Why Did Beijing Shut Down Shanghai’s Plan for a Property Tax?

The proposal for a nation-wide property tax is probably the most heated policy debate in China right now. Currently there is no annual property levy and only transactions are taxed. This reduces the holding costs for speculators and denies local governments a steady stream of revenues. Logically it follows that imposing a property tax (perhaps just on luxury residences) would help curb the excess price inflation in China’s real estate market, while also alleviating the financing problems that pushed local governments to set up urban development and investment companies (UDICs) last year, which borrowed heavily from banks to fund stimulus infrastructure projects.

Shanghai, which has little additional land to sell to raise revenues and hosts a large portion of the country’s luxury properties, looked like it was going to impose a property tax earlier this year. Then Beijing, quite publically, shut this speculation down.

But why?

One explanation may be that the Chinese Communist Party is worried that implementing such a tax would expose the holdings of its cadres. Most Party officials work for relatively low wages, but gain enormous wealth through corruption. Perceived corruption is, perhaps, the Party’s largest obstacle to maintaining its iron grip on power in China. If property was required to be registered and taxed, the thinking goes, then Party officials would be exposed as owning apartments far beyond the reach of their official salaries. It’s widely assumed that developers often grant officials who were helpful in the sales process a piece of the action. Local officials, it is said, often own several apartments, which generally either sit empty or are occupied by family members.

Why, then, would Shanghai push for a tax? And why would Beijing refuse?

Crudely put, the officials in charge of running Shanghai hate President Hu Jintao, and my guess is that they were looking for a way to embarrass his ruling faction. The old “Shanghai Gang” might not strut with the same disrespect for central authority that it did before Beijing went after Chen Liangyu, the local Party secretary in Shanghai, in 2006, but the gang has not rolled over. Hu’s faction clearly made a deal with former-President Jiang Zemin that allowed Chen’s arrest, but drew the line at Jiang’s family, but the icy peace between Beijing and Shanghai remains thin. (From the time the corruption allegations emerged in 2006 to this April, Hu didn’t step foot in Shanghai.) Jiang and company were able to prevent Hu’s preferred candidate, Li Keqiang, from gaining the vice president spot at the 2007 Party conference. Instead, Xi Jinping, a “princeling” with ties to Jiang, was tipped as the next Party secretary and president. 

Nearly three years later, it looks like Shanghai was trying to flex its muscles once again. This time it was preparing to impose a property tax to demonstrate just how sparkling its politicians are after the clean up in 2007-08 surrounding Chen’s trial. (They are also relatively junior in the Party, and thus may have less access to graft.) This would potentially embarrass Beijing, as it would find it difficult to roll out a similar policy in those regions dominated by the Communist Youth League (CYL) faction tied to Hu.

Instead Beijing publically dismissed Shanghai and insisted that only the central government has the power to impose a property tax. This could be read as a threat by Hu to Shanghai to lower its head or risk losing it.

But will Shanghai listen?

Shanghai won’t impose a property tax without the approval of Beijing, but the fight will continue on other fronts. Xi’s position in the Party is still not completely settled, and Shanghai’s leaders will use every opportunity they have to demonstrate their strength. This helps keep cadres within the faction in line, and hopefully attracts new members. Still, Hu and the CYL faction have control of the government for now, which is a pretty big gun to bring to knife fight.

Then again, perhaps it was all a legitimate policy dispute amongst technocrats…

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