Ryan Woo. Liangping Gao. Samuel Shen.

BEIJING/SHANGHAI — China’s long-rumored – but long-resisted – property tax has gained momentum. President Xi Jinping is supporting what will be the largest policy shift in a generation.

In 2003, the idea for a home owner levy was first floated. However, it has not taken off because of concerns about property demand. It could also tank price, causing a financial crisis in local governments that are dependent on land sales to generate income.

However, China’s most powerful leader Mao Zedong may be pushing to reduce the disparities between rural rich and ultra-rich urbanites under the banner “common prosperity”. This could provide the political will needed to pass a national property tax. It is currently on the legislative agenda from 2021-2025.

WHY IS A PROPERTY TX?

Property taxes may be able to control rising home prices.

The average house price has risen more than 2500% in the past 20 years since privatization of China’s housing market in the 1990s. In a rapidly-urbanizing China, this is creating an affordability crisis for many millennials.

An unstoppable rise in prices has also sparked speculation and spurred frenzied building. This was often funded with rampant borrowing, which has now entrapped developers, including the China Evergrande Group, and raised fears about wider economic risks.

Will the TAX BE PERMITTED NATIONWIDE

Pilot programmes were launched in 2011 by the megacities Shanghai and Chongqing. They tax homeowners at rates ranging from 0.4% to 1.2%.

However, the number of pilots has not increased to other cities.

Wealthier regions will likely implement property taxes earlier, experts have said. In recent weeks, they identified Zhejiang province as one candidate.

Betty Wang (an economist based in Hong Kong at ANZ) said that the property tax would likely be rolled-out in cities where there is not too much competition in their real estate markets.

“Lower-tier municipalities would need to follow the lead of top-tier cities.”

WHAT IS THE TAX RATE?

While a rate of 0.7% is possible, China may use a tiered system with rates that differ by city. Julian Evans-Pritchard is a senior China economist at Capital Economics.

In the U.S. some counties with high property tax rates exceed 2% to 3% while others have lower effective property tax rates. The average effective rate in the United States is however 1.1%. It should therefore be possible to attain 0.7% urban China,” said he.

He said that a 0.7% tax rate would have produced 1.8 trillion Yuan ($281billion) in tax revenue by 2020, which is more than the net land sales made last year by local governments.

The hypothetical income from this would correspond to Finland’s gross national product.

WHAT MAY BE IMPACTED ON LOCAL GOVERNMENTS?

The local authority will be able to use a property tax as a way of generating income they can invest in infrastructure investments and public services.

Lu Wenxi from Centaline, chief analyst for property agency Centaline, stated that it may produce fiscal revenue equivalent to 70% to 80% of land sale revenues.

Lu believes that this can be sustained and help local governments to reduce dependence on land sales.

Rocky Fan, an economist with Sealand Securities, stated that local governments might not be getting the new revenue and may have less incentive to collect taxes.

He said that if local governments use the money locally, it would be against “common prosperity”, which calls for a centralised redistribution system.

HOW ARE DEVELOPERS HEARD?

An increase in property taxes will result in higher holding costs for investors. This would allow home-owners to channel some of their housing stock into the market, increasing demand.

According to a developer with a middle-sized office in China, this will cause a decrease in inventory digestion and cash collection. It could further pressure their cash flow and increase their liquidity.

WILL CHINA’S CAPITAL MARKETS BE AFFECTED?

Sealand’s Fan stated that a property tax would increase the price of real estate and trigger asset reallocation toward capital markets.

China’s central bank estimates that 60% of urban households are made up by real estate assets. The remaining 20% is allocated to financial assets like stocks and bonds. However, the U.S. household holds over 40% of its wealth in financial assets.

“People won’t hoard properties with a property tax. Fan explained that instead, people will invest their money in capital markets and benefit from companies.

He warned that while the levy will reduce financial risk in China’s overpriced property market, it must be implemented carefully to minimize its short-term effects.

It is important to allow the market to fully digest the policy before you can respond. A stampede can lead to property price crashes, which could be dangerous for your financial health.

($1 = 6.41111)

Mainland China’s Reliance on Land Sales (by province) https://tmsnrt.rs/3lyvluJ

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