Will China’s property tax rob from the rich and give to the poor, aiding common prosperity drive?

·10-min read

This is the second in a three-part series looking at the potential impact of China’s proposed property tax law.

On the fourth Friday of every month, 30-year-old Ding Xunan makes a nearly 20-hour train journey of over 1,700km from Shenzhen in southern China to Pingdingshan, a prefecture-level city in the central Chinese province of Henan to reunite with his new wife.

The newlyweds are unable to afford the property prices in the big urban cities, so in 2019, car factory worker Ding bought a flat in his wife’s hometown – a medium-sized city of around 4 million people in the hinterland province in central China’s Yellow River Valley.

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I’ve already spent almost all my own and my parents’ savings on getting married, including the cost of the wedding and housing, but I still have a brother who needs to get married in the future

Ding Xunan

“I made a down payment of about 460,000 yuan (US$72,000), and will have to pay back the mortgage by more than 3,600 yuan (US$564) a month for the next 25 years,” Ding said.

“The prices were very high back then, about 8,000 yuan a square metre, and now there are very many communities nearby at around 6,000 and 7,000 yuan a square metre.

“Property prices are starting to drop in growing third, fourth and fifth-tier cities, but I feel relieved. I’ve already spent almost all my own and my parents’ savings on getting married, including the cost of the wedding and housing, but I still have a brother who needs to get married in the future.”

Ding welcomes the idea of a recurring property tax, the first of its kind to be introduced across China, after President Xi Jinping announced in August the move aimed at narrowing the yawning wealth gap and aiding his push to achieve so-called common prosperity in the world’s most populous country.

What is China’s common-prosperity strategy?

“We are just afraid that the policy will be changed suddenly overnight, and soon the housing prices will skyrocket again,” Ding added.

“I feel that the government has to come up with real ideas for narrowing the gap between the rich and the poor, like launching reforms in education and property tax reforms as an important part of common prosperity.”

Under the plans for the property tax, pilot schemes will first be carried out in several cities for five years before eventually being rolled out nationwide.

Property tax is a core component of common prosperity. Without it, income disparity cannot be adjusted because the majority of people’s wealth is in properties

Yi Xianrong

But while no details of the tax or pilot schemes have been revealed, expectation of the tax and credit tightening measures launched previously have cooled the real estate sector remarkably in recent months, particularly in lower-tier cities.

“Property tax is a core component of common prosperity. Without it, income disparity cannot be adjusted because the majority of people’s wealth is in properties,” said Yi Xianrong, a former researcher with the Chinese Academy of Social Sciences.

“The tax is designed to benefit ordinary people who own one or two apartments covering a small or medium area. Most people in third or fourth-tier cities buy an apartment to live in. They suffer from unreasonably high property prices for a long time. I hope the central government can deliver the promise and don’t let the people down.”

In 70 major cities across the country, second-hand property prices fell in 64 month on month in October, up from 53 in September, 43 in August and 29 in July, according to the National Bureau of Statistics.

However, the official housing price index may also be understating the scope of the problem by covering only 70 large and medium-sized cities and excluding more than 3,000 third, fourth and fifth-tier cities in China.

While there is no official list dividing China’s cities into tiers, first-tier cities are the nation’s largest – namely Beijing, Shanghai, Shenzhen and Guangzhou, while second-tier cities are generally provincial capitals and special administrative regions. Third and fourth-tier cities are prefecture or county-level capitals, while fifth-tier cities are even smaller but account for around 70 per cent of China’s urban population of 890 million.

The property tax is definitely aimed at the rich in the prosperous cities, not young wage earners like us, let alone those living in the rural counties or towns

Ding Xunan

“The property tax is definitely aimed at the rich in the prosperous cities, not young wage earners like us, let alone those living in the rural counties or towns,” added Ding.

“But if house prices in China can continue to fall, or stagnate for quite a long time, I think it would actually be good for the younger generation in smaller cities, and the country’s further urbanisation.

“My brother came to visit me in Shenzhen earlier this year and once joked that he was going to lie flat, neither getting married nor having children. I felt very guilty after hearing what he said.”

The social phenomenon of “lying flat”, or tang ping in Chinese, means doing the bare minimum to get by, and striving for nothing more than what is absolutely essential for one’s survival. It became such a concern that it finally warranted a public condemnation by President Xi Jinping as it strikes at the very heart of his “Chinese dream” ideology.

What does China’s coming ‘common prosperity’ mean for the rich?

In lower tier cities the decline in property prices is more obvious due to an oversupply of new housing and as the population moves out to other metropolitan areas.

In September, the inventory digestion cycle in China’s overall housing market rose to 14.92 months, up from 13.04 months in August, and even as high as 17.53 months in third and fourth-tier cities, according to a report released last month by Cric China, one of China’s main real estate data application service provider.

The inventory digestion cycle is the time it takes to sell commercial houses, and the longer it takes, it can leave property developers and the local market facing significant cash flow shortages and falling house prices pressure.

I think whether it is the fall in property prices or with or without property tax, most local people will not trade their properties, and it’s hard to sell because there is few new population moving in

Peng Lunbo

“The main buyers of properties in Tianmen city are local civil servants or those working or doing business in big cities, who need a new house for marriage or for their children to study in their hometown city. Very few outsiders come to buy houses for investment.” said Peng Lunbo, a 24-year-old from Tianmen city in Hubei province.

“I think whether it is the fall in property prices or with or without property tax, most local people will not trade their properties, and it’s hard to sell because there is few new population moving in.

“If you look at the house price, wealth has indeed shrunk compared to two years ago. But it’s just good for the young people born in the nearby rural areas who are going to get married and give birth in nearby cities.”

From 2010 to 2020, the average national population growth rate was 0.53 per cent, with first-tier cities growing at an average annual rate of 2.37 per cent, 1.91 per cent in second-tier cities, 0.43 per cent in third-tier cities and minus 0.45 per cent in fourth-tier cities.

“Now getting married will require the bridegroom’s family to buy a new house in a nearby city as well as a wedding dowry – marriage expenses traditionally offered by the groom’s family in the country. This is actually the cost of urbanisation of a rural family.” said Wang Yan from Liaoning province, who added that there are a significant number of single rural men who are finding it difficult to find wives.

According to data from the seventh national census, China’s urban resident population rose to over 900 million in 2020, with the urbanisation rate of the resident population reaching 63.89 per cent, with the rate set to exceed 70 per cent by 2035.

“The cost of living in small cities, relative to local incomes, is actually not low. Because of the lack of industry, most industrial and household goods are not cheap when they have to be imported from abroad,” said Gao Zhendong, an investor focused on developing industrial estates in China‘s interior provinces, who has visited several small cities in China.

“Supermarkets here rarely sell Coca-Cola because it has to be imported from other provinces and it is too expensive for the locals to afford.”

The best-case scenario is that house prices in smaller cities return to a low base and then rise slowly and modestly each year, which will be conducive to the next urbanisation in China

Gao Zhendong

House prices in a large number of county-level cities across the country have now fallen from a peak of more than 7,000 yuan per square metre in 2018 to around 3,800 yuan per square metre, Gao said.

“This has been the consensus, and while there have been protests by homeowners in some places, it is certainly under the control of the local government,” he added.

“The best-case scenario is that house prices in smaller cities return to a low base and then rise slowly and modestly each year, which will be conducive to the next urbanisation in China.”

Gao believes the property tax pilot scheme will not be implemented in the short term in the third and fourth-tier cities, while it is necessary to be wary of the sharp reduction in the fiscal revenues of local governments.

Is China’s local government debt a concern and what role do LGFVs play?

“Lots of local governments are facing severe problems of aborted auctions of land. For example, a small city in Hunan province originally planned to have land revenues of 9 billion for this year, but only 800 million yuan has been achieved so far,” he said.

“Meanwhile, it’s also obviously impossible to slap extra taxes on the ordinary people and [small and medium-size enterprises] in the lower-tier cities, whose incomes have been shrinking since the coronavirus. So we expect the government is likely to allow local governments to issue further debt financing.”

Gary Liu Shengjun, head of the Shanghai-based research group China Financial Reform Institute, said the property tax was likely to encounter strong opposition from local governments, which could lead to the proposal being delayed or even shelved.

Local governments have limited sources of revenue other than land sales and are likely to either reject the idea of a property tax or recommend a high tax rate to boost their coffers, according to Liu.

“Under either of these scenarios, local residents will be the victim,” Liu said.

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