EconoChina

A blog on Chinese economy & society

Can China cool its property market?

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While all eyes are on the Hellenic melodrama now, Chinese property companies have taken another beating today on the news of pending property tax. The Economic Observer reported that it will be applied in Chongqing, Beijing, and Shenzhen first, and expanded to Shanghai at a later date. The proposed new tax is effectively a transaction tax, and will likely to be progressive, with bigger homes paying higher rates.

China has already announced a series of measures aimed at tightening credit for 2nd and 3rd homes. With this new tax, it does appear that the government is serious about cooling the property market. However, will it succeed in this endeavor without hiking interest rate for the general economy? Andy Xie and Marc Faber both think the answer is no. By not targeting the underlying loose money supply, a hard landing for the Chinese property market, and the general economy, is seen as inevitable.

Both have their points, but I think we should take some other things into consideration as well. For one thing, the US “recovery” is anemic at best and there’s a not to be written off risk of 2nd dip. There’s also the unfortunate fact that Chinese GDP is 20%-40% property related, depending on to whom you listen to. Kicking it too hard will just send the entire economy into tailspin. More importantly, the recent measures do seem more effective than those China tried in 2007.

Loopholes in the previous rounds of control measures rendered them largely useless. Current efforts tend to pay more attention to the details. One possibility of getting around 1st/2nd/3rd home rule is to buy under the names of different members of the family. But unlike the last try, the current measure include all direct kins (spouse and underage children) in the calculation.

The proposed property tax is also important in taking away an incentive for the local governments to stonewall cooling measures. You see, Chinese local governments rely heavily on land transfer tax for revenue. The released figure is at 20% on average, but the real number should be much higher. Some economists estimated that as much as 50% of Beijing’s city revenue comes from land transfer tax. This gives the local government a natural bias towards more new development. Now, the new tax is a stamp duty, levied at each transaction. This tax can be overlook by homeowners, increase the cost for speculators tremendously, generate revenue for the local governments, and helps control new development at the high end, where most of the speculation is centered.

All these attentions to detail signaling that the current measures might actually have a chance at success. The new guy on the block, Li Keqiang, who is slated to succeed Wen Jiabao as premier when the later’s term ends in 2012, has taken over part of China’s economic portfolio that includes housing early this year. And unlike the current premier, who is well loved by the Chinese people but has worked in the central government most of his career, Li had plenty of local experiences, being the party boss of Henan and Liaoning, the equivalent of being governors of both Texas and Illinois. He knew how to get around central government edicts and he’s using this knowledge to other ends now.

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Written by Cindy Luk

April 22, 2010 at 10:09 pm

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