Top consultant: China's technology center Shenzhen is ripe for property tax trial at “critical moment”

China should consider expanding its land tax experiment to Shenzhen and some lower-tier cities, a senior government adviser said. Such a move would pave the way for the long-delayed legislation and its nationwide implementation, while also providing a new source of revenue for debt-ridden local governments.

Shenzhen, home to tech giants such as Huawei, Tencent and DJI, would be an ideal location to address the local land problem, says Yin Zhongli, a senior real estate finance expert at the state-run think tank the Chinese Academy of Social Sciences, who was hired two months ago as an adviser to China's cabinet, the State Council.

About half of the housing in the southern mainland Chinese city bordering Hong Kong is on rural land collectively owned by communities, limiting property rights and making it difficult to collect property taxes, he added.

The proposal came at a time when local and county governments are struggling with enormous debts and declining revenues from land sales and taxes.

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According to the Ministry of Finance, confirmed debt totaled 42.6 trillion yuan ($5.97 trillion) at the end of June, and estimates also suggest implicit debt is in the trillions.

China's proposed property tax, which is similar to the system used in the United States, is widely seen as a potentially stable source of revenue that local governments could rely on to bolster their fiscal strength and manage their debt.

The land tax pilot program began in Shanghai and Chongqing in 2011.

China's supreme parliament did not include any legislation on property tax in its five-year plan last year.

“The real estate market is caught in a vicious cycle of defaults, falling sales and credit crunch,” Yin said.

“The introduction of a nationwide property tax at this critical moment could overflow the market and reinforce the negative loop.

“In addition, the introduction of a property tax could lead to an increase in housing rents, which would have a direct impact on the financial performance of young people, as landlords would potentially offset the effects of a property tax by charging higher rents.”

Yin proposed expanding the land tax pilot program not only to major cities such as Chongqing and Shanghai, where land tax has been in place for over ten years, but also to third- and fourth-tier cities to gain more experience.

The expansion of the pilot program was also proposed last year by former Finance Minister Lou Jiwei.

“The property tax is the most appropriate tax to be levied at the local level and should be tested once the economy returns to normal growth,” Lou wrote in an article published in March 2023.

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However, the scope of the pilot program remains relatively limited, as only expensive homes are included.

A property tax of 0.6 percent applies to the purchase of newly acquired homes in Shanghai.

However, for houses priced less than twice the average selling price of new residential properties in the city last year – which was 91,954 yuan ($12,890) per square meter in 2023 – the tax rate will be reduced to 0.4 percent.

Chongqing, meanwhile, imposes taxes on new buildings with a market price of over 29,616 yuan per square meter.

Starting this year, the tax rate was reduced to a flat rate of 0.5 percent, resulting in a significant reduction in the amount of tax homeowners have to pay.