The recent publication of a speech by president Xi Jinping saw the leader detail in public for the first time how he plans to curb excessive wealth and achieve his goal of “common prosperity” for China. But it was his mention of a property tax, which has been much-discussed in China over the last two decades, that carried the most significant implications.
A few days after excerpts of the speech were published, the country’s top legislative body announced that it will roll out a five-year pilot scheme for the property tax in some regions, despite steep resistance from the middle class and political elites, many of whom own a vast number of properties.
Aside from the fact that it would exclude rural households, the announcement lacked specifics, including the location of the trials and the range of the tax rate. But it represents China’s biggest step towards having a nationwide property tax on homes, which has been discussed since at least 2003.
Xi, whose heightened power is compared often to that of chairman Mao Zedong, seems determined to push through the tax, despite its unpopularity. With around 70% of Chinese families’ wealth parked in properties, it could be his most powerful tool in adjusting the “overly high incomes” targeted by his common prosperity campaign. “In the past years, the value of residential housing has been skyrocketing due to its rising prices, which helped many families to accumulate their wealth, making properties an important element in creating wealth gaps,” wrote Economic Daily, a state-owned media outlet this week. “A property tax will focus on adding taxation for owning the asset to enhance the regulation and adjustment of high income.”
It is too early to say definitively how the property tax could affect China’s economy and society. It may not bring down housing prices substantially, as that will still depend on supply and demand. But the consensus among analysts is that the taxation will finally alter the habit of citizens, developed since the country allowed private home ownership in 1998, of holding on to properties.
“Recent events likely mark the start of a new paradigm for China’s growth and its property sector,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities. “One featuring greater state involvement with less policy support, lower investment and slower activity for the sector, reduced real-estate lending concentration, and less household allocation in property assets.”
In short, the tax could send China onto a different path of development.
Why does China want a property tax?
Despite its hesitation over enacting a property tax, China has long felt the acute need for it.
China’s existing property-related taxes mainly target commercial real estate, and the construction and transaction processes of residential properties. Taxes like the one being piloted by Xi are the largest revenue source for local governments in many US states.
The country’s leaders believe there’s too much speculation in the sector, which they say has pushed up housing prices, widened the wealth gap, and suppressed residents’ desire to spend money elsewhere. “Houses are for living, not for speculation,” Xi famously said in 2017, sending a strong signal of his discontent about the sector.
Prior to the announcement of the tax, property developers had already faced a squeeze. China has pushed real estate firms to deleverage in an effort to deal with their rising debt levels. This has made it harder for giant companies like Evergrande to raise funding, and has led developers to grab land at a slower pace.
This has in turn put pressure on local governments. China only allows the private ownership of properties, whereas land must be leased longterm from local authorities or village collectives. Land sales to property developers account for a third of their revenue. In August and September, the value of land sales in China decreased by double digits, according to Reuters.
This is lending an urgency to the launch of the property tax, which will expand local governments’ fiscal revenues, wrote analysts from Dongfang Securities.
What could the property tax look like?
Two of China’s largest cities, Chongqing and Shanghai have trialed property taxes between 0.4% and 1.2% since 2011, mainly targeting second homes, luxury properties, and purchases by non-residents. The new tax is expected to cover a much wider range of properties.
An important issue is whether the pilot tax will be applied to existing properties or ones purchased going forward, said Zoe Yang, assistant professor at the School of Hotel and Tourism Management at Hong Kong-based CUHK Business School. ” If the tax is imposed on existing properties that will be a huge burden for residents, who would have to deal with both the tax and mortgages,” she said. The disposable income of Shanghai residents per capita is around 70,000 yuan ($10,951). For a 10 million yuan house—a common price tag in an affluent city—even a 0.5% tax rate would cost 50,000 yuan a year, adding pressure to families, she said.
Many analysts expect the central government to focus on taxing all houses. “If the property tax only covers newly purchased homes it will have a small scale, which means it can hardly achieve the purposes of boosting fairness and contributing more fiscal revenues,” said analysts from Dongfang Securities. It is likely the government will give a rough guideline on the tax rate for local authorities to use as a guideline, they wrote. Shenzhen, Hangzhou, Guangzhou, and Nanjing, some of the country’s most developed cities, could also be possible candidates for the pilot scheme, according to Pang at China Renaissance Securities.
A delicate balance
Although the property tax may help reduce the wealth gap in the long run, it will be an immediate sharp shock. The government will need to carefully calculate the range of the tax rate to avoid hurting citizens and the economy too much. The increased thriftiness and reduced spending of consumers is already a concern for China’s economy, which has relied on exports and investment for its fast growth.
For example, retired people who rely on their pensions as a major source of income would struggle to pay the new tax, especially if the value of their home has risen significantly over the years, said Yang, the professor. Rent in first-tier cities which have seen large influxes of people could also rise if the tax comes through, as landlords would want to transfer part of their burden to tenants. Eventually, however, the rich would still be taxed the most, especially if China adopts a progressive model, applying a higher tax rate to individuals holding many properties, she said.
That’s small consolation for prospective home owners. “I am just about to be able to pay mortgage together with my partner, and we have already used up savings from ourselves and parents for buying the house. I don’t know how can people like me survive after the property tax?'” asked a Chinese internet user after news of the pilot tax emerged.
The property tax risks “accelerating the outflow of people and leading to a plunge in property prices,” wrote Chinese finance columnist Shinian Kancha on social media platform Weibo. For underdeveloped, smaller inland cities, it is equal to “drinking poison to quench thirst,” the columnist wrote.