China’s New Property Tax: Toward a Stable Financial Future for Local Government?

Publication: China Brief Volume: 12 Issue: 5

Just over a year ago, the Chinese government took the unprecedented step of launching a trial property tax in response to rising real estate prices. Since the mid-2000s in China, real estate prices have been going through the roof. In 2010, home prices in Shanghai rose 26.1 percent and in Chongqing, 29.4 percent, according to Soufun Holdings, China’s biggest property website (Bloomberg, January 6, 2011). The tax, announced by the Ministry of Finance’s Tax Policy Department in December 2010,  marks a significant departure from pre-existing taxation policies, which include a one-time transaction fee for residential sales and a minimal tax on commercial real estate (Business Daily Update, December 6, 2010). The property tax also may represent a new step forward for China’s market liberalization in that it will require new institutions and systems such as land and property registration that could lead to stronger private ownership laws and other aspects of a more liberal economy. As significant as the property tax may become, however, it is far from clear whether the property tax is having the intended effect on the real estate market or whether it will resolve local governments’ financial woes.

Trials and Tribulations of the Property Tax

Shanghai and Chongqing were announced as the trial cities for the new property tax, and began levying the tax on January 28, 2011. The cities were given the power to set the details of the tax themselves, leading to a number of differences. For one, the Chongqing tax includes preexisting and new properties, while Shanghai taxes only properties purchased after January 28 (Global Strategic Advisors, November 6, 2011).  

The Chongqing tax is on a sliding scale. Based on the transaction price, villas and apartments priced less than three times the average price will be taxed 0.5 percent annually, those priced three to four times the average price will be taxed 1 percent annually, and those four times or higher will be taxed 1.2 percent (Global Insight, January 28, 2011).

In Shanghai, the property tax applies to Shanghai residents purchasing their second homes or nonresidents purchasing their first homes. To be subject to the tax, the area of the second home, when added to that of the first home, must exceed 60 square meters per person. The value of the home determines tax rate. If the value is less than double that of average prices, the rate is 0.4 percent. If it is more than double, the rate is 0.6 percent with the tax calculated on 70 percent of the home’s purchase price (Xinhua, January 28, 2011).

The property tax goes in tandem with other slowing measures, such as increases in bank reserve ratios and increasing down payments, and would ostensibly cool the real estate market by increasing the holding costs of properties and, thus, reducing speculation. Ideally, it would in the long term adjust the market and reduce inefficiencies, preventing a property bubble. Chinese officials also have noted the tax is intended to narrow the income gap and provide social assistance, partially by using property tax revenue to build low-income housing.

A year later, what is the status of this tax? Has it accomplished what it was established to do or have there been other consequences?

In the short term, research conducted by the Chongqing Municipal Land Resources and Housing Administrative Bureau showed a precipitous drop in visits to sales offices of high-end properties (30-50 percent), and showed that from January 28 to November 30, 2011, the sale of high-end housing fell 4.1 percent from 2010 in Chongqing (Xinhua, January 30).In the long-term, however, there are a number of bureaucratic factors involved in the implementation of the tax and pre-existing structural issues that give us real reason to believe that the tax will not dampen property sales in the long-term.

For example, at a seminar in Wuhan in September 2011 on provincial taxation bureaus in China, Qiu Xiaoxiong, deputy director of the State Administration of Taxation, noted in a speech that there was a long way to go to effective tax administration, noting problems such as “a lack of unified planning for the design of various tax categories,” an “over-centralized tax administration authority” and “the quality of ranks of cadres” (China Taxation News, September 28, 2011).

Indeed, there are a number of challenges confronting effective implementation. First, there is the question of how to calculate the property tax. Chongqing and Shanghai are basing the tax off of average market price, but that number varies depending on what statistics one uses. Also, there is the issue of the cost of the home/apartment itself: the tax could be levied on the sale price, or an evaluated price. There are pros and cons to both. The sale price may undervalue housing prices, while an evaluated price, though more accurate, would be nearly impossible logistically to determine.

There is also the issue of how to collect the property tax. The proper collection of a property tax requires a massive administrative infrastructure that can assess property values. Nie Meisheng, president of the China Real Estate Chamber of Commerce, noted that this is a "a hard nut to crack" because “[the implementation of the property tax] needs millions of professional appraisers and a long time to assess the value of properties” (Business Daily Update, June 1, 2010). It will be difficult to develop this professional capacity, which will require training for officials for the whole property valuation process—appraisal/evaluation, appeals and collection.

Data may also present a problem. A value-based tax would require a data set that according to scholar Ding Chengri, has “historically have not been collected systematically,” or is “stored in different locations and in paper format….the Ministry of Land and Resources records and handles land-related data and information, whereas the Ministry of Construction is in charge of structure-related information” [1].

What about those who evade the tax? In Chongqing, those who do not pay their tax will be subject to fines or will be unable to travel overseas, though it is uncertain how easy these punishments will be to dodge (Global Strategic Advisors, November 6, 2011). For instance, it may be possible that the scofflaw could move to another locality—there is little information available about the consequences for disregarding these penalties.

Bureaucratic complexity also may pose a problem. Among the organizations involved in the tax are the Ministry of Finance, the State Administration of Taxation and the Ministry of Housing and Urban-Rural Development. Though the involvement of multiple agencies is not inherently problematic, ministries in China often have conflicting interests, and separate bureaucratic identities may present coordination issues. The more significant issue may be the involvement of local governments, who also are involved heavily in the process. They are responsible for setting the tax rate, the tax standards and when to introduce the tax. Local governments however face a number of counterincentives for proper implementation. First, many local officials have their own hands in the real estate market, or have close personal ties with those that do. Second, competition between local governments to attract investors and buyers may develop with officials offering artificially low property tax rates or declining to implement the property tax at all. As will be discussed later, as a result of the tax share system between the central and local governments, local governments often have counterincentives to implementing central policies.

Additionally, there are also structural issues that may keep real estate afloat. First, there is a paucity of alternate investment opportunities, in terms of both quantity and quality. Banks are not seen as a good option by many Chinese, both because there is no Chinese equivalent to the U.S. Federal Deposit Insurance Corporation and periods of political instability and rampant inflation have made Chinese consumers distrustful of banks. Even if banks were positively perceived, the financial benefits are limited. Interest rates, kept low to spur consumer spending, are often outpaced by inflation rates. Overseas investment is also not a viable option as Chinese citizens are largely restricted from investing abroad. Finally, returns from the stock market are no competition for real estate returns.

On a macro-level, urbanization is continuing at a breakneck pace, which supplies the demand needed to maintain such high prices. The urbanization rate is expected to rise 10 percentage points in less than 10 years—from 47 percent in 2011 to 57 percent in 2020 (China Daily, March 26, 2011).

In terms of suppressing housing prices, the problem of implementation is just one of the factors that could nullify the tax’s impact. In the case of Hong Kong, despite an annual 5 percent tax on the assessed value of a property, the assessed value is so below the actual market value that the effective tax rate is minimal. So far, it has not significantly affected real estate sales (China Economic Review, June 2010). Of course, Hong Kong’s 5 percent is a great deal higher than those currently in place in Chongqing and Shanghai.

So if the property tax may not dampen prices, what will it do? The most important impact of the property tax will be its role as a carrot to focus on qualitative development for local governments, who depend on revenue from land sales and building construction. Beijing’s efforts to rein in growth is choking that revenue off, leaving local governments mired in debt ("Local Debt Problems Highlight Weak Links in China’s Economic Model," China Brief, July 15, 2011).

Fiscal decentralization, instituted in the mid-1990s, reduced local governments’ share of the central revenue stream, but increased their responsibility for providing social goods. Local governments are currently responsible for 80 percent of public spending, but receive just half total government tax revenue (The Economist, February 4). Local governments have become desperate for revenue streams, and real estate is an excellent source. Officials can appropriate land or buy land at very low cost and sell it to developers for a tidy profit. Land revenue is particularly attractive as it counts as extra-budgetary income, which does not count in the central government’s accounting of local government budgets. This means local governments are allowed to retain all monies received and spend it however they wish.

As a result, the revenue coming from commercial and residential land leasing and sales have become a crucial part of local government budgets. According to the Ministry of Land and Resources, land-transfer fees totaled 1.59 trillion yuan ($232.91 billion) in 2009, which accounted for 24 per cent of China‘s total fiscal revenue (Asia Pulse, March 3, 2010). These revenues are used to attract investment, build substantial public works projects and provide services.

Tightening measures launched in 2010-2011 have put a dent in these crucial revenues: one report shows that “land sales in 130 major cities fell 30 percent year-on-year to reach 1.18 trillion yuan ($185 billion) during the first 11 months of the year” (China Daily, December 8, 2011).

There is hope that revenue from a property tax would help to relieve local governments’ addiction to land sales by providing a more consistent form of revenue. This is important for two reasons. First, reducing local government dependence on land sales would help to cool rising real estate prices. Second, the revenue from land sales and leasing cannot be expected to last forever—there is a finite amount of land in China and if the price bubble pops, revenues from these sources will plunge. Reducing local government dependence on land sales may also help to reduce social unrest, which is often caused by farmers protesting the unlawful seizure of their land or inadequate compensation for their land.      

A Difficult Future for the Property Tax

The property tax however cannot be relied on as a short-term (or even medium-term) fix for rising housing prices—it faces too many implementation challenges and is too limited at present. If and when the property tax becomes a legitimate revenue generator, it has the real potential to fix the central-local fiscal divide and minimize some of the negative externalities that have resulted from it, including excessive land appropriation and mismanaged growth. In short, it may have a much more positive impact than just slowing housing prices in the short-term.

It is expected that the government will expand the tax to more cities this year, including potentially Guangzhou and Nanjing (Caijing, January 6). Additionally, in order to counter potential implementation problems, China will be launching a database this year that will include housing information for 40 major cities (Xinhua, January 31).

The tax has the potential to be a major source of revenue. In 2009, property taxes accounted for over four percent of Great Britain’s GDP, about 3.5 percent of Canada’s GDP, and just over 3 percent of the United States’ GDP (The Economist, March 29, 2011). Indeed, a major report issued in February 2012 by the World Bank and China’s Development Research Center calls for social spending in China to be drawn more from property taxes (among other sources) than from land sales. The report also points to the property tax as an incentive for local governments to focus on maintaining property values rather than turning them over [2].

Implementation problems however could keep property taxes from becoming a reliable revenue stream. In the first 10 months of the tax in Chongqing, revenues from the tax accounted for just 0.2 percent of Chongqing’s total tax revenues for that period due to the limited scope of the tax, which affected just 8,500 homes (The Economist, February 4, 2012). Additionally, if property prices fall, so will property tax revenues. The property tax has the potential to be a game-changer in terms of central-local fiscal relations, but only time will tell whether the Chinese state can overcome the bureaucratic and logistic hurdles it faces trying to collect on the property tax.


  1. Ding, Chengri. “Property Tax Development in China,” Land Lines: July 2005, Volume 17, Number 3,
  2. China 2030: Building a Modern, Harmonious and Creative High-Income Society, World Bank and the Development Research Center of the State Council, February 2012, pp. 23, 44–45, 102–103.