Property woes

Falling prices cause local govts to worry about taxes from developers

In contrast to the scorching heat this summer, China's real estate sector, a pillar industry in the economy, is suffering a chilly freeze amid falling property prices, which has spurred local governments to collect overdue taxes from property developers due to fears that bankrupt developers might run away without paying.

China's property business tax and contract tax grew by 6.6 percent and 11.7 percent in the first six months of this year respectively compared with the same period last year, down 39.1 and 28.1 percentage points from a year earlier, according to the Ministry of Finance (MOF).

"The huge gap is even larger at the local level," the Beijing-based China Times newspaper reported on Friday citing an official from the financial authorities in Guangdong.

To deal with the gap, the local tax authorities set up a special tax force to collect land and property related taxes.

"We worry that taxes cannot be collected if small property developers go bankrupt," the China Times cited Li Quan, a Guangdong local tax official who used a pseudonym as he was not authorized to speak to media.

The Guangdong tax authorities have tightened collection targeting property developers and individuals regarding land and property related taxes, Li said.

Local tax bureaus in Southwest China's Guangxi Zhuang Autonomous Region and East China's Jiangsu Province have also set up collection teams targeting land and property taxes, according to the report.

A tax call center representative of the Suzhou Local Taxation Bureau of Jiangsu Province told the Global Times on Monday that all local property developers and individuals engaging in property transactions must file any changes or updates on all land and property information before October 1.

The new move is aimed at preventing tax evasion due to missing land and property information, she said.

Having experienced a fiscal revenue slowdown, many city governments are eager to hasten tax collection especially for the property sector, a major tax contributor.

"The small- and medium-sized developers who have difficulty in financing are the priority targets," the newspaper cited a local tax officer from Jiangsu, noting that many of the small developers owed a lot of outstanding taxes over the last two years, and some of them relied on usurious loans to survive. "We have nowhere to collect taxes if they go bankrupt," he said.

Property 'addiction'

The aggressive tax collection of the tax authorities is due to the local governments' heavy reliance on the property sector.

Local governments had record-high land sale revenues of 3.91 trillion yuan ($636 billion) in 2013, exceeding budgetary targets by 152.6 percent, MOF data showed on July 11.

Land sales revenues made up about 57 percent of total local government fiscal revenues in 2013. The importance of the land sales revenues is more obvious in some local governments than others.

Revenues from land sales contributed about 60 percent of Beijing's municipal government income to repay debt, and 63 percent in Zhejiang in 2012, according to the local governments' audit reports released in January.

Local tax authorities are facing bigger challenges in tax collection this year given a slackening economy and economic restructuring which has resulted in the shutdown of energy-consuming and polluting manufacturers which were major local tax contributors, Zhang Guangtong, vice dean of the School of Taxation with Beijing-based Central University of Finance and Economics, told the Global Times on Sunday.

In the past, local tax authorities may have postponed taxing some property developers if tax collection targets had already been met. However, as they are struggling to meet their tax revenue target this year, they now tend to hasten tax collection, Zhang remarked.

The business tax accounts for the largest share of tax revenues from the real estate sector, followed by the contract tax, land appreciation tax and tax on urban land use, according to the MOF.

Business tax remains the major tax contributor to local authorities. After the value-added tax reform, which will replace the business tax, is expanded to the real estate sector, local tax authorities will see tax revenues slide further and face heavier tax collection pressure.

China's heavy dependency on the property sector is not healthy so local governments should back off from the market player role and serve as a supervisor, Zhang said.

Red-hot market cooling

China's home markets continued to weaken, with 55 of 70 major cities seeing new home prices fall in June, up from 35 cities in May, data from the National Bureau of Statistics indicated.

The average new home price index in the 70 cities fell 0.5 percent in June from the previous month, accelerating from May's 0.2 percent monthly drop, marking the largest fall since April 2011, according to the Centaline Real Estate Research Center's calculation on the official data released on Friday.

Property sales in July are expected to be even worse than June, especially smaller developers, Zhang Haiqing, an analyst at Shanghai-based Centaline Property Research Center, told the Global Times on Monday.

As of Tuesday, 29 cities including Ji'nan in East China's Shandong Province and Suzhou in East China's Jiangsu Province relaxed second-home purchase curbs to revive local property markets, according to market information provider Shanghai DZH Ltd.

Smaller developers suffered cash crisis from sliding sales as they had difficulty in obtaining bank loans, and banks prefer lending to larger developers who are believed to have more steady cash flow and less risks compared with smaller firms, Zhang said.

"Sluggish sales will last for a while, even though some cities have loosened rules for home purchases," she said, noting that residents' income growth failed to catch up with skyrocketing home prices which led to a slump in recent home sales.

Strengthening tax collection on the smaller property developers will weigh on their draining cash flow, making more smaller market players go bankrupt, while bigger competitors will take them over and there will be fewer developers holding larger market shares, she remarked.

It would be a very normal situation if home prices fall 10 or 15 percent in the future and the downward market lasts as long as one or two years, according to Gong Fangxiong, managing director and chief economist of JP Morgan in China, at a forum on Saturday.

Though a price fall is most likely to occur, it cannot trigger an overall financial crisis as the financial system in China is not as highly leveraged as in the US, Gong said.