Central Bank Says Property Market Creating Major Risk for Financial Sector

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One of the central bank’s senior-most officials says that China’s property market has become an acute source of risk for the financial system, and called for the use of an annual tax to curb burgeoning price bubbles.

In an article recently published by the central bank’s flagship media publication Xu Zhong, the head of People’s Bank of China’s research department, said that the country’s bloated property market is having a highly adverse impact upon the health of the financial sector.

“Real estate has serious problems such as crowding out investment (from other areas), impeding the transformation and healthy development of the economy, and is also an important source of financial risks”, he wrote.

According to Xu the property bubble is the result of ineffective regulation of financial markets, as well as the continued use of land auctions by local governments to raise funds and influence economic development, which has the effect of restricting supply and driving up prices.

In Xu’s opinion fine-tuning of monetary policy will not be enough to resolve the “serious” problems caused by China’s overheating property market.

He instead advocates the use of an annual property taxes on homeowners across China as a means of curbing asset inflation and preventing price growth from getting out of hand.

At present Chinese homeowners are only entitled to a lease on their homes for up to 70 years, and are not required to pay recurring property taxes for any domiciles they own.

Xu points out that broader tax reforms that include an annual property tax will also help to shore up the finances of local government, and reduce their dependence upon land sales for funding.

He also advocates the continued use of strict controls in first and second-tier cities, which are host to the most overheated property markets, as well as the inclusion of measures of home mortgage lending in macro-prudential assessments of finance sector risk.

“We must pay attention to the impact of property prices on macro control policies,” he wrote.

“We can consider adding indicators on volatility in broad property lending to the macro-prudential assessment system to control property price volatility from the perspective of growth of property lending.”

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