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  • Writer's pictureMeichen Yi

Chinese Real Estate Market: The Case for Tax Reform

The debate over the real estate tax in China has raged on for more than a decade. Up until now, China has not applied any real estate tax, but on Saturday 23 October, the Chinese government finally announced a new decision to pilot real estate tax reform in some regions.

Earlier this year, one of the biggest headlines in the Chinese real estate market was about an ‘embattled’ Evergrande, one of China’s biggest property development groups. According to the New York Times, Evergrande has racked up more than $300 billion in debt. In addition, the Evergrande financial statements reflect a perennial debt ratio of more than 80%. Its high borrowing rate did promote its rapid growth in the past, but it has generated enormous liquidity risks in the face of declining industry prosperity and tighter regulation.

As one of China's flagship real estate companies, Evergrande represents a significant part of Chinese real estate developments, something that may present a risk to the Chinese government. Indeed, they should be wary of the ‘grey rhino’ phenomenon, a metaphor coined by Michele Wucker, for missing the “big, obvious thing that’s coming at you”. A steadier and healthier mode of development takes the highest priority for the Chinese government, and the new tax reform can satisfy it. The government is trying to cool down the market to avoid systemic risks.

There is no doubt that the real estate tax will become a new fundamental source of government revenues. Like many countries worldwide, the real estate tax will support local finance and further improve local public services. However, beyond the essential benefits to the Chinese government, the incoming policy on real estate might also positively affect the Chinese economy and create a more sustainable environment for the market.

In the short term, the real estate tax might help avoid further dramatic increases in housing prices. The tax will increase the purchase and housing costs and further reduce the market demand for houses. If a progressive tax system is implemented, it might target the high-priced areas and further cool the real estate market.

In the long run, the Chinese government will be hoping that the reform will fit China’s development goal of ‘common prosperity’. According to the data from the China Household Finance Survey in 2017, although 57.8% of the population owns one house, 25.4% of the Chinese population does not own a home, while 2.9% own three or more. Based on research published by Chang Liu and Wei Xiong in 2020, house prices in China increased continuously and rose more sharply in China’s so-called ‘first-tier cities’: Beijing, Shanghai, Guangzhou and Shenzhen. The huge differences in housing prices between first-tier cities and others lead to further income inequality.

On the one hand, part of the population in first-tier cities, especially young people and migrants from other cities, is faced with the prospect of taking on large debts before being able to afford a house. On the other hand, the high-income population can invest in the real estate market and hold several houses, rapidly accumulating assets through relying on ever-rising housing prices. Implementing the new tax plan would be an opportunity for China to redistribute assets to all classes and solve the difficulty of buying houses among different income groups. In the end, it might solve some urgent problems in the market, reduce systemic risks, accelerate China’s advance towards their goal of ‘common prosperity’ and improve people’s quality of life.



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