PROPERTY TAX OFFERS TO PAVE WAY TO CHINA'S SOCIAL REFORM
By Geoff Dyer in Beijing
2010年06月12日 06:32 AM
Ground-breaking policy shifts in China do not take place with one big, cathartic announcement or after a cliff-hanging vote. Instead, they evolve through a steady drip of leaks, hints, denials and oblique official statements – such as the 40-character notice last week by the State Council that it had approved plans gradually to reform the “real estate tax system”.

The real-world translation of this statement is probably: China will start to introduce some form of annual tax on residential property in the coming months. If that does happen – and it is still is an “if” – it would be one of the most important reforms Beijing has pioneered in years.

The immediate explanation for bringing in such a tax is to stifle property speculation, which many fear is feeding a bubble. New data released yesterday showed house prices were up 12.4 per cent over the year to May.

One of the curious things about China's real estate boom is the number of empty flats in big cities. Spend an evening walking round new compounds that estate agents say are sold out and it is not uncommon to find buildings where most of the lights are off.

The reason is that some of the flats will have been bought by investors who have little interest in using them. With no taxes to be paid for just holding property, they keep the apartments as empty shells so they can be “flipped” at the right moment.

There are plenty of other motives for why Chinese investors love real estate, notably the negative real returns they currently get from banks. But a property tax would go some way to making speculation on housing less attractive.

Yet the real importance of the proposed property tax goes far beyond controlling frothy housing prices. It could also open the way to some of the crucial social reforms that Beijing has been talking about for years but has not been able to execute.

The simmering scandal behind China's rapid development has been the treatment of the 100m-150m migrant workers. Deprived of the right to become permanent residents in the cities, they are often denied access to subsidised schools and other social benefits. Chinese reformers bemoan the fate of “second-class citizens” and talk of “apartheid”. Li Keqiang, slated to be China's next premier, said this month that reforming the system was a priority.

But attempts at reform have always been stalled by the fragile finances of the local governments that would have to provide these benefits. Those finances have got weaker over the past year as cities and provinces have borrowed vast sums of money from banks to fund infrastructure spending.

Indeed, if China's post-crisis boom has an Achilles heel, it is the hidden levels of local government debt. If a property tax were introduced, it would eventually help provide local governments with the financial resources to begin paying migrant workers their due.

The spill-over effects do not end there. With more stable income sources, local governments would not need to be so aggressive about selling land to developers, one of their current main sources of revenue and the cause of endless social tension as residents or farmers are displaced. Such a tax would also increase the pressure on local governments to be more transparent about their spending. As Li Daokui, an adviser to the Chinese central bank, put it, local governments would have to “report back to the homeowners how they have used this money. In other words, the tax can be used as an instrument to improve local government management”.

Yet the opposition to property taxes is fierce and sometimes personal. Those officials whose ill-gotten gains have been funnelled into owning multiple apartments will find themselves under new scrutiny. And lots of officials like the current system of auctioning swathes of land, a recipe for “rent-seeking”.

Most of all, the introduction of the tax, if not well-handled, could cause the property market to crash, endangering economic growth and provoking howls of angst across society.

There is a lot of talk in Beijing these days about “reform fatigue”,that the Hu-Wen leadership has given up on difficult decisions and will coast to a planned retirement in 2012. The property tax discussion will be a test of whether this is true.