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China approves testing property tax in 2 cities

Associated Press Modified: January 27, 2011 at 8:38 am •  Published: January 27, 2011
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BEIJING (AP) — China is launching property taxes in two major cities to help curb surging prices, with the plan to go nationwide "when conditions are ripe," the finance ministry said Thursday, part of a broader effort to control high inflation.

China's commercial capital, Shanghai, and the southwestern city of Chongqing announced plans for the taxes Thursday night.

Surging housing costs across China are hurting the government's efforts to cool inflation that has mainly been attributed to surging food prices but is spreading to other parts of the economy.

Thursday's move comes a day after the government made its latest attempt to cool the property market, announcing it would require buyers of second homes to make a 60 percent down payment, up from 50 percent.

The property tax news comes just before China's biggest holiday of the year, Lunar New Year, which begins next week. State media tried to soften the news by reminding citizens that people in other countries such as the United States pay property taxes as well.

"The collection of property taxes helps balance the distribution of income and narrow the gap between rich and poor," said the finance ministry statement, posted on the ministry's website.

The property tax plan was widely expected, and had been weighing on the minds of investors for some time.

"Since they did not know what policies would come out, people were too worried. Now the policies have come out and that will be to everyone's benefit," Chen Jie, director of the Center for Housing Policy Studies at Shanghai's Fudan University, said in an interview on the local state-run TV news channel.

The money raised from the property taxes will be used to fund affordable housing, the finance ministry's statement said.

The entire country will have property taxes "when conditions are ripe," the statement said.

Many economists believe China's economy remains dangerously dependent on investment in real estate and construction. Such spending shot up 23.8 percent over a year earlier in 2010.

The sale by local governments of land-use rights provides a huge share of their revenues. Such sales rose 70 percent in 2010, helping push property prices 6.4 percent higher compared with a year earlier.

In Shanghai, housing prices rose to a record average of 24,176 yuan ($3,652) per square meter in December, state media has reported, up 7.6 percent from November and up 21 percent from January 2010.

The state-run Xinhua News Agency said Thursday that Shanghai has set its property tax rate at 0.4 percent to 0.6 percent. Chongqing set its tax rate at 0.5 percent to 1.2 percent.

Many other big Chinese cities are facing similar trends, raising worries about a financially perilous asset bubble.

Shanghai is preparing to levy a property tax on purchases of newly built, luxury homes. While such a tax is unlikely to have much impact on the overall market, authorities say they expect it to help bring the market under better control.

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Associated Press business writer Elaine Kurtenbach in Shanghai contributed to this report.


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