Some things are so predictable you could almost set your watch by them: debt ceiling standoffs on Capitol Hill, the Bitcoin bubble rising from the dead again, Manchester City winning the Premier League. Add to that list the news that China’s planned property tax has run into serious headwinds.
Feedback on the proposal both from Communist Party elites and rank-and-file members has been overwhelmingly negative, the Wall Street Journal reported Tuesday, citing people familiar with the deliberations. Han Zheng, the vice premier tasked with the rollout, has recommended against imposing the levy too widely for now, and a plan for a test run in 30 cities has been scaled back to about 10, the report said.
There’s no question that a recurrent tax on property ownership would be beneficial for China’s economy and society in the long run. It would put local government finances on a more stable footing, reduce incentives for speculation and overbuilding, and provide funds for social programs. That explains why a renewed push for the tax (which has been debated periodically for more than a decade) emerged this year as a plank of President Xi Jinping’s campaign to reduce inequality and build “common prosperity.”
The hurdles, though, are formidable. The tax would alter the fundamental dynamics of a real estate industry that has come to account for an estimated 29% of China’s gross domestic product. Home prices relative to incomes in many cities are exponentially higher than in global centers such as London, New York and Sydney, where values are already stretched. Tampering with a market perched at such a precariously high level risks potentially catastrophic economic fallout, especially when authorities are already engaged in a drive to control developers’ leverage.
But if the economics are daunting, the politics present a potentially even more insuperable obstacle. Nine out of 10 households in China own their own homes, and many people — including party members — have more than one property. Homes are often kept empty rather than rented out: China had an estimated 60 million vacant dwellings as of 2017. Owners who are asset-rich on paper may lack the cash flow to pay a regular levy on the value of their holdings.
The transparency that a property tax would entail might be troubling for some party members. An essential part of imposing such a levy is constructing a register of who owns what. Officials on modest government salaries might suddenly find it awkward to explain how they and their families had come into possession of multiple properties. That may help to explain the strength of resistance from within party ranks.
The government has shown some determination in its efforts to impose debt discipline on the real estate sector — standing by its “three red lines” and refraining from bailing out China Evergrande Group, the world’s most indebted developer, despite incipient signs of contagion. That fallout alone arguably should make authorities more cautious about pursuing disruptive changes on another front. Home prices fell for the first time in six years, data showed Wednesday, and residential sales tumbled 17% in September.
There have been signs that the government is ready to relent. With an energy crisis also weighing on the economy, authorities have moved to slow the pace of its economic overhaul, Bloomberg News reported Tuesday. A lengthy Xi speech on common prosperity that was reproduced by the party’s theoretical journal Qiushi last week called for “actively and steadily promoting the legislation and reform of real estate tax while ensuring the good completion of pilot projects.”
Interpret that to mean that the ultimate goal of a nationwide property tax that contributes meaningfully to revenue collection is still far away. In this world, nothing can be said to be certain except death and taxes, as Benjamin Franklin observed. China’s property industry can at least rule out the taxes part, for now.
Bloomberg
