China's Profit Tax May Aid Social Goals

An analysis by Michael Lelyveld
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High rise properties are reflected on an office building's windows in Beijing, May 6, 2013.
High rise properties are reflected on an office building's windows in Beijing, May 6, 2013.

Tougher policies on property investment are having an uncertain effect on China's economy as the government prepares to unveil new urbanization rules.

The country's real estate market has been in turmoil since March 1, when the State Council ordered a series of measures to stop speculation in the housing sector and make homes more affordable.

In the most controversial step, the government called for a 20-percent profit tax on home sales, boosting the rate from between 1 and 2 percent.

With little explanation or guidance, it gave cities one month to devise detailed regulations for housing investment, creating a patchwork of rules and a rush to beat the tax hike.

Major cities including Beijing and Shanghai issued a series of restrictions to curb buying of second and third homes, but Nanjing published a rule only 154 characters long, state-run said. Other cities made no mention of the 20-percent tax at all.

Some property investors have openly condemned the government's approach to regulation.

"The government's message is, 'We hope prices won't continue rising; you (local governments) go and fix them, and if you don't fix them, we will punish you,'" said Ren Zhiqiang, chairman of Hua Yuan Real Estate Group, according to the official English-language China Daily.

Few details

The tax is one of the first policy changes of the new government under President Xi Jinping and Prime Minister Li Keqiang, aimed at promoting sustainable development and more moderate growth.

But with little or no explanation about implementation, the central government's order has also left China experts and economists scratching their heads.

"Maybe this is going to be the style of this administration, to just issue policies without talking too much about them," said University of Pittsburgh economics and history professor Thomas Rawski.

Rawski noted that the abruptness of the market-cooling measure contradicts the decades-old practice of introducing reforms gradually through pilot programs to see how they will work nationally.

The curious case of the new tax has made it hard to predict how the government will conduct economic policy.

"This is one of the first big policy initiatives by this new government," said Rawski.

"Either they think they know exactly what they're doing, so they just go do it, or they're very disturbed with what they see, and so they're going to take a big whack at it and pick up the pieces afterwards," he said.

Buying boom

Although the evidence is not yet conclusive, signs suggest that the tax threat created a boom in first-quarter property sales as sellers rushed to avoid the new rates, followed by a falloff that may undercut second-quarter results.

Real estate leader China Vanke Co. reported a 23.5-percent surge in commercial housing sales in the first quarter from a year earlier, according to the China Daily.

China's total property sales revenue soared 61.3 percent during the period, while total tax revenue rose only 6 percent, the paper reported, citing the Ministry of Finance.

Following the deadline for new rules, the market seems to have subsided, although real estate prices in most cities have continued to rise.

In Beijing, home sales sagged to a multi-year low during the May Day holidays, according to the city housing authority. Some housing projects have reportedly been denied sales licenses under a vague rule that bars prices "much higher" than average rates.

A National Bureau of Statistics (NBS) report on Monday suggested the real estate boom is continuing but at a slower pace under the new tax rules.

Revenues from property sales rose 59.8 percent from a year earlier in the first four months of 2013, down slightly from the first-quarter pace of 61.3 percent, the official Xinhua news agency reported.

But government cooling measures are having some initial results, as April home transactions slumped in major cities, Reuters said.

Targeting speculation

While the effects are unclear, the government is trying to break the habit of housing speculation for both economic and social reasons.

Easy profits from home sales have widened the gap between rich and poor by putting housing costs out of reach for millions of rural dwellers coming to China's cities.

The central government hopes to drive speculators out of the market before issuing new urbanization rules.

The National Development and Reform Commission (NDRC) has been drafting an outline of the urbanization policy to be released by the State Council by the end of June, the Shanghai Securities News said.

The blueprint is expected to introduce reforms of the decades-old hukou system of household registration, which has denied migrants access to education and other social benefits in China's cities.

Li Tie, director-general of the NDRC's China Center for Urban Development, told state media on May 10 that the government plans to "improve the residence permit system to enable migrant workers to enjoy basic public services as urban residents."

The plan will also focus on "low-carbon" development with administrative, land and financing reforms, Li said.

The government is likely to see housing prices as a key to the success of the policy and greater social mobility for new entrants to China's cities, although the effect of the 20-percent profit tax remains unclear.

The country's migrant workers now number 252.7 million, according to the NBS.

At the end of 2012, China's urban residents accounted for 52.5 percent of the population, an increase of 1.3 percentage points from the previous year, Xinhua said.





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