Shanghai to impose property tax

Rumors abound that Shanghai will be among the first batch of localities to impose a 0.8% property tax (per annum, on appraisal value) on second homes, as these are classified as “for profit”.

After a series of tough measures, turnover at most cities have fallen dramatically while prices have not budged, as fat profits from last year help buttress most developers from cash flow pressure. This new tax is largely seen as a follow up to earlier measures, to make sure that policy control does work its way and cools China’s property market.

Many commentators are doubting the ability of the central government in achieving its policy objective. I think this is taking too sanguine a view, or perhaps too pessimistic, depending on your stance. Make no mistake, if the Chinese government truely wants to clamp down on housing prices, it will succeed. The runaway housing market has already turned into a political issue, and nothing political is taken lightly in China.

The real question should be what are the consequences? Will everything be just swell after property prices come down from outer space? There already are signs that liquidity squeezed out from the property market is wrecking havoc in other sectors of the economy, like the all important farm produce. Today there’s an interesting story in the Chinese media about Wenzhou speculators (oh, these folks are famed, and not just for making lighters) turning towards gold. One also need to bear in mind that China aims to reform its domestic utilities and resources pricing this year, by taking away the huge subsidies. All these factors just make the 3% CPI target increasingly untenable. The risk of a Q2 rate hike is very real, perhaps even at this coming weekend for the real paranoid.