Chinese put premium on owning homes. Now Beijing wants to tax them.
-
Ann Scott Tyson Staff writer
For mechanical engineer Fan Hongliang, each penny saved moves him closer to his distant dream of buying a home 鈥� a must-have before finding a wife.聽
鈥淚 will get a house first, and later if I meet someone I want to marry, I can,鈥� says the 29-year-old, who currently rents a room in Shanghai. 鈥淪hanghai houses are very expensive,鈥� he says, estimating it will take another five to seven years before he and his parents, retired coal mine workers, can afford a house in the city outskirts costing around $315,000.
In China, homeownership carries far more meaning than a roof over one鈥檚 head. For millions of single men, who today greatly outnumber single women, it is a near requirement for marriage. China has nearly 18 million more men than women between the ages of 20 and 40, according to the 2020 census data. Whole families often scrape together resources to give their sons a leg up in courtship by securing an apartment or house 鈥� assets scrutinized by potential brides and their parents.
Why We Wrote This
China鈥檚 government bases its legitimacy on bread-and-butter issues, but economic growth has come at the cost of massive debt. Trying to tamp it could test the party鈥檚 willingness to push an unpopular policy.
鈥淚t鈥檚 a tradition for Chinese people聽鈥� if a man wants to marry, he must first have his own home,鈥� says Mr. Zhang, a Shanghai homeowner and retired entrepreneur who asked to withhold his first name for privacy. 鈥淚n most of China, it would be a huge loss of face for a man to move into his wife鈥檚 home.鈥�
Adam Yao Liu, a China native and assistant professor of public policy at the National University of Singapore, agrees. 鈥淚t鈥檚 pretty safe to say that a house is a sine qua non for marriage for most Chinese today.鈥�
The marriage imperative is only one reason China鈥檚 latest push to impose the first nationwide property tax on homeowners is politically touchy. Taxes are unpopular in any country, but in China, a property tax could be seen as challenging the cornerstones of middle-class well-being 鈥� family prosperity and continuity. Opponents also question the legitimacy of a property tax, since in China the government already owns the land.
Yet Beijing is gingerly advancing the property-tax plan to try and confront a 鈥済ray rhino,鈥� as state media call China鈥檚 debt crisis (it鈥檚 huge, and everyone sees it coming). After decades of debt-fueled growth, the country鈥檚 debt burden totals about 280% of annual gross domestic product. That sum reflects deep institutional flaws in the financial system. It also reflects a political dilemma of the ruling Communist Party, which has based its legitimacy primarily on bread-and-butter issues such as steady economic growth.
鈥淭he accumulation of debt is still seen as a short-term way to boost the economy, which is seen as essential for keeping the party in power,鈥� says Bruce Dickson, a political scientist at George Washington University and author of 鈥淭he Party and the People: Chinese Politics in the 21st 颁别苍迟耻谤测.鈥�
Yet while the party has favored short-term tweaks and workarounds, it has postponed politically difficult, systemic reforms that are necessary to sustain economic productivity and growth in the long run. The property tax issue represents one test of the party鈥檚 willingness and ability to push forward a controversial policy 鈥� knowing it could stir unrest.
Property tax 鈥渋s going to be a tough sell,鈥� says Jean Oi, a professor of Chinese politics at Stanford University and co-editor of 鈥淔ateful Decisions: Choices That Will Shape China鈥檚 Future.鈥� 鈥淭axing the middle class is something officials are not sure they are able to do. You don鈥檛 want local people out there demonstrating,鈥� she says. 鈥淚t鈥檚 a question of political stability.鈥�
鈥淭he public has already shown it is prone to mobilize on key issues when it feels they are being challenged,鈥� says Professor Dickson, referring to grassroots protests on everything from environmental hazards to workers鈥� rights.
Local-level challenge
Ideas for imposing property tax have been tentatively discussed for years 鈥� driven, in part, by local governments鈥� chronic shortage of steady revenue streams. This spring, officials have again floated proposals for tax reform. The national government will 鈥渁ctively and steadily promote property tax legislation and reform,鈥� in an article published this month, as officials discussed expanding pilot programs for the tax.
The bottom line, experts say, is a growing bill that 鈥� sooner or later 鈥� Chinese taxpayers will have to foot. 鈥淚 don鈥檛 think a conventional explosive debt crisis is in the cards,鈥� says Eswar Prasad, professor of trade policy at Cornell University and the former head of the International Monetary Fund鈥檚 China division. 鈥淎 better way of looking at it is 鈥� somebody has to pay for all this, and who鈥檚 going to pay for it? Ultimately, it is going to be the taxpayer.鈥�
China鈥檚 debt problem is composed of corporate, household, and government debt 鈥� with the local government debt posing one of the trickiest challenges.
When China鈥檚 economy took off in the 1980s, local governments enjoyed a surge of revenues that greatly outpaced those of the central government in Beijing. Those revenues translated into bonuses for local cadres and a big incentive for growth. But that changed after 1994, when Beijing negotiated a new tax-sharing arrangement that shifted the majority of revenues back to the center. This political deal created a gaping shortfall in local government funding that continues today, but it also gave local governments the tools and autonomy to open up new, opaque channels to earn revenue outside the tax system.
鈥淭his whole grand bargain is basically just backdoor financing,鈥� says Professor Oi.
Local governments were prohibited from borrowing from banks. In a workaround, they set up entities akin to shell companies called 鈥渓ocal government financing vehicles鈥� (LGFV) that acted as middlemen, borrowing vast sums without discipline by arm-twisting local banks, analysts say.
鈥淟ocal debt is a significant financial risk that is looming because the ownership of this debt is not clear and a lot of this debt has gone to finance projects that are not that productive 鈥� so this is something of a hidden problem,鈥� says Professor Prasad.
Beijing has since indicated these local vehicles will be allowed to go bankrupt 鈥� and some analysts predict the first default will happen soon. This year Beijing will 鈥減robably allow some defaults to happen鈥� to signal the risk, according to Larry Hu, chief China economist at Macquarie Capital in Hong Kong.
A property tax would produce steady fiscal streams for local governments, says Professor Liu, and could dampen widespread housing market speculation. But important policy questions remain, such as whether current owners should be taxed and whether the taxes should vary from place to place. Moreover, he adds, the impact of the tax on China鈥檚 heated real estate market is uncertain.
鈥淐rying wolf鈥�?
Still, more than 10 years after Beijing first floated the property tax idea, some experts doubt the political will exists to impose the levy 鈥� saying officials themselves may worry lest a tax force disclosure of expensive properties they own.
鈥淔or more than a decade, property tax has been the equivalent of crying wolf in China,鈥� commented the official China Daily newspaper earlier this year.
As for Mr. Zhang, the Shanghai homeowner, he says he can鈥檛 conceive of the government imposing taxes on people for the houses they live in. 鈥淭he government can鈥檛 do that,鈥� he says, explaining that it would run counter to the party鈥檚 consideration of people鈥檚 basic needs. 鈥淚t鈥檚 not possible that they will force this on people.鈥�
A property tax might not bother wealthy people, says Mr. Fan, but he worries it could further delay his quest for homeownership and marriage. 鈥淔or someone like me,鈥� he says, 鈥渢he policy is not good.鈥�
