Tax, the new revolution in China Karl Heinrich Marx spent most of his lifetime studying how to distribute social wealth fairly, and later Vladimir Ilyich Lenin concluded that revolution should be the way. In China, Mao Zedong picked up some ideas from Marx and Lenin and a “new China” was eventually created. We all know what has happened since then. Today in Shanghai and Chongqing, two of the richest cities in China, the local governments discussed how to distribute and balance social wealth, ideally for every citizen in the country. They decided to use financial tools rather than revolution, hence the new property tax, which Chongqing Mayor Huang Qifan, considered a Liberal who helped Shanghai open up its Pudong New Area, said could help the city increase revenue from property to 200 million yuan this year. The reaction? An online poll on China’s top portal Sina.com showed this morning that nearly 60 percent of respondents voted against the property tax plan and more than 40 percent said they did not expect the new tax to lower property prices. Experts and scholars are now interested to see how Shanghai and Chongqing are going to collect the tax –0.6 percent for Shanghai and 0.5-1.2 percent for Chongqing, both announced on Thursday evening and effective from today — in a peaceful and practical way. Others cast doubt over the policymaking process — shall we have a consultation with taxpayers or at least go through local lawmakers, who are considered “representatives of the people”, for ideas before making a decision? The mayors of Shanghai and Chongqing both said the new tax they plan to collect, mainly from the fast-growing middle-class, will mainly be spent on building more cheap, affordable public housing for low-income people, hence redistributing social wealth. A very socialist idea. In my humble view, three factors are worth bearing in mind: First, all things considered, I don’t think the new property tax will bring prices down. Second, the property tax is a strong political signal from the government aimed at winning the hearts and minds of the poor, but it could certainly hurt the feelings of the middle-class. Third but not least, watch out, Hong Kong, Australia, Canada and so on, you may see more Chinese immigrants buying property, little by little, if not in a rush from tomorrow. So, should we pay a bit more attention to Hong Kong developers? Maybe they’ll see better earnings this year if there are more property buyers from the mainland. Oops! What is Donald Tsang going to do to keep the city’s property prices from climbing? That’s another story, but at least most people in Hong Kong don’t believe that socialism can really work.
Shanghai and Hong Kong are often considered twin cities from a historical and economic perspective, and the two cities do face many similar challenges. One of the most burning issues is the ongoing property struggle between the government, investors and developers in the two Asian strongholds of business and investment, and of course home to growing populations. The Shanghai property stock index jumped more than 5 percent on Jan. 4, the first trading day of 2011 and the surge of Shanghai-listed property stocks gave a strong boost to the Hong Kong market. Given the bigger influence and impact of China’s economic development in Hong Kong since it returned to Beijing’s control in 1997, some traders often joke that the Hang Seng Index is like Shanghai’s mistress these days – your happiness depends on your master’s mood. Usually, if the Shanghai market rises, Hong Kong’s benchmark Hang Seng Index will follow suit. When the Shanghai index falls, the HSI can fall further and faster. This week, Chinese property counters, trading at low valuations compared with their historical averages, mostly soared after local media reports indicated that the authorities could delay a new property tax because of disputes between the central, city and provincial governments, and property owners and investors. Apparently, the new property tax issue in mainland China, which some in the market had expected to be implemented as soon as possible to further curb rising prices, is running into the typical bureaucratic holdups. On average, property prices in the four first top-tier Chinese cities – Beijing, Guangzhou, Shanghai and Shenzhen – rose more than 20 percent in 2010, according to local media reports, with Beijing recording the fastest rise of 42 percent on year. It’s understandable for the Chinese government to seek to control property prices via tax, an old-fashioned solution that has prompted some analysts argue that China is becoming more like a command economy, rather than the market-oriented economy it claims to be. More interesting, even Hong Kong, known as one of the world’s leading free markets, has drawn up a special bill to allow the local government to impose an additional stamp duty on short-term property transactions. So, what is a short-term property transaction from the viewpoint of the Hong Kong authorities? Buyers who sell within two years of purchase are considered potentially speculative. The special bill has won the hearts of local residents who are struggling to climb onto the property ladder, even for less than 300 sq ft, but the bill also faces growing criticism and objections from market activists, developers, pro-business lawmakers and of course, property investors. The Donald Tsang administration announced the new property tax last November, but the bill is pending approval from lawmakers of the former British colony before it can be put to work. Some activists and analysts believe the special bill will hurt Hong Kong’s image as a market-oriented free economy, which is the core reason Hong Kong remains a top destination for foreign investment. The Real Estate Developers Association of Hong Kong (REDA) issued an open letter to the media including Reuters last night saying the industry group supported the objectives behind the introduction of the new “Special Stamp Duty” targeting short-term speculation but was concerned the new rules would also affect “genuine home buyers”. Last year, when Hong Kong implemented the city’s first-ever minimum wage policy, at least HK$28 per hour (US$3.6) for low-income workers, The Economist magazine published an article commenting that the introduction of a minimum wage “marks the further erosion of Hong Kong’s free-market ways”. Let’s not be emotional. We know how poor Hong Kong people can be. Local friends tell me Hong Kong can be a nightmare for the poor but a paradise for the rich. The city is home to Li Ka-shing, who rose from poverty to become one of the world’s richest men, as well as the very poor who can only afford to live in a cage and eat twice a day. For a very long time, the poor didn’t really resent or complain about the rich, partly because many traditional Chinese are what might be called believers in destiny. With the rise of the younger generation, the atmosphere of dissatisfaction is apparently growing in the city. Technically and from a more academic perspective, moves such as the Special Stamp Duty on short-term property transactions and the minimum wage policy could much to shake Hong Kong’s long-standing position as the world’s leading free market. Are we talking about capitalism or socialism for the future of Hong Kong’s economy? If Shanghai, one of the richest cities in mainland China must take the route of so-called socialism with Chinese characteristics to develop its economy and markets, it will be interesting to see what Hong Kong does next to please both Beijing and global investors.
By George Chen
By George Chen
The opinions expressed are the author’s own.