Seo Yeon Jeong
China stands alone among developed economies for its lack of property tax, a status that it has maintained over the years despite being the second largest economy in the world. However, with the nation’s largest real estate giant Evergrande tipping on the edge of a default crisis, the government may finally be compelled to cast off this unique position and to finally impose one.
In early October this year, the Standing Committee of the National People’s Congress (NPC), China’s top legislative body, decided to authorize a five-year property tax pilot program in selected cities such as Shenzhen, Hangzhou, and Hainan. This economic move is of great significance in regulating China’s real estate sector, but the stakes are high.
The dark side of China’s astounding economic growth over the past several decades lies in its unhealthy dependence on debt-fueled growth and property speculation. While the nation is building more and more apartments and stacking them higher and higher, the bubble under the housing system is becoming ever more inflated. The residential property market has been the single largest driver of the nation’s economy with the market substantiating about 20% of China’s GDP. This is partly the reason why the announcement of Evergrande’s possible default on its huge loans in September came as such a shock to the domestic economy and rattled the global economy.
However, the excessive risk-taking behavior of real estate companies should not simply be thought of as a product of greed of company owners’ self-aggrandization. Rather, it is a byproduct of China’s economic growth model: the state-capitalist system. With the land owned and distributed by the government, the idea that real estate is guaranteed and backed by the government is as old as the current Chinese housing market. China is a nation of homeowners and municipal governments have every incentive to support the ever-escalating land prices with land sales accounting for about 46% of total government fiscal revenue. In fact, some small cities actively encourage their rural residents to move to more urbanized and expensive high-rise apartments. Abetted by the supposed confidence of this one-way increase in property price, property developers took on massive debts to supply more and more apartments, eventually accumulating a mountain of debt around $5 trillion in total. Chinese home prices have experienced growth of over 2,000% since the 1990s. With real-estate contributing about a quarter of the nation’s economic output with $1.3 trillion raised from land sales revenue and the fact that 90% of citizens are homeowners, speculators’ high confidence in the escalating housing prices are not unfounded. However, China’s biggest real estate and properties companies such as Evergrande, Fantasia, Sinic Holdings, and China Properties Group failing to meet their loan payments shows signs of financial contagion and exposed the vulnerability of China’s housing bubble. While economists and market experts do not expect Evergrande’s crisis to be the next Lehman moment, it could increase global economic volatility.
Trapped under a financial crisis of its own making, will President Xi Jin Ping’s property tax plan be its exit? Since 2016, Xi has regularly said “housing is for living, not for speculation.” The property tax lies at the heart of Xi’s ambitious “common prosperity” plan as a measure to disincentive speculation and to solve China’s overdependence on the real estate market. The official state-run news agency Xinhua reported that the pilot program intends to tax all residential and non-residential properties. A real estate tax is needed to combat the most unsustainable elements of China’s economic boom and could help in redirecting capital towards other economic sectors such as high-tech industries, better social safety nets, or improving public services, but overcoming it will not be an easy task for China. A nationwide property tax could, in essence, alter China’s economic model in which the property market is inseparable from China’s road to becoming an economic powerhouse. Moreover, another critical challenge is the fear of instability and confidence drop among average consumers whose savings are inextricably tied to increasing housing values. A significant reversal in the major source of wealth accumulation among Chinese households is to be expected, and concerns over how the society will be able to adjust to a system that has lasted and shaped the social and financial system for over 40 years are rising.
Property tax is not a new phenomenon, however. Such an initiative has been discussed since 2003. In 2011, the city governments in Chongqing and Shanghai conducted a limited property tax trial. However, the taxes had little impact in curbing the skyrocketing home prices and dependence on land sales.
Thus, the expansion of property tax reveals Xi’s ambition and effort to return China’s economic policies back to Socialism with Chinese Characteristics by promoting income redistribution. In the short run, the tax could harm lower-income homeowners, but it may also push affluent owners to sell their often-empty housing investments. Whatever the short-term consequences may unfold, this pilot program signals a major pivot point in China’s fiscal history in which it sends a message that the mentality that housing is a “one-way bet” will no longer be infallible. However, with an overwhelming portion of average citizens’ wealth tied to real estate, what will this policy mean towards the country’s future growth and its impact on China’s current status as the second-largest economy? It is too early to determine its impact on the Chinese economy and society with the details of the plan yet to be specified, but the policy signals the start of the new paradigm for China’s growth strategy. The tax could potentially reduce the wealth gap, but the immediate economic sharp shock seems unavoidable. The government is facing a delicate balance where it’ll need to carefully calculate the range of tax rates to avoid hurting the citizens and its economy while maintaining its fast growth. Given the prominence of China’s economy and its intertwined nature in international trade, a slowdown on the nation’s economy will have a global impact and the global stakeholders will have to closely watch out for China’s progression towards the new chapter of its growth model.
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