Chinese Real Estate Slowdown Opens Avenues to Reform

5 MINS READDec 27, 2014 | 14:01 GMT
(PETER PARKS/AFP/Getty Images)
A man walking in front of a real estate agent's window in Shanghai on Dec. 4, 2014.

With nationwide housing construction activity set to decline further in the coming months, China's central government has signaled it intends to use the real estate sector slowdown to push through a number of long-stalled fiscal and administrative reforms in 2015. Chief among these initiatives will be the establishment of a national property registration system. The State Council, China's Cabinet, published preliminary rules for the system Dec. 22. Though it will be several years before a fully functioning registry is in place, the effects of provisional regulations, set to begin March 1, 2015, will be felt far sooner in Chinese property markets. In addition to further curbing speculative home purchases — and likely further depressing home prices in many cities, at least in the short-term — the rules will give central authorities a powerful new tool in the fight against local-level official corruption.

The rules that Beijing issued Dec. 22 will require local governments above the county level to create special departments for registering ownership and land use rights, housing and a variety of natural resources. They will mandate that local authorities keep entries electronically and in print and that they update them regularly. These records will then be subject to both central and provincial oversight. According to news reports, the regulations will require property owners to register their holdings with local authorities. Anyone found guilty of "abuse of power" or otherwise failing to fully disclose their holdings will be prosecuted and potentially fined. It is still unclear exactly how the registry will function and what specific mechanisms will be put in place to guard against collusion between property holders and local authorities, and undoubtedly these problems will take time to resolve. Nonetheless, with these and related reform measures set to go into partial effect in the coming months, 2015 is shaping up to be a watershed year for China's housing and construction sectors. More fundamentally, it will be a key year in the Chinese government's struggle to shift toward a less investment-intensive economic growth model.

Chinese Fiscal Revenue

Chinese Fiscal Revenue

Within the broader scheme of nationwide real estate reform, the national property registry must be understood in relation to three other initiatives, all of which will progress in 2015. Most relevant is the central government's effort to expand a property tax scheme, which it is currently being piloted in Chongqing and Shanghai municipalities, to the national level. If effectively implemented, the effects of such a tax on China's property markets would be manifold. Such a tax could provide a crucial supplemental revenue source for local governments, which are responsible for the vast majority of government-related expenditures in China today. Similarly placing a regular tax on homeownership would incentivize those who own more than one property to put their additional properties to productive use. Currently, homebuyers pay taxes at purchase but not thereafter. This means that many treat second and third homes as investments rather than as sources of income through rent. The new tax would create the basis for a more stable and sustainable rental market and curb extreme property speculation. For such a tax to be implemented effectively on a nationwide basis, however, authorities must have access to reliable information on property ownership. Such a comprehensive registry does not yet exist and, if assembled, would go a long way toward addressing this gap.

Chinese Fiscal Expenditures

Chinese Fiscal Expenditures

Beijing's efforts to widen a municipal bond pilot program currently in progress in 10 regions and cities across the country will also be critical. By opening municipal bond markets, central authorities aim to create new ways for local governments to raise capital. This would allow these governments to repay outstanding debts and to cover new expenditures, further reducing their reliance on land sales for revenue generation. Beijing will need to implement bond markets and the national property registry in tandem over the coming years. This is essential. For a national property registry to be effective in curbing speculation, a municipal bond market must be in place. This would give investors new avenues for generating reasonable returns on their investments. If however, Beijing implements a registry first without expanding municipal bond markets, the government runs the risk of depressing home prices before local governments develop other revenue sources.

Integrating the home ownership registry for similar databases of land ownership and usage rights into a national registry will be crucial for Beijing to realize its long-term plan to integrate urban and rural land markets. This integration would allow farmers to purchase and sell agricultural land, giving rural residents new means for capital generation and incentivizing more productive use of rural land. It would also, in theory, accelerate the process of agricultural modernization by allowing farming conglomerates to purchase land directly from rural landholders.

Opposition to these and other reforms still in the planning stages will run high. Most objection will come from local governments and a range of local-level actors — particularly property developers and speculators. Municipal governments will hesitate to carry out top-down reform initiatives that, in spite of long-term benefits, will likely result in direct revenue loss, slowing local economic activity and causing a rise in unemployment. Local government officials, too, are often directly and indirectly tied to property developers and speculators. Because of this, they will hesitate to carry out measures that either limit their own financial prospects or implicate them in illegal activity. Over the course of 2015, this resistance will hinder Beijing's ability to push through real estate-related reforms, ensuring that few if any are fully realized before the end of the year.

At the same time, the national property registry will give central authorities one of their most powerful tools yet for combating local-level resistance. Such resistance most often manifests in local disregard for central edicts, especially when they conflict with local governments' core interest of maintaining high levels of economic growth and employment. By enabling central authorities to, in theory, track property ownership nationwide, the registry will aid Beijing's effort to clamp down on bureaucratic corruption. Indeed, the registry could well become a key locus of the anti-corruption campaign in 2015 and could pave the way for an expansion of the campaign's focus from regional and sectorial power bases — exemplified by the investigation into Zhou Yongkang — to a broad-based crackdown on low-level corruption in a sphere that directly affects the daily lives of ordinary Chinese citizens.

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