China’s top decision-making body gave the green light for controversial property tax trials to be expanded to more areas, suggesting President Xi Jinping is gaining the upper hand against powerful vested interests opposed to the change.
The starting date for the new five-year pilot trials and the areas to be included will be determined by the State Council, according to the decision. The Ministry of Finance and the State Taxation Administration will draft the measures for the pilots, the official Xinhua News Agency reported. The Standing Committee of the National People’s Congress (NPC) adopted the decision and authorized the State Council to move ahead.
The long-mooted property tax has gained new momentum since President Xi Jinping threw his support behind what experts describe as potentially the most profound change to China’s real estate policies in a generation. Its implementation, opposed by many powerful vested interests, is fraught with risks for the world’s second-biggest economy and would be a profound shift in its economic model.
A property tax has been discussed since at least 2003 but resisted because of fear it would trigger a cascading spiral of problems. If introduced too quickly it risks slashing demand, triggering price falls that would undercut household wealth and hurt the finances of local governments that are heavily dependent on land sales for revenue. Property developers, already reeling from government measures to deflate a property bubble, would face further pressure.
The total value of Chinese homes and developers’ inventory hit $52 trillion in 2019, twice the size of the US residential market and bigger even than the US bond market, according to Goldman Sachs. Economists estimate that the property and construction industry together contribute about a quarter of the country’s gross domestic product and former UBS economist Jonathan Anderson once called China’s property industry the most important sector in the entire global economy.
The move comes at a time when the property sector has been hammered by restrictions on lending in a bid to deleverage vast debts built up over years. China Evergrande, the country’s second-largest builder, is teetering on the brink of collapse with total debts north of $300 billion.
Property tax pilot programmes were unveiled in Shanghai and Chongqing in 2011, although only homeowners with higher-end housing and second homes were taxed – at rates from 0.4% to 1.2%. The sensitivity of the move can be seen in the Xinhua report, which says property tax reform must be advanced “in an active and prudent way, (to) guide the rational housing consumption” and … facilitate “steady and sound development of the property market”.
None of this comes as a surprise, given President Xi’s now infamous remark from the 19th party congress in November 2017 that “houses are for living in, not for speculation“.
The argument underlying the NPC decision is that in recent years the property sector has got out of control and been in urgent need of reform as developers focused more on “churn” to fund projects all over the country. China has ended up with infamous ‘ghost cities’ and tens of millions of home units that are empty – enough real estate to house the population of France, one report claimed – and developers with dangerous levels of debt.
A tax could help curb home prices that have soared more than more than 2,000% since the privatisation of the housing market in the 1990s and created an affordability crisis in recent years.
Government leaders want to reduce the price of homes and may also be seeking to cut the scale of real estate transactions, which is now about a quarter of national economic activity.
But the plan comes at a delicate time, given the property market is currently under significant stress, with home prices starting to fall in tens of cities, and resistance from stakeholders such as local officials, who fear it will erode property values or cause a market sell-off.
Over 90% of households own at least one home, the central bank said last year. But analysts believe the tax will bring in much needed revenue.
“Land sales are not a sustainable source of government revenue any more,” Capital Economics said in a note on Friday. “Gradual implementation should also mitigate fears that a tax could cause prices to crash.”
Analysts expect wealthier and economically more diversified regions in eastern and southern China such as the provinces of Zhejiang, Guangdong and perhaps Hainan Island will be targeted initially.
“It is expected that Zhejiang is likely to be included in the reform, especially Hangzhou,” Yan Yuejin, director of Shanghai-based E-house China Research and Development Institution, said.
Hangzhou, the base of e-commerce giant Alibaba, is China’s eighth-richest city, with economic output reaching 1.61 trillion yuan ($252 billion) last year, about 70% of Hong Kong’s gross domestic product.
A 0.7% rate is plausible, although China is likely to take a tiered approach with differentiated rates depending on the city, Julian Evans-Pritchard, senior China economist at Capital Economics, said recently.
“In the US, some wealthy counties have effective property tax rates in excess of 2%-3%, while in others it is much lower. But the average effective rate across the US is 1.1%. So it should be feasible to reach 0.7% in urban China,” he said.
A 0.7% rate would have generated 1.8 trillion yuan ($281 billion) of tax revenue in 2020 and exceeded the net land sales of local governments last year, he added.
• By Jim Pollard with Reuters.
This story was updated on October 24th with additional edits.