Explanation: Is China finally ready to implement a property tax?

Security officers enter a building in front of apartment buildings in Beijing on March 22, 2013. REUTERS / Jason Lee

  • China has been considering a property tax since 2003
  • Shanghai and Chongqing rolled out pilot programs in 2011
  • President Xi Jinping wants to advance property tax legislation

BEIJING / SHANGHAI, Oct. 19 (Reuters) – China’s long-hinted – and long-resisted – Chinese property tax is set to gain new momentum as President Xi Jinping lends his backing to what experts say is one of the most significant changes deeper in the country real estate policies in a generation.

The idea of ​​a homeowners tax first surfaced in 2003, but did not take off amid fears that it would damage real estate demand and tank prices, hurt household wealth. and future real estate projects, and triggers a fiscal crisis for local governments addicted to land sales for income.

But the push by China’s most powerful ruler since Mao Zedong to reduce disparities between the ultra-rich city dwellers and the rural poor under the banner of “common prosperity” could provide the political will to pass a tax. nationwide land tenure, currently on the legislative agenda. for 2021-2025. Read more

WHY A PROPERTY TAX?

A property tax could finally control the soaring house prices.

Average house prices have climbed more than 2,000% since the privatization of the housing market since the 1990s in a rapidly urbanizing China and in recent years creating an accessibility crisis, especially among millennials .

The seemingly unstoppable price gains also sparked speculative buying, sparking a frenzied build, often funded by rampant borrowing that has now trapped developers – including the severely indebted China Evergrande group (3333.HK) – and fueled fears of greater risks to the economy.

WILL THE IMPT BE TAKEN AT THE NATIONAL LEVEL?

In the pilot programs rolled out in 2011, the mega-cities of Shanghai and Chongqing taxed homeowners, but only those with high-end housing and second homes, at rates of 0.4% to 1.2%.

But the pilots did not expand to more cities.

Wealthier regions should apply property taxes first, as experts have identified wealthy Zhejiang province as one such candidate in recent weeks, along with the prosperous southern city of Shenzhen and the island province of Hainan. Read more

“It would be a major policy change in the history of China’s real estate development,” said Betty Wang, senior Chinese economist at ANZ in Hong Kong. “It would be a medium to long term policy change.”

WHAT ABOUT THE TAX RATE?

A rate of 0.7% is plausible, although in practice China is likely to take a tiered approach with rates differentiated by city, said Julian Evans-Pritchard, senior Chinese economist at Capital Economics.

“In the United States, some wealthy countries have effective property tax rates above 2% to 3%, while in others it is much lower. But the average effective rate in the United States is 1 , 1%. So it should be possible to reach 0.7% in urban China, “he said.

A rate of 0.7% would have generated 1.8 trillion yuan ($ 281 billion) in tax revenue in 2020 and exceeded net sales of land by local governments last year, he added.

This hypothetical income would be equal to the size of Finland’s gross domestic product.

HOW CAN LOCAL GOVERNMENTS BE AFFECTED?

A property tax will provide local communities with a new source of income that they can reinvest in public services and investments in infrastructure.

It can generate tax revenue equal to 70 to 80 percent of land sales revenue, said Lu Wenxi, chief analyst at real estate agency Centaline.

If maintained, it can help local governments slowly reduce their reliance on land sales, Lu said.

But local governments aren’t necessarily the ones getting these new revenues, which reduces their incentive to collect such taxes, said Rocky Fan, an economist at Sealand Securities.

If local governments use the funds locally, it would run counter to the idea of ​​”common prosperity,” which requires a centralized redistribution mechanism, he said.

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AND THE DEVELOPERS?

A property tax will increase the costs of holding real estate assets by investors. This would channel some housing inventory into the homeowner market, thereby increasing the supply.

As such, developers will face a slowdown in the rate of inventory digestion and fundraising, which will put additional pressure on their cash flow and liquidity, said a mid-size developer based in the United States. east of China.

WILL CHINA’S CAPITAL MARKETS BE AFFECTED?

A property tax will increase the cost of owning real estate, triggering a reallocation of assets to capital markets, Sealand’s Fan said.

Real estate represents nearly 60% of the assets of urban households, against 20.4% allocated to financial assets, especially stocks and bonds, according to the central bank of China. In contrast, American households hold more than 40% of their wealth in financial assets.

“(With a property tax) people will not hoard property. Instead, they will allocate their money elsewhere, in the capital markets, for the benefit of businesses,” Fan said.

But while the tax would diffuse financial risks into China’s bloated real estate market in the long run, careful implementation is needed to mitigate the impact in the short term, he warned.

“You have to give the market time to digest and react to the policy. A stampede would trigger a real estate crash, jeopardizing financial health.”

($ 1 = 6.4111 Chinese yuan)

Reporting by Ryan Woo and Liangping Gao in Beijing and Samuel Shen in Shanghai; Additional reporting by Clare Jim in Hong Kong; Editing by Jacqueline Wong

Our standards: Thomson Reuters Trust Principles.


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