China has revealed plans to introduce a tax on property in a new bid to cool the overheating property sector, and to give governments a new source of revenues.
There have been rumours of such a tax, but now it’s a reality. We don’t know anything about its composition or its planned start date.
In a statement yesterday on its website and reported in the Chinese media overnight, the State Council said in a report on its 2010 plan for economic reforms that the government “will deepen fiscal and taxation system reforms by gradually advancing property tax reform, reforming resource and environment taxes, researching and implementing the personal income tax reforms, and improving consumption tax systems”.
The statement did not detail the property tax reform plan. At the same time, other media reports said the Shanghai municipal government had also submitted its property tax proposal to the government for approval.
The National Development and Reform Commission, the state planning agency whose real estate tax plan was approved by the State Council yesterday, didn’t give any further clues, according to the reports. But the news had an immediate impact on Chinese shares.
The Shanghai market fell 2.4%, taking the loss for May to 9.7% and 20.9% for the year so far. But the real damage was done to property shares and the index that measures their performance fell 2.6% yesterday, to be down more than 28% from the start of 2010 and a massive 46% from its 2009 peak last July.
A tax on property would be a good earner for the central government and would give it a way of better controlling demand and supply and trying to match that to lending controls. It could also be a way of helping the many local government bodies who have been playing in the property market and have huge loans, backed by land and property developments that are losing money and value as the controls on the sector tighten.
Already this year the central government has tightened controls on lending by cutting loans growth targets, forcing banks to check the security of their property loans, telling banks not to lend to developers using undeveloped land as security (it has to be established property). It also told local governments to stop playing in the property sector, banned banks from funding them.
As well, people have been banned from buying a third home in some cities, such as Beijing, and deposit requirements have been boosted for second homes. People from outside many major cities and towns are now not allowed to buy property until they have paid local taxes for a year.
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As we have seen, these measures have hurt the stock market and caused prices to fall in many cities and towns, according to anecdotal reports.
But in the year to April, house prices in the country’s 70 major cities rose a reported 12.8% and some analysts say that the rise could have been as high as 18%.