OREANDA-NEWS. August 23, 2013. Construction of low-income housing has been the key project vigorously promoted by the central government. After the former premier of the State Council Wen Jiabo proposed in 2011 for the five-year construction plan of 36 million low-income houses, on June 26, 2013, the premier of the State Council Li Keqiang also proposes for a 5 year reconstruction plan of shantytown s affecting 10million households.

However, the implementation by local governments fell far short of what had been expected. The cause lies in the characteristics of construction of low-income housing of huge prophase investment and long cycle of recovery, which makes the commercial capitals unwilling to enter the market and causes relatively large financing gap for the projects, making it a difficult problem in construction of low-income houses.

China Development Bank (hereinafter referred to as "the Bank’) is the only exception. As shown by the latest data provided by the Bank, the present loan balance for low-income housing projects exceeds RMB500billion, accounting for 50% of its market share and covering low-rent housing, affordable housing, price-fixed housing, public rental housing and reconstruction of shantytown.

The relevant personnel from China Development Bank said to the journalists from China Business News, "The central government has not issued scheme for new-type urbanization. However, further promotion of shantytown reconstruction is the least disputed field and is a significant affair affecting the wellbeing of the people and thus we will continue to vigorously support the undertaking."

With the assistance of new-type urbanization and reconstruction of shantytown as the starting point, China Development Bank has found new breakthrough for platform loan business.

China Development Bank "Played a Pivotal Role"

When our journalist surveys shantytown reconstruction and other low-income housing projects in Jilin Province recently, he deeply feels the pivotal role played by China Development Bank.

A typical case is Liaoyuan in Jilin Province. As of end of last year, this city had relocated 670 thousand households and accumulatively completed investment of RMB8.36 billion with investment on government leading projects amounting up to RMB6.1billion. Among which, Liaoyuan municipal government borrowed RMB2.18billion from banks through platform companies and Jilin Branch of China Development Band provided loans of RMB1.92496 billion, accounting up to 88.3% of the total loans.

In Kuancheng District of Changchun, Tuanshan Community, a low-income housing community with total area of 200 thousand square meters and the largest shantytown reconstruction project in this city has been completed and put into use, which satisfies accommodation demand of large amount of local low-income families. The total investment on this project was RMB6 billion and the capital was mainly provided by China Development Bank.

In Jilin, the government is promoting the Hadawan Traditional Industrial Area Reconstruction Project mainly consisted of reconstruction of shantytown. Of the total investment of RMB10.4billion, China Development Bank has promised to provide loan of RMB7.4 billion and the China Development Finance Company under the Bank has invested RMB1.05 billion to relevant platform so that the Project may kickoff promptly.

Relevant personnel from China Development Bank told the journalist that the shantytown reconstruction loans released by the Bank are mainly loans with tenure for 15 years at benchmark interest rate. "Reconstruction of shantytown is a business for the wellbeing of the people and the investment cannot be fully recovered in a short term, so the tenure must be long, which suits the position of China Development Bank as the main force for mid and long term financing."

"Our cooperation with China Development Bank is the longest and both parties have established sufficient mutual trust," said by the Deputy Mayor of Liaoyuan, Tai Hai to our journalist, "We have also inquired with other banks but the low-income housing business is not their focus. So we can only obtain small amount of short-term bridging loans at interest rate higher than benchmark rate."

According to the statistics of China Development Bank, from 2010 to 2012, the Bank has increased low-income housing loans by RMB100billion each year; as of end of June this year, the Bank has accumulatively released low-income housing loans of RMB530.1billion for projects with total construction area upon completion of 370million square meters, benefiting 22 million middle and low-income persons of 7 million households; among which, the Bank has released shantytown reconstruction loans of RMB342.3billion, making it the main force in supporting low-income housing projects.

According to previous report of Financial Times under the People’s Bank of China, since 2011, the Industrial and Commercial Bank of China has accumulatively provided over 75billion capitals to support low-income housing construction by various means including releasing loans and underwriting private placement bonds; as of end of 2012, the development loan balance of China Construction Bank for low-income housing projects was RMB59.08 billion and the loan balance of Agricultural Bank of China for low-income housing projects was RMB16.429billion.

The acts of commercial banks are actually results of reasonable choice. After huge wave of real estate development in recent years, the remaining shantytowns are basically located in peripheral areas of cities with relatively bad surrounding environment and supporting facilities and low land value, which means difficulty in attracting commercial investment on existing shantytown projects as well as excessively long recovery period for low-income housing projects make the commercial banks beat a retreat in face of difficulties.

"The parcels with relatively high commercial values have been reconstructed and the reconstruction of remaining parts with relatively low commercial values has to be led by governments," said by Tan Hai, "Although China Development Bank is undergoing transformation, we need its policy function and we wish to continue to be entitled to benefits brought by policy finance."

Innovate Financing Model for Shantytown Reconstruction

China Development Bank is the pioneer in financing shantytown reconstruction in China. Under the administration by Li Keqiang in Liaoning Province from 2005 to 2006, Liaoning Province completed reconstruction of shantytown for nearly 900 thousand households in 11 cities in less than 2 years with the soft loan of RMB6billion (that can be used as capital for shantytown reconstruction projects) provided by China Development Bank and has created the Liaoning model for shantytown reconstruction with far-reaching influence.

According to relevant personnel from China Development Bank, since 2005, to solve the capital restrictions on shantytown reconstruction projects, China Development Bank has used market construction methods to jointly establish market financing platform with local government to integrate various resources. On this basis, with investment of prophase loans from China Development Bank, the projects can be kicked off, drive commercial banks and other social capitals to invest and promote sustainable development of shantytown reconstruction.

The modeling project for such practice is the Hadawan Model. To start the shantytown reconstruction project of Hadawan Traditional Industrial Area in Jilin, with the investment from China Development Finance Company under the Bank, China Development Bank and Jilin Urban Construction Company jointly invested to establish a company for special purpose, China Development Jilin and made it a qualified market financing subject.

Up till now, Jilin municipal government and China Development Finance Company has respectively invested RMB1.95billlion and 1.05billion in cash and made cash contribution to China Development Jilin reach RMB3billion. Before then, China Development Bank has promised to provide mid and long-term loans of RMB7.4billion to Hadawan Project, which has completed the financing plan of RMB10.4billion of this Project.

According to relevant personnel of China Development Bank, in Hadawan Model, China Development Bank has referred to generally accepted international practice of "joint-venture by the public and private enterprises" to establish company for special purpose with joint investment from social capitals responsible for financing, developing, organizing and constructing specific areas of the city based on implementation of relevant documents of the State Council on standardization of liability of local government and rectification of original local financing platform.

"Through introduction of social capital, the internal and external supervision of the company can be realized in real sense and the business operation can be standardized," said by above mentioned personnel.

In the risk control process, China Development Bank has continued its constant features of platform loan model. For example, for Hadawan Project, China Development Bank has strictly controlled capital operation, requested to execute account custodian agreement with the Borrower, mastered the key capital nodes to achieve internal flows of capitals and close operation to the greatest extent and earnestly prevent credit risk.

Three major principles were proposed by President of China Development Bank, Hu Huaibang after he took the office, including the strategic necessity of the project, financial balance of overall business and sustainability in institutional development. He emphasized that when serving the national strategy, the Bank shall strictly insist on risk control over policy loans.

"China Development Bank has a strict and mature risk control system for government financing platform," said by competent principal of Jilin Branch of China Development Bank, "Low-income housing loans are granted at benchmark interest rate in principle to lessen the pressure on local finance; all these projects must be approved by the Head Office and are guaranteed with land collaterals upon title registration. The Bank also designates a customer manager to station on the project for long term."

"Make Full Use of Land"

The issue of present concern is how to repay the loans. Especially for cities with common fiscal prowess such as Liaoyuan, this issue is more pressing.

"In developed regions, the balance can be achieved through land operation and commercial development. However, in third and fourth-tier cities like Liaoyuan this pattern will not work," said by Tan Hai.

As introduced by Tan Hai, in the process of shantytown reconstruction in Liaoyuan, the government emphasizes on "making full use of the land". For development enterprises undertaking construction of low-income housing, the government will grant them development right for corresponding parcels with priority to supplement fiscal investment with returns from land. The prophase investment shall be made by enterprises in advance and repaid gradually with government funds successively in place to lessen pressure on capital.

Tan Hai points out the repayment of debt incurred by shantytown reconstruction will be realized through returns from commercial houses in low-income housing community and State fiscal subsidy. It is estimated by him that the total value of commercial houses in all low-income housing communities in Liaoyuan is RMB600 million to 700 million. "I wish these commercial houses can be sold upon appreciation in future."

"The most important factor is that construction of low-income housing will drive the economic development, the construction of urban traffic network will add value to surrounding lands and provide more room for the government to operate land," said by Tan Hai, "Through shantytown reconstruction, the city will become more beautiful and the infrastructure will be improved, which is favorable for attracting investment and increasing tax income. All these factors provide support to repayment of debt."

According to official statistics released by Liaoyuan government, in 2012, Liaoyuan constructed low-income housing of 2.65million square meters providing 49 thousand jobs, accepting about 5000 households of migrant workers, realizing tax income in construction and real estate industry of RMB700million and directly driving economic growth of 3%.

In fact, reconstruction of shantytown has been raised to an unprecedented height on the agenda of the new government. Li Keqiang said that reconstruction of shantytown is not only a significant wellbeing project but also a significant development project. It can effectively drive investment and consumption demand and spur the development of relevant industries.

In Hadawan Model, the government also "makes full use of the land". Competent principal of Jilin Branch of China Development Bank says that cash flows of China Development Jilin are mainly land grant revenues supplemented with returns of corporate tax and land grant fee and franchise revenues in the region. At the same time, Jilin municipal government agrees that during the repayment period it will reasonably coordinate the land supply plan in Jilin and Hadawan area to ensure due loans can be timely repaid.

According to the planning scheme prepared by China Development Bank, the Hadawan Project will be implemented in three phases: Phase I is the kickoff phase during which the project has not generated any revenues and majority shareholders will provide guarantee for the loan to ensure smooth kickoff of the project; Phase II is the land development and consolidation phase during which the "raw land" will become "developed land" and Jilin municipal government is requested to grant the project company the primary land development right to facilitate mortgage for loans; Phase III is the land grant and repayment phase during which the Bank will dissolve mortgage in several stages and realize listing and granting of land to obtain returns from land development when the parcels satisfy requirements for granting.

In summary, "The Hadawan Project trades parcels one by one upon consolidation with recycle land development as core of operation; part of the returns are used to repay the loans and the other part are used to develop the next parcel to achieve recycle development", said by competent principal of Jilin Branch of China Development Bank.