LAUSR

The Housing Provident Fund System (HPFS) was established in China in the 1990s as a welfare program to offer low-cost loans and encourage the purchasing of houses. However, there has been some controversy over the income redistribution effect of HPFS. Previous studies focused on the effect of low-interest-rate loans but ignored the effects of tax exemptions and low-interest-rate deposits. This paper introduces a lifetime cash flow model which considers the effects of low-interest-rate loans, tax exemptions, and low-interest-rate deposits together. It compares the internal rate of return (IRR) for typical employees with different incomes in four situations: whether or not HPFS participation and whether or not house purchasing. We found that the IRRs of the typical low-income HPFS participants who buy houses with HPFS loans were lower than the IRRs of non-participants who buy houses with commercial mortgages without HPFS participation. For the typical middle-income employees, there is not much difference in IRR between the two situations. Only the typical high-income employees can benefit from HPFS participation, and this is mostly due to the effect of the tax exemptions, rather than the effect of low-interest-rate loans. Increasing the coverage of HPFS and HPFS loans among low-income employees will not improve the income redistribution effect of HPFS.