Roughly 7.83 billion yuan ($1.25 billion) in public funds for China's affordable housing projects has been misused by local governments, according to the National Audit Office.

The public funds, which include government subsidies, bank loans and enterprise bonds, were funneled by local governments into infrastructure construction, industrial park development and government investment projects, according to a report released on Friday by the NAO.

From December last year to March, auditors investigated 272,500 families and 33,500 government departments and companies to oversee the investment, construction, distribution and administration of affordable housing.

They also discovered that approximately 47,500 unqualified families illegally received 19,300 apartments and 50.36 million yuan in residential subsidies, the NAO said.

In Taiyuan, capital of Shanxi province, 47 families illegally received 195,300 yuan in subsidies by submitting false application materials. Many claimed they were low-income families qualified for affordable housing funds.

The auditors also found that 1.54 billion yuan in public funds planned for the renovation of shantytowns was illegally obtained by 38 government departments, private companies or State-owned enterprises to fund other projects.

Roughly 26,500 affordable housing units were illegally sold or used for other purposes by real estate developers, according to the NAO report.

After auditors issued their findings to local governments, authorities retrieved 4.16 billion yuan in misused public funds and 16,500 affordable housing units illegally obtained by unqualified families.

Scandals related to the distribution of affordable housing have triggered public outcry in recent years.

Critics claim that most of the affordable housing is being occupied by government workers.

According to a report by the Economic Observer in August 2010, 61 percent of the 3,725 applicants qualified to buy affordable housing units in a project in Beijing's Haidian district are civil servants.

The Beijing government began soliciting the public's opinion on Wednesday to draft a regulation on affordable housing that has stricter rules to regulate the distribution of affordable houses.

Ren Jianming, a professor of clean-governance research at Beihang University, said that because the affordable housing projects are directly connected with the interests of the public, the projects should be closely supervised.

"The public is highly concerned with this issue and massive protests could be easily triggered by this inequality and corruption," he said.