beyondbrics

For the past six months, one of the big risks hanging over the Chinese real estate market has been that the government will introduce a property tax for the first time. And sure enough, China Business News, a leading newspaper, reported on Tuesday that the government is readying a tax which will be announced shortly after October 1 – just as Chinese will be enjoying a week-long national holiday.

A property tax is the favoured policy tool of many a reform-minded economist. It would help reduce the rampant speculation in the real estate sector by introducing a cost for holding empty property. And it would help develop a reliable source of income for cash-strapped local governments – one of the key long-term policy challenges for Beijing.

Yet even though the likely first steps towards a property tax will be very modest – a small annual levy on second or third homes in the luxury sector – the fear is that it could spark a massive sell-off in the property market, which has been one of the key drivers of economic growth. As a result, the idea of the tax has so far been used only as a threat by policy-makers looking to cool the market, rather than a real reform proposal.

If Beijing does roll out a property tax during the October break, it would be a bold move and a strong sign that the authorities are prepared to take risks with their rigid 8 per cent annual growth target in order to push through important structural reforms. But Tuesday’s story could also be part of a recent pattern of stern warnings about overheated property from officials who are worried that the clampdown on speculation since April is beginning to lose its bite.