Politics push China's property tax toward Beijing

BEIJING Tue Mar 13, 2012 7:33pm EDT

Labourers work on a railway construction project in front of a residential complex in Shenyang, Liaoning province March 5, 2012. REUTERS/Stringer

Labourers work on a railway construction project in front of a residential complex in Shenyang, Liaoning province March 5, 2012.

Credit: Reuters/Stringer

BEIJING (Reuters) - China's capital could be the next major testing ground for a national property tax, putting the central government at risk of vocal criticism close to home that underscores its determination to roll out an unpopular fiscal plan that has been a decade in the making.

Premier Wen Jiabao's opening address last week to the largely rubber-stamp annual meeting of parliament, the National People's Congress (NPC), made it crystal clear that the leadership will push ahead with property tax reform.

But a chorus of carefully nuanced complaints from officials in relatively rich coastal provinces which are expected to join Shanghai and Chongqing in the property tax test has likely forced Wen to experiment on Beijing instead, where he risks the ire of retired state workers and officials.

"I'm against it," Zhang Xiaoji, officially a pensioner, but also a senior researcher at a think tank under the powerful National Development and Reform Commission, and a member of parliament's advisory body, the Chinese People's Political Consultative Conference (CPPCC), which meets alongside the NPC.

"Old men like me have retired. We've worked our life for the country and got a home as welfare from the state. Now if we are ordered to pay property tax, it is very unjust, isn't it? What do we have to do with home prices?" Zhang told Reuters.

Beijing has a high concentration of vocal and influential pensioned-off officials living in homes subsidized, or given directly to them, by the state in a city that has seen some of the steepest property price rises in the country.

It makes a universal tax based on property size, location and value particularly unpopular.

The government's plan for a nationwide property tax is designed to consolidate existing levies and replace a slew of restrictions on multiple and speculative home purchases that had seen property prices surge 10-fold in a decade, until a two-year tightening campaign began to bite in the autumn.

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UNPOPULAR MEASURE

There's plenty of work to do to get the tax code defined and persuade homeowners it will not simply be an extra burden.

Right now, it is. Roughly a third of the purchase price of a home goes to the government as land cost, with a one-off transaction tax and an annual bill for property maintenance.

To limit the burden, Chongqing and Shanghai set low rates of between 0.4 percent to 1.2 percent of a home's price and exempted the majority of local home owners. But that led to only a trickle of income, discouraging revenue-obsessed officials from imposing it and raising questions about its effectiveness.

Chongqing raised only 100 million yuan ($15.9 million) from the new tax, versus 82 billion yuan from land sales. Shanghai raised 300 million yuan versus 151 billion yuan via land sales.

So while it is unpopular with homeowners, there is also no love for it among local and provincial governments as implementing the tax now will drive down the number of real estate transactions and cut the budget-bolstering revenue earned from land sales.

They need every penny to meet payments on debts which totaled 10.7 trillion yuan ($1.7 trillion) as of the end of 2010, about a quarter of which analysts think may turn sour as a consequence of central government property calming measures.

"Local governments do not want to start the property tax this year. So, Beijing is most likely to be picked as the first one to give a leading example," said Jinsong Du, a property analyst with Credit Suisse in Hong Kong.

That's because besides wanting to play it tough on a fiscal reform that Wen told the NPC was needed for "the long-term stable and healthy development of the real estate market", a show of stability and national unity is required ahead of a once-in-a-decade leadership transition later this year.

Taking criticism on the chin at home helps deliver that.

So, too, do comments from Chongqing Mayor Huang Qifan, who heaped praise on the calming effect of the tax move on speculation when speaking to reporters on the sidelines of the NPC.

"The effect is very good. In the past year, transactions on high-end homes fell sharply," Huang said.

Finance Minister Xie Xuren told his annual NPC news conference that China would "appropriately expand the trial" after a serious study of results from Shanghai and Chongqing.

"In the long run, China needs to use taxes and interest rates to curb property speculation, although for now, administrative steps seem more effective," Lu Fengyong, a researcher at the Chinese Academy of Social Sciences in Beijing, told Reuters.

SUBTLE SHOWDOWN

However, the subtle showdown between central and local governments will probably delay a wider roll out of the tax until next year, especially in the wealthier coastal provinces of Jiangsu, Shandong, Guangdong and Zhejiang, all of which sit near the top of analysts' lists of likely locations for stage two trials.

While being careful to show solidarity with the central government's long-term plans, officials from all four provinces expected to escape the tax this year.

"As far as I know, there are some problems seen in the trial in Chongqing and Shanghai that need further discussion and improvement," Wang Nanjian, an NPC member and local tax chief in Guangdong province, told reporters.

"We hope to summarise and compare the two different ways (of collecting property tax in Chongqing and Shanghai) and combine it together with the conditions in Guangdong. So far, Guangdong has no plan to start the trial."

Jiang Daming, an NPC member and governor of Shandong, told reporters there was no order yet for his province to launch the tax this year. There was a similar story from Jiangsu, whose head of housing and urban-rural development, Zhou Lan, a CPPCC member, told reporters his province, too, remained exempt.

"We will probably need to observe, for a while, the results in Shanghai and Chongqing so as to take their best parts," said Mao Guanglie, vice governor of Zhejiang province, told a news conference on sidelines of the NPC.

"We are still at the early stage," he added.

The fact is, though, that all are likely to have to toe the line at some point because China has included the introduction of the tax in the 12th Five-Year Plan, blueprint outlining all policies to be adopted between 2011 and 2015.

"Technically, there is no barrier to expand property tax," Jia Kang, a senior researcher with the Ministry of Finance and also a CPPCC member, told reporters during the NPC.

"The hardest nut to crack is to break vested interest."

(Additional reporting by Aileen Wang; Editing by Kim Coghill)

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