One of China’s leading economists anticipates the widespread introduction of property tax pilot schemes throughout the country, in a bid to improve the revenue-raising capabilities of local governments whose debts could pose a systemic financial risk.
On 25 April, the Minister of Natural Resources announced at the National Conference on Natural Resource and Real Estate Registration and Certification that China has achieved unified registration of all real estate in the country.
The move was much hailed in China’s state-owned media as a major development in efforts to improve both property rights and market transparency.
Leading Chinese economist Ren Zeping (任泽平) says that the unified registration system signals the start of efforts to implement a property taxation system on a nationwide basis.
“We believe that unified registration of all real estate is a necessary but not sufficient condition for the collection real estate tax,” Ren wrote in an online opinion piece.
“Subsequent tax collection would still require legislative processes, and pilot programs could soon be launched in hotspot cities such as Xiamen and Shenzhen.
“In the long run, the trend will be towards a transition from land finance to real estate tax.”
China’s local governments still reliant upon land revenues
China has seen increasing calls for reforms to the fiscal system over the past decade, after local governments amassed burdensome debts in the wake of the Global Financial Crisis (GFC).
Since the early 2000s, China’s local governments have been significantly dependent upon a land-based local financing system to raise fiscal revenues. This was made possible by housing privatisation policies implemented during the period from 1998 to 2003, that led to the creation of a market for urban land development.
Municipal governments around China made extensive use of land sales to raise funds, as well as created “local government financing vehicles” (LGVFs) that used state-owned land as collateral for bank loans. This enabled local governments to bypass prohibitions on bank borrowing, with loans repaid by subsequent sales or leases of land during a boom market in the property sector.
As a consequence, net revenues from land sales and leases comprised around 20% of local government revenues by 2010.
This LGVF-based financing model entered a state of overdrive after the GFC, when local governments ratcheted up their debt levels with land-collateralised bank loans for the purpose of funding Beijing’s 4 trillion yuan stimulus program.
This led to an explosion of government debt via LGVFs, much of it likely to be non-performing given that local banks often made loans against land at irrationally high valuations.
In 2013, the National Audit Office estimated that local government debt had nearly doubled from 2010 to approach 18 trillion yuan, equal to around one-third of GDP.
Shift away from land-based fiscal revenues inevitable
As a consequence of the debt problems created by the land-based finance model when put to the purpose of mass stimulus, as well as subsequent changes to the Chinese property market, Ren Zeping forecasts a shift away from land-based financing towards real estate taxation.
“The trend of transitioning from land finance to real estate tax is inevitable. The main reason for the launch of a real estate tax is that local finances are tight. As the era of large-scale real estate development comes to an end and era of housing inventories commences, new sources of funds need to be raised.
“In some cities, the real estate market is sluggish, there is a large-scale rejection of land auctions, and small and medium-sized enterprises are facing operational difficulties, all of which pose great challenges to local finance.”
Real estate tax to be implemented via pilot schemes
With regard to the launch of pilot schemes for real estate taxes, Ren advises a targeted initiative which focuses on key urban areas where housing suffers from affordability problems.
“As China’s housing stock reaches a basic equilibrium and the number of homebuyers as well as the total population peaks and declines, the real estate market has entered a period of ‘structural differentiation’ and the performance of property markets in different regions is highly variable.”
“Pilot areas should focus on hotspot cities with significant pressure on rising housing prices, such as the Yangtze River Delta, the Pearl River Delta, the Beijing-Tianjin-Hebei region and other regions, as well as some regional central cities.
“It is expected that pilot implementation of real estate taxes will gradually include hotspot cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Hangzhou, Ningbo, Suzhou, Dongguan, Sanya, Haikou, Chengdu, Xi’an, and Xiamen.”
Trials will be tailored on an ad hoc basis for the particular conditions for each city, in order to provide a basis for subsequent legislation.
“The collection plan will vary in each city, following the basic principles determined by the State Council,” Ren wrote.
“Considering that the pilot implementation will come first, and legislation will follow, a relatively simple plan may be adopted to rapidly promote the pilot program.
“The plan may involve determining the deductible area and amount based on the number of household members, followed by collection at an average tax rate.
“Thus, the plan would not be too complicated, and could ensure a rapid start with gradual improvement. It is recommended that the tax be levied at the inventory accumulation phase, while reducing the tax on transaction links, in order to avoid excessively increasing the burden in the average citizen.”
Ren called for the tax on low-income and demand-driven households to be reduced or subject to exemptions, while the tax burden on owners of multiple houses or luxury homes for speculative ends should be more significant, in line with Beijing’s long-standing policy that “homes are for occupation, not speculation.”
Launch of trials awaits market recovery
Given the enervated state of China’s property markets at present, Ren advises restraint and caution in the implementation of real estate tax trials, as well as a greater focus in the short-term on the restoration of market confidence.
“After the Spring Festival, the real estate market experienced a brief period of prosperity, but the growth rate slowed down after April, and the momentum of the market’s ongoing recovery remains somewhat insufficient,” Ren writes.
“Considering the current early stage of economic recovery, it is suggested that pilot programs for a real estate tax should be postponed and that the priority should be given to development, which is the most urgent task at present.
“After economic recovery is fully achieved, exploration and trials implementation of real estate taxes can be implemented a greater sense of priority and urgency.”