Katsuji Nakazawa is a Tokyo-based senior staff writer and editorial writer at Nikkei. He spent seven years in China as a correspondent and later as China bureau chief. He was the 2014 recipient of the Vaughn-Ueda International Journalist prize.
TOKYO -- A long-held belief in China is that as long as the Communist Party stays in power, housing prices will continue to rise. Ordinary Chinese, however, are now debating whether this conviction is about to be turned upside down.
The debate was triggered on Saturday by a decision at the Standing Committee of the National People's Congress, China's parliament, to introduce a property tax in select areas on a trial basis.
Socialist China currently charges no fixed-asset tax, even on high-net-worth individuals owning multiple mansions. Seminars explaining just what the new tax will look like are seeing an influx of new participants across China: rich folk desperate to understand the magnitude.
Every seminar venue has a banner with the words "common prosperity," the new political slogan Chinese President Xi Jinping uses as he attempts to rectify the disparities.
China's parliament on Oct. 23 decided to take a property tax out for a test drive in certain areas of the country. The areas will be selected later this year. © CCTV/Reuters In the Chinese social media sphere, meanwhile, an interesting conversation is taking place.
"The days when people could become rich through housing investment are over," one post says. "Let's sell houses where we don't live early before their prices go down."
Another post disagrees. "No. Don't panic. The trial introduction of the property tax will have only a small impact on housing prices."
Without doubt, the wealthy are in a state of panic. But the truth is there have been signs of the move for some time now.
A Chinese man in his 50s who sold his Beijing condominium at a high price a few years ago and moved to the south of the country with the proceeds analyzes the real estate market as follows.
"Since last year, my friends in Beijing and Shanghai have also finally begun to sell their condos," he said. These are second and third houses they do not live in. "President Xi has continued to say, 'Housing is for living in, not for speculation,' hasn't he? Housing prices that have gone up too much will inevitably go down. Why does everyone not believe it?"
As the man suggests, wiser folk have already offloaded their assets at a profit and are sighing in relief.
What made the difference is an acute awareness of China's political future.
By all measures, Xi looks likely to stay in power beyond the Chinese Communist Party's next quinquennial national congress in the autumn of 2022. Xi, also the party's chief, has concentrated power in his hands. He will not become a lame duck for the foreseeable future, and a full-scale introduction of the property tax looks inevitable, considering Xi's need to prevent an acceleration in housing prices.
During the Xi administration's first term, from 2012 to 2017, housing prices continued to soar abnormally in Beijing, doubling in just several years.
Around that time, when a Japanese businessperson urged multiple Chinese acquaintances to be cautious, drawing from Japan's experience with an asset bubble that imploded, the listeners often brushed aside the advice, noting that foreigners do not understand the real China. "Housing prices always go up, even if they fluctuate somewhat," went the replies. "That's how it works in a market economy under socialism with Chinese characteristics."
For a while that was true, and housing prices went on surging.
China's property market does indeed have Chinese characteristics. Those who took advantage of the commercial housing market after the 1990s and made a fortune from speculation were mainly party members, bureaucrats and those lucky enough to come by information of what was happening at the center of power.
These people were able to borrow money from banks due to impeccable creditworthiness. By putting up their first houses as collateral, they could borrow even more.
Today, wealthy Chinese in cities make significant amounts of extra money by renting out properties. Even when tenants leave, there is little sense of panic because there is no ownership tax. If the market is not right, they only have to wait until prices begin to climb again.
The distorted structure put housing prices on a one-way street and eventually prevented young people in big cities from affording the smallest of apartments, even if they worked until the day they died.
It is Xi Jinping's will to introduce a property tax that might contribute to common prosperity, or send home values plunging. Photo taken October 7, 2021, in Wuhan, Hubei Province. The winners of this cutthroat economy are those who bought two or three properties earlier than others, even if they borrowed money for it.
And it was those winners, in the pre-pandemic days, who traveled overseas, enjoyed luxury cruises and went on shopping sprees, to the delight of luxury brands.
Some people opt to retire from their not-so-profitable main jobs early and live on the revenue their properties generate.
Ever-rising home prices emboldened owners to increase their consumer spending, which in turn became a driving force behind China's high-growth economy.
Private property developers, including the now embattled China Evergrande Group, made money by building clusters of massive condominium towers after purchasing land-use rights from local governments.
Local governments themselves made out by selling land-use rights at high prices. For property developers, wealthy buyers and municipalities, it was a win-win-win dream.
People's belief that the party would never destroy this convenient system also supported the conviction that home prices would only rise. But now, the common practices of the past look like they will no longer work.
What is driving the president to push through a property tax? First of all, he wants to help young people cope with social issues.
He has been sending clear signals. Nei juan , involution, and tang ping , lying flat, are catchphrases that have become popular on social media.
In an Aug. 17 speech at a meeting of the party's Central Committee for Financial and Economic Affairs to discuss social issues faced by the country's youth, Xi made use of the trending vocabulary.
Involution is deeply related to China's education fever and competitive society. It is a buzzword that means people are trapped in a vicious cycle of over-competition and exhaustion.
Lying flat is the antithesis of a vicious cycle. It points to a phenomenon of young people refusing to compete socially, to push themselves and to become greedy.
If Xi embarks on reforming the property market now, he might be able to tout it as an achievement toward the realization of common prosperity at next year's party national congress.
A construction site in Shanghai on Oct. 22. Shanghai and Chongqing experimented with a property tax 10 years ago, targeting owners of higher-end and second homes. © EPA/Jiji Many local governments, struggling to pay swollen debts, are now warming up to the introduction of a property tax, hoping it could become a stable long-term revenue source.
Some of the revenue is expected to go into the construction of inexpensive public rental housing.
The tax has faced strong objections for some time now due to fears it would adversely impact the real estate market and subsequently the wider Chinese economy.
Shanghai and Chongqing in 2011 experimented with a property tax, targeting owners of higher-end and second homes. But the tax never caught on elsewhere.
The latest trial run comes at a challenging time for the Chinese economy and risks further dampening the housing market and pouring cold water on the wider economy.
The areas where the property tax will be tested for five years are expected to be announced by the end of this year. There is a possibility that the number of such areas will be smaller than initially assumed.
"If President Xi serves a third term in 2022 and beyond, there is no doubt that the new tax will be introduced widely in various parts of the country through legislation," predicted a source familiar with China's tax and fiscal issues.
The collapse of China's housing conviction is already beginning to become a reality. The property sector, which enjoyed consecutive years of bumper earnings, has quickly become a declining industry due to the long-running Xi administration's rapid shift to common prosperity.
This is not the end. The introduction of the tax, which reflects the top national leader's will, will have far greater destructive power than the current debt crisis at China Evergrande Group.