China’s controversial property tax appears to clear major hurdle, but questions remain on start date

[Hamartia Antidote]

China’s controversial property tax appears to clear a major hurdle

The implementation of a national household registration system after a decade-long effort could usher in a property tax that would help alleviate local-level government debt pressure and narrow the wealth gap.

www.scmp.com

• Implementation of a national household registration system after a decade-long effort could usher in a property tax that would help alleviate local-level government debt pressure and narrow wealth gap
• More than 790 million real estate certificates have been issued in China in the past decade

Chinese households have expressed concerns that a US-like property tax would take a heavy financial toll. Photo: AFP

China has completed a major technical step toward a controversial property tax that now awaits approval by leadership – a decision that could help alleviate the crushing debt pressure on local governments while advancing Beijing’s plans to narrow the wealth gap.

The progress was announced on Tuesday by natural resources minister Wang Guanghua, who said a national registration system is now in place after a decade-long effort to record all of the information on urban apartments, villas, offices and rural houses.

In the past 10 years, China’s Ministry of Natural Resources has issued more than 790 million real estate certificates, which mainly refer to properties in official documents.

However, Chinese households have expressed concerns that a US-like property tax would increase their holding costs, as only commercial housing holders currently pay a small property tax. And the move could be yet another sign for developers that the good old days are not coming back.

The creation of a national housing registration system began in 2013, and it has been widely discussed for its role in potentially curbing the rise in property prices, especially after President Xi Jinping began saying in 2016 that “houses are for living in, not for speculation”.

Such an information system would help tax bureaus assess how many apartments a family owns and decide how property tax should be collected, if top leaders decide to proceed with it.

The property market has been a major economic engine for China for 25 years, and it accounted for more than a quarter of the national gross domestic product in its heyday in 2016.

It was once a key sector for people to amass fortunes – developers once dominated China’s billionaire list – and was a means of wealth accumulation for China’s middle class. The strong demand pushed up property prices, but it also had other side effects, such as widening the wealth gap, contributing to a low national birth rate, and fuelling a “lying-flat” attitude among young people who cannot afford a home.

“Every mention [of such a system] would trigger lots of speculation,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

“The tax is necessary from a long-term perspective, but I doubt it can be started in a year,” he said, noting that authorisation is needed by legislators, and that preparations by the Ministry of Finance are still needed.

The property tax could help address trillions of yuan worth of local government debt, which local-level authorities have struggled to pay off in the face of falling land sales and smaller tax streams amid China’s economic slowdown.

Speaking at a symposium held by the East Asian Institute of the National University of Singapore in January, former finance minister Lou Jiwei said a property tax would be the most suitable type for the local tax system.

“Its pilot should be expanded as soon as the economy recovers,” he said.
Meanwhile, the tax would help advance Beijing’s policy objectives such as income-distribution adjustments under common prosperity plans, anti-corruption efforts, and making housing more affordable for young people.

Housing accounts for 59.1 per cent of Chinese households’ assets, according to a survey by China’s central bank in early 2020. The proportion is about 28.5 percentage points higher than it is for US families.

China has imposed property taxes in Shanghai and Chongqing since 2011, but the tax sizes were fairly small because only high-priced homes were targeted as part of the pilot programmes.

Chongqing, for instance, charges a property tax only on new homes with a market price above 28,566 yuan (US$4,126) per square metre, compared with the current local average price of 10,982 yuan per square metre.

The central government said in 2021 that it planned to expand the trial to more cities, but that plan was delayed last year due to the weak domestic economy and fragile market sentiment.

In addition to the strong opposition from those who already hold several properties, the uneven post-Covid recovery this year and the property downturn – which remains a threat to the overall economy – may challenge Beijing’s attempts to roll out the tax nationwide.

Chinese property developers have felt the pressure of Beijing’s “three red lines”, including tighter debt-ratio requirements. The pandemic also affected the delivery of properties, household purchases and cash flows.

The debt crisis broke out among major private players, including former top firm Evergrande, in late 2021.

“We are still in the process of supporting the property market. I believe [the government’s plans] won’t be able to be rolled out in two or three years – not even a pilot expansion this year,” said Zhang at Centaline Property.

The property market has improved thanks to the government’s support measures in the past year, but it hasn’t returned to positive growth, as investment in the first quarter dropped by 5.8 per cent from a year earlier, and the amount of sold floor space fell by 1.8 per cent.

Economists have largely estimated that the property tax would entail a mixture of different housing-related tax items, and many expect that tax exemptions or reductions would be offered to Chinese families – especially those buying their first home – to facilitate its implementation,