The expected property tax trial runs will be postponed, according to media reports and STRATFOR sources. The report follows word that the People's Bank of China will set the new loan quota for 2011 at 7.5 trillion yuan, (about $1.1 trillion) the same as 2010. The two moves are signs that robust economic reform following China's Central Economic Work Conference is not likely.
China's Finance Ministry announced that there is not yet a final version of the new property tax proposals, China Securities Journal reported Dec. 18. This fits with Dec. 15 reports from STRATFOR sources in the Chinese media that implementation of trial programs for the new property tax would be delayed. The rumors are plausible given that the tax has yet to materialize after appearing impending several times. The delay is one of two major signs of business as usual — prioritizing high growth rather than robust economic restructuring — after the Central Economic Work Conference (CEWC) on Dec. 10-12. The CEWC is a major annual economic policy meeting of top party and state planners that determines the direction of economic policy for the upcoming year. This year's conference was seen as particularly important as it would set the tone for the first year of the new Five Year Plan, 2011-15, which has ambitious goals for restructuring China's economy to improve the wealth gap and national energy efficiency and to upgrade manufacturing sectors. In the first sign that business as usual would be the order of the day, the People's Bank of China reportedly will set the new loan quota for 2011 at 7.5 trillion yuan, (about $1.1 trillion) the same as 2010. According to initial reports, the government was going to tighten credit more aggressively, cutting the quota to the 6-7 trillion yuan range. Not doing so strongly signals that China is not meaningfully tightening credit conditions and is seeking to propel growth more than to dampen inflation. There is a possible exception: STRATFOR sources in Beijing indicate that the 7.5 trillion yuan may include around 1.5 trillion worth of loans that banks kept off their balance sheets in 2010. The China Banking Regulatory Commission may force the banks to bring those loans back onto their books in 2011 — meaning that the true target for new loans would be 6 trillion yuan. Even should this prove true, whether the central government could stick to such a reduced target remains unclear. After all, it went over both the 2009 and 2010 quotas by a long shot. Beijing's reasons for adhering to high-growth policies are manifold, but another year of historically high lending levels will only increase the size of asset bubbles and add to the ramifications of their eventual collapse. The new quota is not a powerful sign that the government will forcefully pursue "economic restructuring." And, in relation to real estate, the continued surge of credit will fuel more rapid real estate investment and property construction, which the government will then have to manage to dampen price rises and to control negative social impacts. The second sign that business as usual would be the order of the day is the delay of the property tax trial programs. A property tax is widely seen as an effective means by which China could add to the overhead costs of owning property, and therefore discourage individuals and companies from excessive property accumulation as a means of storing value and speculating. Such property hoarding has driven up prices to levels far beyond what supply-and-demand would dictate, while leaving China with 64 million vacant homes and many vacant commercial properties, all while the large population of low- and middle-income earners have trouble affording housing. Perhaps even more important, a property tax would provide local governments with a steady stream of revenues, reducing their need to borrow from banks, and enabling them to spend more on social welfare and public services. The current property tax under debate is in fact a trial program that will be slow to phase in and limited in scope. Many city governments are drafting plans, gathering information and conducting surveys, putting personnel in place, but none have begun collecting taxes. Only Chongqing and Shanghai municipalities appear close to collecting taxes, though there are also signs of delay here — Beijing and Shenzhen are following behind. From what we have seen of these proposals, the tax will strike specifically at properties over a certain size — for instance, 200 square meters (about 2,200 square feet) — in key urban areas whose prices are above a certain range or have risen especially rapidly within a designated time frame. The point is to put a bit of weight on high-end and luxury homes to discourage the trend of building and buying these types of homes while low to middle income housing remains inadequate. Government stimulus programs are simultaneously aimed at building 10 million affordable public housing units in 2011 to increase supply (at a cost of 1.4 trillion yuan). Of course, Chinese local governments are are reluctant to impose a property tax that will drag on growth and slow down their booming real estate and construction sectors. Sources say a primary technical reason for the delay is that while the Finance Ministry continues to push for the tax, the State Administration of Taxation has the responsibility of actually enforcing it and dealing with the tactical consequences of collection, including any incidents of resistance. There are also disagreements over other drafted provisions, such as whether the tax should be a perpetual tax on owning the property or a one-time tax paid at the time of purchase. At the core of the entire debate is the concern that a direct property tax will generate greater demands for political participation, demands Beijing wants to delay as long as possible. This is not to say that property tax trials are not coming, or that they will not signify a major development. In Chinese fashion, they will come only after extensive debate, be limited in scope and will be imposed gradually. But even then there is the danger they will have unintended consequences. Some sources indicate that the current draft of the Shanghai tax will only target newly purchased houses at first, with the intention of expanding to secondhand homes only later. Such a provision would therefore fall squarely on the shoulders of first-time home buyers, many of whom fall under the low-income category — exactly the group that is suffering the most from skyrocketing house prices.