MNI Analysis: China Property Tax Gains Some Traction

     BEIJING (MNI) - With the government trying to further curb speculation in

the red-hot property market, China is now expected to implement a property tax

within the next couple years, judging by signals from government officials and

other experts.

     The deputy director of the National People's Congress Financial and

Economic Affairs Committee, Huang Qifan, said at the 2017 Caixin Summit last

week that China will roll out a more comprehensive property tax policy within

"several years," rather than waiting a decade or even two to make the change. 

     Creating a nationally unified property tax system has been in discussion

since at least 2003, when some Chinese scholars and officials started a

discussion on ways to better improve the property sector. China already imposes

various taxes for property construction and transactions, but at present only

companies are required to pay taxes on property units they own.

     A comprehensive property tax in theory would help bring down property

prices by making it more expensive for investors to hold property, which in turn

would clamp down on speculators, especially those who already own several

properties. 

     Home prices in China have mostly been on a sharp upward trend in recent

years, with home prices in 2016 surging the most in five years, increasing 12.4%

at the end of last year compared with the end of 2015. Price growth has

decelerated every month since December, however, with October's price growth

coming in at 5.4%. 

     Huang's prediction echoes comments made by Chinese Finance Minister Xiao

Jie, who stressed last month that the government would implement a property tax

based on the principle of first creating laws, then fully implementing them at

the local level, and then advancing the process nationally. 

     In his article analyzing President Xi Jinping's report for the 19th

Communist Party Congress in October, Xiao pointed out that a more comprehensive

property tax would be based on the market value of both commercial and

residential properties, would reflect market prices, and would help curb market

speculation. 

     The government has taken a number of steps to rein in surging property

prices, including raising down payment amounts and mortgage interest rates;

implementing home purchase quotas; extending the wait time for a property unit

to be resold on the secondary market; and launching a recent campaign to develop

its rental housing market along with the planned launch of real estate

investment trusts (REITs).

     But Yi Xianrong, an outspoken property expert and economics professor at

Qingdao University in Shandong Province, told MNI that the impact of the

currently proposed property tax mechanism "would be very limited" because it

hasn't been fully discussed with the public and may not be fair anyway. 

     Yi, former director of the financial development office of the

government-backed think thank China Academy of Social Sciences, said a

comprehensive property tax would indeed benefit almost every Chinese because it

could help lower housing prices. He also said speculators would no longer hold

as many as houses they do now if non-commercial residential property units would

be taxed, and that increased supply would also help reduce housing prices. 

     However, he said, he lacked "confidence in the government" that such a law

could be passed, referring to vested interests within the government trying to

inhibit property tax reform and a reluctance by local governments to give up

monetary windfalls they get from land sales, absent a property tax.

     Yi also said the plan to levy newly purchased homes first would still allow

investors to speculate in the secondary housing market. 

     Lacking high-quality investment choices and facing strict capital controls,

wealthy individual Chinese and government officials have preferred to invest in

property over the past decade, pushing the market up dramatically, and object to

even the suggestion a property tax on residential homes should be implemented. 

     A large proportion of local governments' fiscal revenue, around 35%, comes

from land sales, according to the International Monetary Fund. But a real estate

tax would likely cool local property markets, leading to less demand for land.

Although a property tax could add revenue to local governments, it would not be

as great as what local governments receive through their land sales. 

     Yan Yuejin, director of the E-house Real Estate Research Institute based in

Shanghai, said in an interview with MNI that a comprehensive property tax could

help tackle the unequal allocation of property resources, whereby some investors

own several houses while some families that have a real need for housing can

barely afford to make ownership a reality.  

     Yan noted that the poor implementation and unsatisfactory effect of pilot

property tax programs in Shanghai and Chongqing show implementation of a

nationwide property tax would still face many barriers.

     The two cities implemented property taxes in 2011, with Shanghai targeting

homes, excluding first homes, owned by residents registered in the local "hukou"

system. It also levies a tax on the first homes of non-residents, or those

without a local hukou. The city charges a 0.6% tax on 70% of the market value of

houses, with some exceptions.

     Chongqing targets single-standing houses, homes with a price twice equal to

the average housing price in the main nine districts or even with a higher

price, and homes owned by non-residents with no jobs in the city.

     But the pilot programs' impact on surging housing prices has been limited.

Housing price growth in Shanghai increased 15% since the beginning of 2010 to

September this year, while growth in Chongqing over the same period was 31%,

according to data from E-house. 

     Yan stressed that a real estate tax could hurt some "reasonable" investors,

especially families, who simply want to buy bigger houses due to growing

families or because they are now receiving better incomes. Sales in Tier-1 and

Tier-2 cities have to a large degree been buoyed by this type of demand in

recent years. 

     Ordinary Chinese and families are also concerned about why they should pay

real estate taxes on a property unit they can only own for 70 years -- the

effective limit of ownership under Chinese law. They also are concerned whether

double taxation would occur, given the already heavy taxes they face on property

transactions.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MT$$$$,MGQ$$$]