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Milking the cash cow through property tax
February 26, 2011, Saturday
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FOR foreign visitors to China, Chongqing might best be known as the port city where their Yangtze River excursions begin.
For locals, the heaving southwestern urban jungle is more likely to stand out on their map for another reason: its burgeoning property market whose jaw-dropping prices are squeezing out all but the wealthiest investors.
Chongqing is far from alone.
As prices soar, commercial and residential property buyers in 2008 were paying a hefty premium of 255 percent over the national average in China's tier-one cities, and 140 percent in Chongqing and other smaller tier-two and tier-three cities.
All told, cities like Chongqing look increasingly like they're sitting on a huge property bubble that's ready to burst dramatically.
US hedge fund veteran Jim Chanos of Kynikos Associates told the Financial Times in January that he is now short on China property stocks, pointing out that based on China's preliminary 2010 accounts, fixed asset investment - including real estate - is at a record 70 percent of GDP; in comparison, at the peak of property bubble in 2006 and 2007 in the UK and the US, such investments were in the "high teens."
Though a national problem, it's Chongqing, along with Shanghai, that the central government has singled out by making them the country's first-ever local authorities to tax residential property.
Under the pilot programs - which have no set end date - Shanghai residents must now pay an annual tax of 0.6 percent on second homes bought after January 28 and non-residents must pay 0.6 percent on any new home bought in Shanghai, or 0.4 percent if they meet certain conditions.
Meanwhile, Chongqing's package of taxes has three rates - 0.5 percent, 1 percent and 1.2 percent - depending on the type and price of properties purchased.
But trying to curb speculation and cool the market aren't the sole reasons for the tax, said an entourage of government officials at a press conference held the day before the pilot projects began on January 28.
Revenue stream
Another aim: to begin an overhaul of the nation's fiscal program, which until this year taxed commercial and industrial but not residential property, denying local governments an important revenue stream.
According to the officials, the revenue generated from the new taxes will go toward building more low-income housing for the poor and other much-needed infrastructure in the country's fast-growing urban centers.
The new local taxes may only be a short-term fix - if one at all - to both deflate asset bubbles and bolster municipal balance sheets. What's needed are deeper structural reforms to the country's woefully out-dated taxation system. The challenge for the government will be to confront the needs of various interest groups.
The first are the individual investors, including the country's thousands of so-called "house slaves," home buyers who have invested the savings of several generations and taken on huge mortgages to finance property purchases. Many Chinese see real estate as one of the few - if not only - secure, long-term investment options they have. By contrast, investments in stocks and shares in China have been volatile.
As for any interest-based investment products, they are neither high yielding nor widely available to the general public. And parking savings in bank accounts is even less enticing given the recent period of negative real interest rates and now rising inflation.
Without lucrative alternatives, experts predict that new taxes and ownership restrictions will do little to dampen the property shopping sprees.
"If we look at market demand now, many people who purchase more than one apartment do so for wealth preservation," says Long Shengping, professor of East China Normal University. "The real estate tax won't have any significant impact on them."
Nor will the tax and other measures have much impact on local government coffers.
Under a system set up in the 1990s, local governments currently receive less than a third of most of the tax revenue, despite the fact that they, not Beijing, provide the bulk of public services, according to Liu Zuo, director of the Taxation Science Research Institute affiliated with China's State Administration of Taxation.
That imbalance leaves local governments under constant budgetary pressures, and many have become reliant on land conveyance charges and the use of land as collateral for bank loans to make ends meet.
Ji says he's skeptical that revenue from the tax will be high enough to discourage local governments from selling land, especially after the record amounts they've been raising recently.
According to the Ministry of Land, land sales receipts increased 70.4 percent in 2010 to a record 2.7 trillion, or 33.75 percent of all fiscal revenues in China.
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article. The second and last part of the article will be published on Tuesday.)
For locals, the heaving southwestern urban jungle is more likely to stand out on their map for another reason: its burgeoning property market whose jaw-dropping prices are squeezing out all but the wealthiest investors.
Chongqing is far from alone.
As prices soar, commercial and residential property buyers in 2008 were paying a hefty premium of 255 percent over the national average in China's tier-one cities, and 140 percent in Chongqing and other smaller tier-two and tier-three cities.
All told, cities like Chongqing look increasingly like they're sitting on a huge property bubble that's ready to burst dramatically.
US hedge fund veteran Jim Chanos of Kynikos Associates told the Financial Times in January that he is now short on China property stocks, pointing out that based on China's preliminary 2010 accounts, fixed asset investment - including real estate - is at a record 70 percent of GDP; in comparison, at the peak of property bubble in 2006 and 2007 in the UK and the US, such investments were in the "high teens."
Though a national problem, it's Chongqing, along with Shanghai, that the central government has singled out by making them the country's first-ever local authorities to tax residential property.
Under the pilot programs - which have no set end date - Shanghai residents must now pay an annual tax of 0.6 percent on second homes bought after January 28 and non-residents must pay 0.6 percent on any new home bought in Shanghai, or 0.4 percent if they meet certain conditions.
Meanwhile, Chongqing's package of taxes has three rates - 0.5 percent, 1 percent and 1.2 percent - depending on the type and price of properties purchased.
But trying to curb speculation and cool the market aren't the sole reasons for the tax, said an entourage of government officials at a press conference held the day before the pilot projects began on January 28.
Revenue stream
Another aim: to begin an overhaul of the nation's fiscal program, which until this year taxed commercial and industrial but not residential property, denying local governments an important revenue stream.
According to the officials, the revenue generated from the new taxes will go toward building more low-income housing for the poor and other much-needed infrastructure in the country's fast-growing urban centers.
The new local taxes may only be a short-term fix - if one at all - to both deflate asset bubbles and bolster municipal balance sheets. What's needed are deeper structural reforms to the country's woefully out-dated taxation system. The challenge for the government will be to confront the needs of various interest groups.
The first are the individual investors, including the country's thousands of so-called "house slaves," home buyers who have invested the savings of several generations and taken on huge mortgages to finance property purchases. Many Chinese see real estate as one of the few - if not only - secure, long-term investment options they have. By contrast, investments in stocks and shares in China have been volatile.
As for any interest-based investment products, they are neither high yielding nor widely available to the general public. And parking savings in bank accounts is even less enticing given the recent period of negative real interest rates and now rising inflation.
Without lucrative alternatives, experts predict that new taxes and ownership restrictions will do little to dampen the property shopping sprees.
"If we look at market demand now, many people who purchase more than one apartment do so for wealth preservation," says Long Shengping, professor of East China Normal University. "The real estate tax won't have any significant impact on them."
Nor will the tax and other measures have much impact on local government coffers.
Under a system set up in the 1990s, local governments currently receive less than a third of most of the tax revenue, despite the fact that they, not Beijing, provide the bulk of public services, according to Liu Zuo, director of the Taxation Science Research Institute affiliated with China's State Administration of Taxation.
That imbalance leaves local governments under constant budgetary pressures, and many have become reliant on land conveyance charges and the use of land as collateral for bank loans to make ends meet.
Ji says he's skeptical that revenue from the tax will be high enough to discourage local governments from selling land, especially after the record amounts they've been raising recently.
According to the Ministry of Land, land sales receipts increased 70.4 percent in 2010 to a record 2.7 trillion, or 33.75 percent of all fiscal revenues in China.
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article. The second and last part of the article will be published on Tuesday.)
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