How to understand the pilot property tax in China – Quartz


The recent publication of a speech by President Xi Jinping saw the leader detail for the first time in public how he plans to curb excess wealth and achieve his goal of “common prosperity” for China. But it was his mention of a property tax, which has been the subject of much discussion in China over the past two decades, that has had the most significant implications.

Days after the release of excerpts from the speech, the country’s highest legislative body announced that it would implement a five-year pilot program for property taxes in some areas, despite strong resistance from the middle class and political elites, many of whom own a large number of properties.

As well as excluding rural households, the ad lacked specifics, including the location of the trials and the range of the tax rate. But it represents China’s biggest step towards instituting a national property tax on houses, which has been under discussion since at least 2003.

Xi, whose increased power is often compared to that of Chairman Mao Zedong, appears determined to pass the tax, despite his unpopularity. With around 70% of the wealth of Chinese families parked in properties, this could be its most powerful tool for adjusting the “too high incomes” targeted by its common prosperity campaign. “Over the past few years, residential housing values ​​have skyrocketed due to rising prices, which has helped many families accumulate wealth, making properties an important component in creating wealth gaps.” , wrote Economic Daily, a state media outlet. this week. “A property tax will focus on adding taxes for owning the asset to improve regulation and high income adjustment.”

It is too early to say for sure how the property tax could affect the Chinese economy and society. This may not bring house prices down significantly, as it will always depend on supply and demand. But the consensus among analysts is that taxation will finally change the habit of citizens, developed since the country allowed private property ownership in 1998, to hold on to property.

“Recent events probably mark the start of a new paradigm for China’s growth and its real estate industry,” said Bruce Pang, head of macro and strategic research at China Renaissance Securities. “One with greater state involvement with less political support, lower investments and slower activity for the sector, reduced concentration of mortgage lending and lower household allocation in real estate assets.”

In short, the tax could send China on another development path.

Why does China want a property tax?

Despite its reluctance to enact a property tax, China has long felt the acute need for it.

Existing property taxes in China primarily target commercial real estate and residential property construction and transaction processes. Taxes like the one driven by Xi are the biggest source of revenue for local governments in many states in the US.

The country’s rulers believe there is too much speculation in the sector, which they say has pushed up house prices, widened the wealth gap and suppressed residents’ desire to spend money elsewhere . “Houses are made for living, not for speculating,” Xi said in 2017, sending a strong signal of his dissatisfaction with the industry.

Before the tax was announced, real estate developers had already faced a cut. China has pushed real estate companies to deleverage in order to cope with their growing indebtedness. This made it harder for giant companies like Evergrande to raise funds and led developers to take over land at a slower pace.

This in turn put pressure on local governments. China only allows private ownership of properties, while land must be leased on a long-term basis from local authorities or village communities. Sales of land to property developers represent a third of their turnover. In August and September, the value of land sales in China fell to double digits, according to Reuters.

This makes the launch of the property tax, which will increase tax revenues for local governments, urgent, wrote analysts at Dongfang Securities.

What could property tax look like?

Two of China’s largest cities, Chongqing and Shanghai, have tested property taxes between 0.4% and 1.2% since 2011, mainly targeting second homes, luxury properties and purchases by non-residents. The new tax is expected to cover a much wider range of properties.

An important question is whether the pilot tax will be applied to existing properties or to those purchased in the future, said Zoe Yang, assistant professor in the School of Hotel and Tourism Management at Hong Kong-based CUHK Business School. “If the tax is imposed on existing properties, it will be a huge burden on residents, who will have to deal with both the tax and mortgages,” she said. The disposable income of Shanghai residents per capita is approximately 70,000 yuan ($ 10,951). For a 10 million yuan house, a going price in a wealthy city, even a 0.5% tax rate would cost 50,000 yuan a year, which would increase the pressure on families, she said. .

Many analysts expect the central government to focus on taxing all homes. “If the property tax only covers newly purchased homes, it will have a small scale, which means it can hardly meet the goals of enhancing equity and contributing to more tax revenue,” analysts said. of Dongfang Securities. It is likely that the government will give a rough guideline on the tax rate that local authorities will use as a guideline, they wrote. Shenzhen, Hangzhou, Guangzhou and Nanjing, some of the more developed cities in the country, could also be possible candidates for the pilot project, according to Pang of China Renaissance Securities.

A delicate balance

While property tax can help narrow the wealth gap in the long run, it will be an immediate brutal shock. The government will need to carefully calculate the tax rate range to avoid causing too much harm to citizens and the economy. The increased economy and reduced consumer spending are already a concern for the Chinese economy, which has relied on exports and investment for its rapid growth.

For example, retirees who depend on their pensions as their main source of income would find it difficult to pay the new tax, especially if the value of their home has increased significantly over the years, said Yang, the professor. Rents in first-tier cities that have seen a large influx of people could also increase if the tax were imposed, as landlords would like to shift part of their load to tenants. Ultimately, however, the rich would still be taxed the most, especially if China adopted a progressive model, applying a higher tax rate to people with many properties, she said.

It’s a little consolation for future owners. “I’m about to be able to pay off the mortgage with my partner, and we’ve already used our own and our parents’ savings to buy the house. I don’t know how people like me can survive after the property tax? ‘ A Chinese net surfer asked after the news of the pilot tax was announced.

The property tax risks “accelerating the exodus of people and driving down property prices,” Chinese financial columnist Shinian Kancha wrote on the social media platform Weibo. For underdeveloped and smaller inland cities, this is tantamount to “drinking poison to quench thirst,” the columnist wrote.

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