China's latest move to introduce a controversial property tax represents a fresh crackdown on property speculation and a curb on runaway home prices, but analysts believe it is also an "inevitable" solution to help solve the nation's debt crisis and ensure financial stability.

A new scheme, like many Western countries, would eventually cover ordinary Chinese households. At the moment, taxes and fees are mainly collected only at land auctions, or in the property development or trading process, with few additional costs for residential homeowners.

However, the real estate tax has not been put on the legislation agenda for this year, with Beijing warned to exercise caution because it has the potential to impact a wide range of industries and households, as well as the country's financial and social stability.

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A joint symposium on Tuesday, which included the Ministry of Finance and Ministry of Housing and Urban-Rural Development, heard opinions from municipal officials and experts about the current real estate tax reform pilot programme, further increasing speculation on the outlook for property taxation in more Chinese cities.

"There's no doubt that it will be levied," said Cai Chang, a tax professor at Central University of Finance and Economics. "The only issue is how."

Beijing's proposed taxation on property owners has received strong opposition for the past decade due to the lack of availability of housing information systems as well as questions about the legitimacy of such a move, as the land which a house is built on is already owned by the state.

Previous discussions often involved a number of exemptions for ordinary households, particularly those living in the only flat they own, to facilitate early implementation.

"The best time [to levy such a tax] should have been 20 years ago when home prices were low. Now it faces strong opposition," said Larry Hu, chief China economist of Macquarie Capital, who nevertheless believes more cities will be added to the pilot programme.

The current programme in Chongqing and Shanghai mainly target villas and high-end property owners, with big cities with runaway home prices in line to be added, including the technology hub of Shenzhen.

Jia Kang, former head of the finance ministry's research institute, told Chinese media earlier this week that reform pilot zones like Shenzhen and Hainan are good candidates.

Last month, a team led by Liu Xiuwen, deputy director of the top legislature's budget work committee, visited the cities of Guangzhou, Jiangmen and Shenzhen in the southern province of Guangdong to study how to improve the local and direct tax systems.

Beijing's amplified tone, with property tax legislation mentioned in the 14th five-year plan and in an article by Finance Minister Liu Kun last week, came as the Politburo headed by Xi Jinping bombarded property speculation in well-regarded school districts of big cities at its meeting last month.

Previous government endeavours concentrated on purchase restrictions and mortgage availability for buyers, land auction and financing restrictions for developers and the government's affordable housing programme.

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However, Yi Xianrong, a former researcher with the Chinese Academy of Social Sciences, believes policymakers intend to create a solution to the mountains of local government debt, particularly for many low-tier cities which are finding it much harder to sell land to raise funds. Once a prime source of income, these cities are now seeing their debt levels snowball.

"The core notion is to bring a stable stream of fiscal revenue for local governments and accordingly help solve the debt crisis," he said.

While the Finance Ministry has prioritised solving local debt risks, property taxes are part of its policy design to empower local financial strength, through the wider distribution of national tax revenue and the creation of more local taxes.

"The old [real estate driven] growth model can no longer last. Housing is everywhere, but who dares to buy?" said Yi.

Local authorities rely heavily on land sales revenues, which have nearly tripled in the past 10 years to 8.4 trillion yuan (US$1.3 trillion) in 2020.

Guiyang, the capital city of the Western province of Guizhou, said its net revenues incurred from land sales totalled 61.7 billion yuan (US$9.6 billion) last year, while its general budget revenues were only 39.8 billion yuan.

Although land auctions in big cities remain fierce, with the top 50 cities netting around half of the national land revenue, they also increase pressure on home prices.

Real estate has been a pillar industry since home privatisation in 1998, and despite repeated efforts to lower the reliance, it still accounted for 26.8 per cent of the national fixed-asset investment last year.

Outstanding real estate related loans, including lending to developers and mortgages for individuals, hit a high of 50 trillion yuan (US$7.7 trillion) at the end of March, accounting for 28 per cent of total outstanding loans.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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