EARLY in March, I was invited to speak at two conferences in Beijing.  At the first one,   I spoke about an item sorely needed in China, not to mention both Hong Kong and Macao, as well - but unlikely to ever come to fruition in the latter two jurisdictions:  the property tax.

I briefly covered this topic a couple of articles ago.  There are ten cities in China that, over the next couple of years, must experiment, must implement some form of municipal tax change that would involve property taxation.  Shenzhen needs it now - actually, they needed it, Shenzhen in particular, though, because last year, that thriving municipality finally started seeing the well run dry - they’ve run out of land to sell.  With no land sales,, there's no municipal revenue.  With no revenue, who's going to get paid - and how?

Over the past 15 years, I have known many young, talented, well-trained, Beijing-based civil servants who have been accepted into what I think is one of the lowest costing, best resulting programs governments have sponsored:  scholarships for graduate work in the U.K., jointly funded by the PRC and British governments.
 
I know three from the Ministry of Finance who were accepted to this program.   Upon return to the PRC, all scholarship recipients had to complete five additional years of working for the government, prior to leaving, if they chose, for private industry.  About 1/3 of the returnees do, in fact, depart government service.  The others, those who stay on, are the best and the brightest that the country has to offer for the future of civil service in China.  These are dedicated employees - they would truly be valuable to any country having young, career-oriented workers of this training and calibre.

The truly marvelous thing, though, is a simple, little, low cost function that the British Embassy in Beijing performs:  The Brits, see that this 'alumni association' of grad school returnees gets together on a periodic basis to discuss various topics of concern to Beijing.  This gathering, this networking, this meeting of minds to discuss various and sundry aspects of life in urban China costs so little to perform and yields such worthwhile results - it almost makes me less cynical about government!

Anyhow, I met with approximately 30 men and women on a cold, snowy, Sunday afternoon in Beijing.  Basically, I discussed my recollections of how the property tax worked in California.  True, I haven't lived in California for 20 years but for the 22 years preceding my departure, I was a bona fide property owning property tax payer.  This was further 'enhanced' by my first 'in-charge' job as a CPA:  the County of Tulare, California government audit, less than half a year after a major Los Angeles County Tax Assessor scandal had taken place.  Ah, what a time I had - perhaps the only time in my professional career I experienced the 'power of an accountant' who struck fear in the minds of loyal, capable civil servants within the County of Tulare Assessors office because of the transgressions of their Los Angeles County brethren ...

Anyhow, during my presentation, I explained the valuation and assessment functions', the tax collection functions and the checks and balances to prevent corrupt practices as well as to provide a fair method of appealing valuations.  While I had prepared a PowerPoint presentation, I did not use it:  we sat in a large, round-table configuration and I answered questions as they were asked.  By and large, these were quite intelligent questions posed by young adults who had never really considered the implications of a property tax but were quite receptive to discussing what they overwhelmingly agreed was a likely answer to the problems facing the Shenzhens of China.

Simultaneously, while we were meeting, there were two other meetings taking place that same day in Beijing - actually within walking distance of where we met (although, with the snow and cold, I'd have recommended taking the three stop subway train ride over walking and slip/sliding one's way along Changan Avenue to the Great Hall of the People):  The National People's Congress and the Chinese People's Political and Consultative Conference.

According to the South China Morning Post, in a 17 March article, Zong Qinghou, the richest mainland resident and a delegate to the CPPCC, a property tax would hurt homeowners.  Zhong was quoted on this matter in the 15 March issue of Business Week.  Hey, additional taxes will hurt all tax payers.  Yet a property tax will have far less impact upon home owners/occupiers, than on the speculators  and would be far more helpful in stabilizing real estate prices for the vast majority in China who aspire to home ownership but for whom the cost of real estate is rising far more rapidly than their incomes or savings.

Lu Guanqiu, China's 19th wealthiest individual (as per the Hurun Report, Rupert Hoogewerf’s much sought after annual listing of who has what in the PRC - to make this list is an often aspired to goal of so many, many people in China.   As an interesting side comment, Rupert and I chatted at the second of three conferences I attended that week in Beijing - the one at which I did not speak.  I mentioned to Rupert that we have basic differences in all the hoopla and fanfare:  his clients sought to be listed while my clients craved anonymity!), concurred, as did Pan Shiyi, number 24 on the Forbes China wealth list and, as with the other two, also a member of the CPPCC.  Shiyi stated:  "The ones who have properties are the ones with the power to implement the tax, so it's very unlikely the tax will become law".

Just what are all these wealthy individuals doing at annual, national political gatherings in Beijing, held by the Communist Party?   Blame that, my friends, on former President Jian Zemin who, in 2002, changed party doctrine, encouraging private entrepreneurs to join the Party.  These individuals are now voicing opposition to government initiatives from within the system!  Gee I always thought that the concept of 'rich communist' was somewhat oxymoronic!
The fact of the matter is that an annual levy on property would likely yield a far more reliable revenue stream, making municipalities far less dependent upon land auctions that alone, helped prices rise 10.7 percent, year on year, for the month of February.  This is the fastest pace of property price increases in  well over two years.

Let it not be said, though, that there was actually someone who is a member of the CPPCC was not available to speak out in opposition to property tax implementation:  Delegate Wang Chaobin, a Henan Province property developer (who, it appears, made absolutely no one's 'rich list') stated in the SCMP that "the whole world pays property tax.  China's economy must be linked with the whole world in order to become prosperous."

Yes, a property tax is, in my opinion, needed.  Yet the implementation process is going to be far more difficult than anyone can possibly imagine.   A large, new bureaucratic infrastructure will have to be created for assessment, appeals, collection and anti-corruption - one city at a time, to see how it all can be developed....with Chinese characteristics.  It's coming to China.  The only matters of concern are when, where and how.  It's not, of course, my opinion, that matters.  That lies in the seat of power, with the ultimate decision makers in Beijing.    The central government's Ministry of Land Resources ploughed RMB1.6 trillion in revenues, into the China economic stimulus package. 40 percent of this was generated through the sale of land, through the central government, with the revenues going to the provinces and cities. I think this portends problems because so much tax-equivalent revenues flowed out and  into the banking sector to lend out so fast, primarily to the state owned entities, who grabbed all available real estate to construct upon, with someone else's money.  Insanity?  I think so.  Yet it seems to be working.  And yet ...

In a Singapore Business Times article, 8 February, Neil McDonalds, an insolvency attorney with Lovells in Hong Kong stated:  There are literally trillions and trillions of RenMinBi of frankly, defaulting loans in China that no one is doing anything about."  If, at some point of time, the banks need a bail out, it will obviously have to come from the central government, leaving nothing for those cities who have sold all their land.  City by city, as the need is most acute - that's how there'll be a property tax in China - no matter what those rich Communists think!
 
Property tax in Hong Kong?   Not in my lifetime!   The magnates who own, operate and control my favorite city will never let it happen.  Hong Kong operates upon the real estate standard, with the price of real estate, if Hong Kongers had their way, always going up, never down!   And yet, Hong Kong taxation has made the newspapers for the last three days in a row.  On 22 March, Hong Kong announced signing a double tax avoidance treaty with Brunei.  To make the OECD 'white list', you've got to have a certain number of treaties and TIEAs - not necessarily arrangements with big jurisdictions but equally with the smaller ones.   I cannot, for the life of me, think of tax treaty benefits to be derived from a Hong Kong - Brunei treaty - other than inching one's way out of the grey and into the white list.  The very next day,  though, Hong Kong and Netherlands announced a DTAA.  Who knows - I might actually read this one! And what I will read, no doubt is the third treaty signing announced in three days:  a Hong Kong - Indonesia DTAA.  This one is of interest because it appears to contain some very favorable treatment for Hong Kong owned entities doing business in Indonesia.  This should be of interest to PRC companies wishing to avail themselves of tax breaks that previously were not available.  Now all I need is the time to read - and hopefully comprehend - this tax treaty!

O.K. Let's get back to property taxation and the other functions it performs.  This time, let's take a look at Macao, where,  on 22 March, another SCMP article discussed a government decision to fill in a lake in order to build a public hospital.  Land reclamation to be performed at government expense, while adjoining properties of either 'real' land or previously filled in land lie vacant/undeveloped.  This has aroused some concern in Macao because of its inability to seize land from speculators.   Large sites, near the lake to be filled in, are, frankly, sitting idle.  Without a property tax, once a parcel of land is sold by the government, the government loses control and the speculator/developer has absolutely no incentive to do anything but wait until he/she can either afford to develop the property or has the financing in place.  Somehow, I think that an assessed market valuation and annual tax would curb this practice.
 
Macao's Land Law requires government land sales to be carried out through public auction.  Yet, since the 1999 handover to the PRC, only a small number of the more than 400 sites sold by the government have actually gone through the bidding process.  Without open bidding, sites, according to the SCMP, have often sold at below-market prices.  In fact, according to the SCMP, one 10.6 hectare parcel, near the soon-to-be-land-filled lake, is sitting vacant, owned by Chui Sai-cheong, elder brother of Macao's Chief Executive, presumably sold to him without a bidding process, presumably at below-market price.

Shenzhen and Shanghai, I believe, will implement property taxation measures ahead of the pack of other cities.  Shenzhen needs it as they've already run out of land to sell.  Shanghai, in its desire to control development, is taking an aggressive approach towards developers who do not fulfill their project commitments.

Beijing?  That's too tough one to predict.  The third conference I attended that week in Beijing was held in the southern sector of the city, half an hour away from the nearest subway station, 3/4 of an hour away from either the nearest McDonalds or Starbucks.  Normally, I'd not care about McDonalds but after five consecutive nights of Chinese banquets, I really would not have minded opting for an 'elusive' Big Mac, , late night, after the opening of that third conference!

And yet, the fact of the matter is that an annual property tax would likely have meant that the luxurious resort at which I spoke in south Beijing would probably have never been built;  the entire area of business parks currently being developed in south Beijing (through the courtesy of the most phenomenally large  bank loan stimulus package - unregulated, of course!) would never have been constructed with a property tax in place.   There will be a property tax in China..... eventually........because there is a necessity for the municipalities to have revenue as well as a demand from the urban classes to curb speculation and make housing affordable.