past, this is almost like paradise."

For shantytown residents, to get out the mud houses is the simplest source of their happiness. For the nation, shantytown revamping is an initial and key link for new urbanization to achieve human urbanization.

State Council executive meeting has particularly emphasized the need to guide financial institutions to ratchet up their credit support for shantytown revamping. As a leading bank for shantytown revamping, China Development Bank (CDB) has explored supporting shantytown revamping for many years, and longer-term lending and the "planning ahead" philosophy have raised government-bank cooperation to a new level.

In the old industrial bases in northeastern China, there are many coal mining, forestry, reclamation, and state-owned mining shantytowns. It was from there that CDB began to support shantytown revamping. As a new round of shantytown revamping is taking place, the reporter has revisited Jilin. Since 2005, development financing has become a strong financial backing for local governments' people's livelihood projects. Just like the innovation in the shantytown revamping financing model in northeastern China, now development financing has also begun more beneficial attempts here.

Financial Backing
Flash back to the beginning of last year. In Liaoyuan, with the spring of 2012 came a new unprecedented round of shantytown revamping. In it we could spot the presence of development financing. It was the seventh year in which development financing had been supporting shantytown revamping.

"Liaoyuan is a resource-exhausted city. Shantytowns have been here for a long time, and they are large, many, and widely distributed. Their residents account for over 63% of the urban population." Tan Hai, vice mayor of Liaoyuan, told the reporter that, at the beginning of shantytown revamping in 2006, shantytown had low commercial development value. Shantytown revamping would be costly while local fiscal resources were limited. Shantytown revamping had met with unprecedented difficulties.

Since then, CDB has been actively involved in shantytown revamping in Liaoyuan. With advancement in several years, development financing has successfully integrated with government resources. With the reduction in shantytowns, Liaoyuan has acquired a brand new look, per capita residents' housing area has risen from 14.2 to 21.2 square meters, and industrial investment environment has been greatly improved.

Just like Gao and over 60,000 other shantytown residents in Liaoyuan, residents of various shantytowns have benefited greatly from shantytown revamping. Jilin Provincial Government has successively carried out revamping of urban, coal mining, forestry, and state-owned mining shantytowns, rural mud cottages and dilapidated houses, and state-owned reclamation area revamping, as well as low-rent and public rental housing construction. Welfare housing in the province has expanded from "one road" to "eight roads", achieving full coverage from cities to the countryside, and from mining and forestry areas to reclamation areas.

In this vast project that has an impact on the vital interests of millions of residents, CDB's development financing has undoubtedly become a strong financial backing. The practice of "planning ahead and market building" has brought long-term development prospects to those people's livelihood projects and given more vitality to welfare housing projects, thus attracting more social funds as well as effectively preventing credit risks. According to statistics, as of the end of June 2013, CDB Jilin Branch's welfare housing project lending balance stood at 13.74 billion yuan with cumulative total loans of 16.7 billion yuan, supporting new welfare housing with total area of over 76 million square meters and benefiting more than 4.5 million residents from over 1.3 million households.

Meanwhile, as a bond-issuing bank, CDB uses the financing model of lending integrated with bonds to break through the funding bottleneck in welfare housing construction, issuing 1.8 billion yuan of bonds for Jilin in 2011, of which 780 million yuan was lent to the automobile sector shantytown revamping project for Jilin's High-Tech Zone; and issued 1 billion yuan of bonds for Liaoyuan City, of which 400 million yuan was for the city's shantytown revamping project.

Integration of Investment and Lending
"In with the government, grown by development financing, and out with the market" is an important principle and method of development financing and is also what distinguishes development financing from commercial finance. CDB has extensively applied this principle to the practice of shantytown revamping and has been continually exploring and innovating.

Hadawan shantytown revamping is an example. The industrial zone in the northwestern part of Jilin City was a key industrial zone listed in New China's the 1st Five-Year Plan. Main industrial enterprises in the zone are mostly heavy industry and supporting industry characterized by high energy consumption and high pollution. Over the years, due to obsolete equipment, relatively backward technology, and serious pollution, industrial upgrading has become an urgent problem to be solved, and there is also left a shantytown of total construction area of 970,000 square meters involving 12,813 residents.

Jilin City plans to achieve upgrading through relocating businesses within the next five years. It plans to upgrade the zone to transform it into a zone with a concentration of modern services in logistics, commerce, leisure, and residential service. Such zonal revamping and upgrading are also the core of the city's urban development plan that calls for "industrial area in the north, commercial area in the center, and residential area in the south". The project requires total investment of 10.4 billion yuan, of which 3 billion yuan of capital and 7.4 billion yuan of bank loan.

For such a huge project, three key issues are how to structure qualified financing recipient, how to build operating cash flow in the financing project, and how to bring into play the maximum effectiveness of public resources with market means.

In this context, CDB has creatively designed a model of having the "project company" as the main financing recipient and "integrating investment with lending". The key to the innovation is to have created qualified market-based financing recipients, "changed BT, entrusted construction, and other existing urban construction project financing models, broken the single form of having the state-owned Urban Development Group in charge of financing construction, and established special purpose companies with participation from social capital," a CDB Jilin Branch official told the reporter.

This special purpose company is China Development Jilin, co-founded by CDB Capital Company and Jilin City Financing Platform. Jilin City Government and CDB Capital provided capital of 1.95 billion and 1.05 billion yuan respectively to bring the cash investment for the construction project to 3 billion yuan. "We have achieved rolling development and revenue sharing in a virtuous circle by having this company in charge of the construction, operations, and management in the Hadawan area," said the official.

The reporter has learned that China Development Jilin's cash flow is composed of primarily revenue from land transfers and secondarily business tax rebates, land transfer fee rebates, and concession revenues within the area. Such an innovative financing model has implemented the "planning ahead" concept in the development financing theory, and has also designed a reasonable loan operation model in conjunction with the actual situation of the project.

"Supporting local economic development should not simply rely on bank loans, but should be based on the features of the project, focus on government resources, make use of various financial tools, and seek multiple financing channels. CDB has provided funding support for the Hadawan project through its advantages of integrated financial services including investment, lending, bonds, leasing, and securities," said the official in charge of CDB Jilin Branch.

Continuing to Support Shantytown Revamping
Since 2008, China's shantytown revamping has been included in urban welfare housing projects, and shantytown revamping has embarked on a fast lane of large-scale advancement. In June 2013, the central government put forward revamping 10 million households in urban, state-owned mining, forestry, and reclamation area shantytowns within the next five years, including 3.04 million households in 2013.

In fact, the remaining shantytown revamping projects are all difficult ones. Particularly it becomes more difficult in the later stage of shantytown revamping projects. It is harder to collect shantytown revamping project houses, public service facilities construction lags in the forestry, reclamation, mining, and urban shantytowns, and there is also much pressure on the supporting construction for shantytown revamping.

At CDB's 2Q13 work meeting held in mid-July, CDB Chairman Hu Huaibang said the bank would further ratchet up its support for shantytown revamping and other welfare housing projects. This shows that development financing will continue to play its role in shantytown revamping. Since taking up the post at CDB, Hu has put forward the three principles of "strategic necessity of the projects, financial balanceability of the overall business, and sustainability of institutional development", indicating CDB will continue to conduct further thinking and exploration in the practice of supporting welfare housing and new urbanization.

Other commercial banks are also likely to take part in the new round of shantytown revamping, but CDB will undoubtedly continue to play a leading role. CDB's initiative in the building of a shantytown revamping financing mechanism over the past eight years has created a successful model of financial support for the development of welfare housing projects, and CDB is still continuing with its beneficial tries.

In the Hadawan revamping project, CDB, in accordance with the urban development plan and through the shantytown revamping project, prompted a series of business relocations, industrial upgrading, and infrastructure building, thus driving overall regional construction. The enhancement to the value of the city and the land also created the sustainable development and hemopoietic function of shantytown revamping, a project that nearly had zero commercial value.
More importantly, shantytown revamping is a people's livelihood project and can also be seen as real estate investment. As a breakthrough in new urbanization, it has incorporated local governments' wishes to stimulate the economy, so there have been concerns about possible debt risks brought by a large-scale implementation of such projects. In fact, government support for shantytown revamping is still a necessary condition. The key to whether such government-run public welfare projects and quasi-public welfare projects can continue to receive bank financing lies in the structuring of qualified market-based financing recipient and of business and project cash flow that meets financial regulatory requirements. Under the new circumstances, focusing on this key issue, the utilization of financial tools and the development of financing models are key to a breakthrough in innovation. CDB has undoubtedly taken a firm step once again in this regard.