SUN WUKONG
Shanghai breaks with market principles
By Wu Zhong, China Editor

HONG KONG – The transformation of China into a free-wheeling market economy over the past 30 years has been paralleled by a whittling away of the power of central government over economic affairs, with regional authorities now directly overseeing economic activity within their jurisdiction and more eager to protect local interests than to implement macro-economic policies proposed by Beijing.

When local authorities do react, the result can be a distortion of central government wishes. Last year, as public discontent centered on growing costs in housing, medical care and education, central government policies introduced to cool the



property market included the requirement that cities, including the financial hub of Shanghai, build cheap housing for low-income families.

Shanghai, the country's second-largest commercial metropolis and sometimes seen as a competitor and rival power base to the capital, came under new management after Beijing sacked former Shanghai party chief Chen Liangyu about 15 months ago on charges of corruption. Chen was widely know for his defiance of Premier Wen Jiabao’s macro-economic controls.
After a major reshuffle, the new Shanghai municipal government is now more eager to toe Beijing’s line. So on December 24, 2007 it issued a circular detailing measures on how to implement the State Council’s instructions on helping low-income families solve their housing problems.
Nevertheless, a line of regionalist thinking can still be traced from this Shanghai circular. In particular, the circular said: ''The municipal departments of housing, development and reform, as well as public security must consider working out a housing purchase policy based on the residency system to rationally guide cross-region housing purchases.''
In plain language, the Shanghai government demands the relevant authorities to consider launching a policy to restrict non-Shanghai residents from buying housing in the city. The circular goes so far as to stipulate clearly that it overrides any previous rules. If Shanghai implements the measure, it will be the first city to impose a ban on non-local Chinese buying housing in its territory.
The country has already imposed restrictions on foreigners and overseas Chinese from buying housing in major cities, one of the measures taken to cool the urban real estate market. The Shanghai circular, when it was published in the Shanghai media on December 27, immediately aroused fierce public criticism.
The city, with its fast-growing wealth, modern infrastructure and fashionable lifestyles, has attracted increasing numbers of wealthy people from other parts of the country. Newly rich coal mine owners and notorious Wenzhou speculators are among those have moved in to buy real estate in Shanghai over the past year, helping to push up housing prices.
Average house prices in Shanghai were up 8.8% in November compared with a year earlier and the local government predicts a rise of just less than 10% for the whole of 2007.
Even so, to totally ban non-local Chinese from buying houses in Shanghai would be like giving up eating for fear of choking. Shanghai’s development has benefited from investment from overseas and other parts of the country. At the same time, the city has gained from attracting millions of rural migrant workers who do jobs Shanghainese themselves regard as disgusting.
With so many non-locals living in the city, the ban would be counterproductive. It would also be a discriminative measure and possibly illegal as there is no law classifying consumers into local and non-local sectors, and commercial housing should be regarded as a consumer product, special in nature as it may be. China’s constitution guarantees citizens’ freedom of migration in the country, though in practice the rigid hukou (residency) system still deprives citizens of this constitutional freedom.
For example, more than 100 million rural migrant workers to urban centers are still largely regarded as rural residents who cannot enjoy the rights and benefits of city residents. The hukou system can also be manipulated to serve local interests.
The Shanghai government's action has an ironic precedent. When the property market remained sluggish in the late 1990s, the local authority launched a preferential policy to encourage people from other parts of the country to buy housing in the city. For instance, if someone bought an apartment of 70 square meters or larger, the city government would grant the buyer and his or her spouse permanent residency so they could enjoy all the benefits and welfare advantages of local citizens.
The contradictory policies serve as a perfect example of government intervention in the market and from this perspective, the ban, if applied, is a retrogressive move from the development of a market economy. In response to sharp criticism from an angry public, the Shanghai housing authority on January 4 issued a statement saying that at present its policy does not ban non-local Chinese from buying housing in the city.
However, it did not say whether such a ban was under consideration. China is right to condem international protectionism against free trade. However, to embrace the market economy, Beijing should also combat regional protectionism at home.