There is a chance that China can finally put taxes on property


Vehicles drive past unfinished residential buildings in the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China on September 16, 2021.

Carlos Garcia Rawlins | Reuters

BEIJING – China is closer than ever to taxing landowners, analysts say, nearly two decades after authorities started to pitch the idea.

What has changed is that Chinese President Xi Jinping now has the political momentum to start the land tax movement, analysts said. This summer, Xi stressed the authorities’ commitment to deliver “common prosperity” or moderate wealth for all, rather than a few.

And in an essay earlier this month detailing what common prosperity means, Xi called for regulating excessively high incomes, with measures such as property tax tests.

It’s something that they’ll have to do because it’s from above, and therefore, it will happen.

David Roche

Independent Strategy, President and Global Strategist

On Saturday, the highest executive body, the Council of State, was allowed to carry out such a test for five years in unspecified regions. These developments follow years of efforts to curb speculation in the Chinese real estate market, which accounts for the bulk of household wealth.

“I think the central government chose [the] right time due to the political reshuffle happening before and after the 20th party congress next year, so really resisting a central government policy will be [a risk] to the careers of local officials, ”said Yue Su, senior economist at The Economist Intelligence Unit.

She was referring to the National Congress of the Communist Party of China, held every five years to determine leadership positions.

Discussion on property tax since 2003

Unlike the United States, China does not have a general property tax. Real estate ownership in China may also differ. For example, public companies have distributed apartments to their employees.

Chinese leaders began discussing a property tax in 2003, but so far only the municipalities of Shanghai and Chongqing have implemented a limited version, analysts say.

The experiences of these two cities over the past decade have not created a compelling case for other local governments to implement a property tax, said Larry Hu, chief economist for China at Macquarie, in a note this weekend.

In 2020, property taxes in Shanghai and Chongqing were 5% or less of local tax revenue and contributed far less than what land sales did, Hu said.

More than 20% of regional and local government revenues come from the sale of land to real estate developers, according to Moody’s. But if the real estate market is successfully exploited through tax channels, it could ultimately bring significant revenues to local communities.

Real estate and related sectors like construction account for at least 25% of Chinese GDP, according to Moody’s.

These numbers partly reveal how real estate is a force in China.

China’s privatization of the housing market in 1998 allowed an older generation to purchase apartments at low prices, giving them a disproportionately larger share of the housing market than younger generations, Hu said in a note this week. -end. He added that house prices vary widely from city to city.

“The property tax in China is more than a redistribution of wealth from the rich to the poor, but from the older, high-level generations [more developed] the townspeople to others, ”Hu said. “As a result, the resistance to property taxes is not only broad, but also powerful.

A wealth tax

Property accounts for about 70 to 80 percent of household wealth in China and accounts for about 10 percent of household income, Moody’s said.

A nationwide property tax would likely require disclosure of the real estate assets of companies and government officials, meaning such a policy could meet with resistance even as the country grapples with corruption.

But the latest political developments could tip the scales. Tycoons once built fortunes through developers like Evergrande by relying on debt for their growth. This use of debt has become a target of government control over the past 18 months.

In addition, Xi said in August that the pursuit of “common prosperity” in China would require reducing “excessive” incomes and encouraging the rich to give back to society. Later in the month, the State Revenue Authority said it was investigating people who were hiding their high incomes and evading taxes.

“The big idea of ​​course is to recreate a lot of new happy middle class people who have affordable housing, affordable health care and affordable education, and therefore happy citizens,” David Roche, Independent Strategy, said on Monday. president and global strategist. on CNBC’s “Squawk Box Asia”.

“And in order to do that, you have to make sure that the housing is for life, that is, not for speculation or investment,” Roche said. “So, [property tax] is not something that is going to be left to local authorities to implement or to local governments. This is something that they will have to do because it is from above, and therefore, it will happen. “

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Even with the latest political momentum, analysts don’t expect a national real estate tax anytime soon.

“We believe Beijing is determined to speed up the roll-out of the property tax, but will continue to proceed cautiously and will only implement the tax gradually,” Ting Lu, chief economist for China at Nomura said on Monday. , in a note.

“Yet,” he said, “the expectation of a steady rise in house prices will likely be significantly curbed among Chinese households, new home sales across China may slow, Beijing may see challenges on the way to a nationwide property tax, and short-term pain is inevitable. “

Ultimately, authorities will have to weigh the economic consequences of any move in China’s huge real estate market.

If there are simultaneous landfills, it could slow down the introduction of the property tax and increase the ability of individuals to claim exemptions, EIU’s Su said.

– CNBC Weizhen Tan contributed to this report.


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