Tag Archives: property tax

And The Greatest Of These Is Stability

THE PECKING ORDER of the priorities laid out by the Financial Stability and Development Committee (FSDC), China’s top financial policy committee, on March 16 is probably stability, economic stimulus and greater clarity on the regulation of the platform internet companies.

The readout from the meeting, chaired by Vice Premier Liu, also represents a short-term order of business in response to some unexpectedly gusty economic headwinds rather than a long-term change of policy course — an effort to stabilise financial markets and bolster investor confidence.

There is nothing in the reports of the FSDC’s deliberations to suggest private companies will not have to align themselves with government policy objectives or that current policy objectives have changed materially.

On the contrary, financial institutions were told to ‘consider the big picture’ and firmly support the development of the real economy, while regulators were told to complete the ‘rectification’ of the platform internet companies soon and with transparency, not to ease off them.

Nonetheless, investors in Chinese financial markets chose to see only light at the end of the tunnel, not the darkness surrounding them of late. The CSI 300 Index of mainland shares climbed 4.3%, while the Hang Seng China Enterprises Index jumped 13% in Hong Kong, recouping nearly half of its loss this year.

The China Banking and Insurance Regulatory Commission encouraged bank subsidiaries, asset managers and insurance companies to increase their investment in equities. The People’s Bank of China said the risks in the real estate market must be dealt with ‘under the principle of steady progress’. The finance ministry let it be known that there would be no further expansion of the property tax trial this year, regardless that President Xi Jinping in a speech last October indicated that a national property tax would be a centrepiece of ‘common prosperity’ .

Going even slower on deleveraging the real estate sector and introducing a property tax is a sign of how worried authorities remain about the housing market’s slump, the intractability of developers’ debt and their potential knock-on effects for the broader economy.

Despite regulators relaxing M&A funding rules and being more permissive towards developers taking on new debt, reversing the squeeze on financing for property developers, potential buyers have remained cautious. It has only really been state-owned banks buying up their clients’ distressed deals.

Reuters news agency has reported that in Shanghai, authorities told local state-owned enterprises (SOEs) to buy new bonds being sold by Greenland, a developer at risk of defaulting on a $500 million offshore bond in December. Reuters says this is the first known example of SOEs being ordered to participate this way in a bailout.

The war in Ukraine poses further challenges to an economy also dealing with an uncertain global economy, the effects of the most menacing surge in new Covid cases since the pandemic’s earliest days at the start of 2020, and the unexpected outflow of capital when other emerging markets are attracting it.

At the Two Meetings earlier this month, authorities made it clear that some long-term economic reforms would be put off for now in order to focus on growth this year. Even before then, at the Central Economic Work Conference at the end of last year, stability was the watchword.

Stability will matter more than ever in the Party Congress in the autumn. Investors should remember that their sentiment is also expected to fall in with that cause.

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China’s Property Tax Edges Closer But Is Still Distant

IT HAS BEEN a decade since a property tax was piloted in Shanghai and Chongqing. However, on October 23, the National People’s Congress announced that these pilots would be extended to other cities in a five-year test, although details have not been made public.

The decade-long gap is indicative of how much resistance there has been to bringing in a property tax nationally in the meanwhile.

Unaffordable home prices are a significant grievance among the urban middle class, especially for younger members struggling to get on the property ladder. Yet, it is also the primary means of accumulating wealth, particularly for the subset of the middle class who are officials. According to the rating agency Moody’s, property accounts for about 70% to 80% of household wealth in China.

The current five-year plan (2021-25) promises the introduction of a property tax within its term. However, when President Xi Jinping called for a property tax earlier this month, albeit couched in terms of curbing property speculation and limiting excessively high incomes under his ‘common prosperity’ rubric, there was scepticism about whether this latest attempt to introduce it more widely would be any more successful than previous efforts.

A property tax would be instrumental in reforming China’s fiscal model in a way that would support more balanced development and reduce local authorities dependence on land sales to raise revenue — and the associated opportunities for pocket lining by local officials. More than 20% of provincial and municipal government revenue comes from land sales to developers, totalling some $1.3 trillion last year.

A property tax would have to replace that and more. The limited schemes being tested in Shanghai and Chongqing accounted for an estimated 5% of local tax revenue at most last year. Sticking our fiscal finger in the air, we reckon that a national property tax, like property taxes in most countries, would have to extend far beyond the superwealthy to raise the revenue that would be needed.

The political obstacles to a property tax remain high, although arguably the least high of any point in the past decade. For many, officials in particular, it will not be so much the taxes to be handed over to the central government as the disclosures of properties for tax assessment.

There is also the significant risk that, if mismanaged, it would exacerbate the slowdown in the property market triggered by the Evergrande crisis.

There is some headroom for growth to slow and still meet official targets of around 6% growth. Yet, a prolonged or significant slowing of the economy beyond that could cause politically troubling social instability.

The expanded trials of property tax will likely start small and be implemented gradually. Wealthy Zhejiang province has been floated as a possible candidate. Other reports speak of up to 10 cities being selected. First-tier and core second-tier cities would be the most likely to be chosen. What the tax rate would be, what it would be applied to and when it would start has still probably to be argued out. Similarly, what, and more importantly, who gets an exemption or preferential rate.

If Xi throws his weight behind pushing through a property tax, it will be a litmus test of how powerful he is. However, as he has given himself five years for the expanded pilots, we may well know the answer to that by other means by then.

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