China’s Housing Provident Fund: Is the Housing Program Successful?

This article discusses China’s Housing Provident Fund (HPF), and the role it can play in boosting house ownership.

HPFs have been introduced by many Asian countries as a tool to promote house ownership. Once enrolled in the program, participants are required to have a savings account and make monthly contributions to it. After meeting the minimum requirement of consecutive monthly deposits, which is specified by the program, they become eligible to apply for discounted loans for housing.

The benefits of HPF are twofold. Firstly, it is a good saving strategy, because contributions to the savings account come directly from the employer due to which large funds for housing finance are accumulated over time.

Secondly, participants are provided mortgage loans at discounted rates. This encourages housing construction and purchases due to increased affordability and access to loan facilities.

In China, mandatory HPF program was introduced in 1994, as part of its greater housing reform, which included policy initiatives such as privatization of public housing, among many others. Employees from a few selected sectors were automatically enrolled in the program, with a specific percentage of their gross salary transferred to their HPF account, and matched by the employer. Moreover, tax incentives were provided by exempting tax payments from both participants and the employer. In 1998, loan disbursement started officially through this program.

To channel funds into housing-related purchases, the participants were allowed to withdraw from their accounts for limited purposes only, such as home construction, improvements, mortgage down-payments, and home purchases.

Evidence on Improvement in Home Ownership through HPF

Multiple studies have tried to analyze the extent to which the program became successful in improving house ownership in China. The findings of two such studies with important policy implications are discussed below.

According to an empirical study, households in which both spouses participated in the HPF program had 38 percentage points higher homeownership rates, as compared to those without HPF enrolment.

Similarly, for a household with one of the couples enrolled in the program, homeownership increased by 14 percentage points. Thus, enrollment in the program did have a significant impact on homeownership.

Moreover, an additional year of membership in the HPF program increased homeownership by 2 percentage points. This shows that households enrolled in the program for a longer period are more likely to own houses since this allows them to accumulate more funds.

However, another study sheds light on the limitations of the program and its downsides. The findings of this study show that although the program was successful in accumulating funds, it remained only partially successful in promoting homeownership through housing loans.  Thus, while the program increased its funds from 11 billion yuan in 1994 to 630 billion in 2004, it did not have as significant an impact on house ownership.

Thus, the productive usage of these large funds remains limited. Although more people enrolled in the program, the number of beneficiaries of loans is still comparatively very low. The percentage of contributors who actually obtain loans is, on average, less than 6 percent, and a large share of HPF assets remain idle in banks.

Moreover, it can be argued that social groups, such as low-income families, laid-off and temporary workers, as well as migrants, were not able to fare well from these loans, whereas those with stable employment, especially in the public sector, reaped the benefits. Hence, regressive redistribution, that is, transfer of wealth from low to high income households, is likely to have occurred in this case.

In conclusion, China’s Housing Provident Fund did improve home ownership to a great extent among households that enrolled in the program. However, there still is room for improvement, as not everyone who enrolled in the program could benefit from it.

The lessons learned from China’s experience in designing and implementation of its HPF can be highly useful for countries like Pakistan that are trying to improve housing construction and ownership, and are facing affordability issues. With appropriate interventions like HPF, housing sector in Pakistan can also be developed to a great extent.