The Introduction of Property Tax in China

Property taxes are common across the world. They are one of the most sustainable ways for local governments to earn money. This money is then used for social programs within the city. However, the system in China is totally different. There is no concept of property taxes at all! There are a few cities like Shanghai and Chongqing which levy taxes but by and large, the most populous nation on the planet does not really pay any property taxes.

In Shanghai, only people who have more than one home pay taxes on their homes whereas in Chongqing only the people living in the most expensive homes have to pay taxes. This is all set to change as the Chinese government mulls the introduction of property taxes. In this article, we will have a closer look as to how the introduction of property taxes in China will have a profound impact on the real estate market in the region.

How The Chinese Government Currently Raises Money?

The Chinese government currently raises money by selling land to real estate developers. It is no secret that the local governments in China have a lot of debt. Hence, each time they need to raise more money, they tend to sell land parcels at higher prices. These high prices may be good for the government in the short run, but they have created a housing crisis for the Chinese people.

The higher land costs lead to higher costs of constructed apartments. Since land parcels are sold at increasingly higher rates, there is a systemic push towards increasing apartment costs. This has created a dichotomy wherein only the rich are able to afford houses in China. Thus the current policy is a state-sponsored way of ensuring that housing prices will always keep escalating.

China has realized its mistake. It is aware that its current policy is keeping billions of people out of houses. This is the reason that the Chinese government wants to rectify its mistake by creating an alternate source of income via property taxes. This will remove the necessity for the government to sell land at high prices. However, the implementation of the property tax bill may not be as easy as it sounds. Although the Chinese government has been making rapid advances towards passing this bill, it is likely to face several obstacles. Some of the obstacles have been listed down as below:

Resistance from Wealthy

The Chinese government’s bill is likely to face severe resistance from the wealthy class in China. This is because it is a known fact that Chinese people tend to invest the bulk of their savings in China. The current market value of the residential stock in China is over $44 trillion.

Because of the spectacular return that the property market has provided, it has become the preferred source of investment for the Chinese elite. This is the reason why China is home to many ghost cities, i.e. fully built cities which do not have any inhabitants. If the current policy is implemented, the wealthy stand to lose a lot of money. This is the reason why they are opposing the implementation of a property tax.

Resistance from Bureaucrats

The Chinese bureaucrats have a lot of vested interests in the real estate sector. They are also part of China’s elite class. Also, since they were insiders to the central planning process, they knew which neighborhoods were going to be developed faster than others. As a result, they have made a lot of property investments. Bureaucrats have significant influence over the decisions of the Chinese government. Since they are against the implementation of a property tax, it would be very difficult for the Chinese government to pass such a bill.

Tax Base

There is considerable ambiguity about how the property tax will work. Will the property be taxes based on the purchase price? Or will it be taxed based on the current market value? The government itself believes that the real estate sector in China is overvalued. Hence investors are complaining that using an overheated market value as a tax base will lead to humungous tax payments.

China is considering creating an “appraised value” for properties. This value will be determined by the government and will be used for taxation. However, there is still confusion regarding how exactly this system will work.

Real Estate Crash

Lastly, there is a likelihood that the implementation of a property tax will lead to widespread sell-offs. According to several surveys, two in five real estate investors would be looking to sell off if any taxes were levied. If 40% of investors start selling their houses, this would create panic and drive the housing market down.

China needs a controlled devaluation of the housing market. If the prices were to crash all of a sudden, the Chinese banks would be significantly affected. This is because the banks have a lot of exposure to the real estate sector. Thus, a tanking housing market would be bad news for the state-owned banking system which is already struggling because money has been lent to many state-owned companies which are now defunct. Exacerbating the banking crisis will not be in the best interest of the Chinese government.

Hence, even though the Chinese government intends to introduce a property tax, in reality, the odds are stacked against them. The government will have to navigate a lot of issues before the proposed property tax can actually become a reality.

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