MNI:China May Extend Property Tax Pilot Despite Market Tremors

China may soon extend a pilot property tax to more cities despite fears over a weakening real estate market, targeting high-income centres such as Shenzhen as authorities cap speculation and excessive borrowing in line with President Xi Jinping's drive to reduce inequality, policy advisors told MNI.

Major metropolitan areas with relatively high prices may be selected for the pilot, like the Greater Bay Area covering tier-one cities Guangzhou and Shenzhen, the Yangtze Delta centered around Shanghai, the Chengdu-Chongqing Twin City Economic Circle in southwest China, and Wuhan city in Hubei province, said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department.

"The government is quickening the pace of promoting property tax, and cities to start with a pilot program may be announced by the end of this year or early next year," said Zhang.

Shanghai and Chongqing have conducted property tax trials since 2011, levying an annual charge on high-priced or second homes.

Shenzhen would be suitable as a new pilot city because of its role as a pioneer of Chinese socialism, as well as Hainan province, where the central government aims to build the world's largest free trade port, said Jia Kang, former research head at the Ministry of Finance, adding that both places should be equipped with a modern tax system.

"Zhejiang province in eastern China, which has been given the job of creating a 'Common Prosperity' pilot zone, should also consider joining the pilot property tax reform," Jia added.

Second-hand house prices in Shenzhen rose 85.7% during 2015 to 2020, the highest among 70 large and medium cities tracked by the National Bureau of Statistics. Gains above 50% were also recorded in Hefei, Guangzhou, Hangzhou, Beijing and Nanjing.

Average transaction prices of new residential housings in Shenzhen rose to CNY55,000 per square meter last year from CNY34,000 in 2015, according to Yan Yuejin, director of E-house China Research and Development Institution.

ECONOMIC IMPACT

The government has tried for years to cool the housing market by going after speculators as well as to steer away from using real estate to provide short-term boosts for the economy. Other recent curbs on the sector include limits on developers' debt ratios and increases in mortgage rates in some cities.

The sector, an important pillar of economic growth, is already slowing, with potential financial risks highlighted by the crisis at Evergrande Group. Zhang believes tax pilots should be pushed forward cautiously, while Kuang Weida, director of the Urban and Real Estate Research Center at the National Academy of Development and Strategy suggests the tax rate should be around 1.2% of valuation.

Pilots may not necessarily lead to a significant deceleration in real estate investment but could squeeze out housing bubbles and lower home prices, Kuang said. A tax aimed at higher incomes could also spur more purchasing demand by first-time buyers.

In line with the recently re-emphasised goal of "common prosperity", pilot property tax efforts could be followed, over a much longer horizon, by other measures such as capital gains or inheritance taxes. But the ideal timing for a capital gains tax may not arrive until China's GDP is close to, or surpasses, that of the U.S., Zhang said.

LOCAL REVENUE

"Local governments are unlikely to charge a high property tax, as it could dampen home prices and thus reduce the government's revenue from land sales which is a major source of local off-budget income," Zhang added.

He noted that property tax only accounts for about 1.2% of total 2020 tax revenues in Shanghai, where it is set between 0.4% to 0.6% of the last sale price, while in Chongqing it is between 0.5% to 1.2%. Both cities offer breaks in some cases by setting tax-free areas.

Kuang said higher urbanisation rates mean less land sales revenue, and so local governments would be increasingly motivated to push forward the new tax. Property tax trials may first expand to major cities such as Shenzhen, he said.

Currently, China's overall urbanisation rate is over 60%.

Pilots would continue targeting homes outside of primary residences, such as rental and investment properties, or large and expensive residences, Zhang and Jia said.