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China’s “Subprime Mortgage Crisis” Avoided Downscaling Real Estate Tax Might Have Saved China - YouTube
Channel: Zooming In China
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Hello, everyone. Welcome to Zooming In China.
I’m Simone Gao.
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There is always a great deal to talk about
in China, but perhaps the biggest topic right
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now is the real estate tax that Xi Jinping
wants to implement and the resistance to it.
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The topic is not new. Neither is the resistance.
Since 2003, well before Xi Jinping’s rule,
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the Chinese government has been considering
this tax. In 2011, they implemented pilot
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programs in Shanghai and Chongqing, but those
programs taxed only higher-end apartments
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and second homes, at rates between 0.4% and
1.2%.
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Now, a decade later, the State Council, the
top decision-making body of the Chinese government,
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has announced it will roll out a pilot of
a broader real estate tax in some regions.
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They declined to name the regions or to provide
more public details about the properties that
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would be taxed or the amount of the tax, but
many experts expect real estate hot spots
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Zhejiang, Shenzhen and Hainan to be targeted.
The pilot program is expected to last for
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five years before the government determines
whether or not to roll the program out to
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the entire country.
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This smaller-scale rollout is a far cry from
the original desire of Xi Jinping and the
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Communist Party government to create a tax
that some experts say would lead to one of
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the most profound changes to the country’s
real estate policies in a generation. So,
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why would Xi trim down a country-defining
change when he has the power to implement
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and enforce it? Might the timing of this change
show a compromise meant to appease Communist
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leadership ahead of the Sixth Plenary Session
in which Xi will likely be granted a level
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footing with Mao Zedong and Deng Xiaoping,
the party’s widely recognized supreme leaders?
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I do not believe this compromise is related
to the Sixth Plenary Session. The battles
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for that session have already been fought
and won by Xi Jinping, as we have seen with
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the October 18th announcement published on
the official website of the Chinese government.
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In that report, they announce that the Political
Bureau of the Communist Party of China Central
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committee held a meeting to discuss the resolution
to be submitted for the Sixth Plenary Session
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and the result was the resolution was approved.
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The resolution says that the Chinese Communist
leaders, with Mao Zedong, Deng Xiaoping, Jiang
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Zemin and Hu Jintao as the main representatives,
had led the Chinese people to great achievements,
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but Xi Jinping led the country to new achievements
and to new valuable experiences, providing
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a system to guarantee a great rejuvenation
of the Chinese nation.
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The feeling in this passage is that although
prior leaders had some major achievements,
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the new, more complete, more reliable power
for China is in Xi Jinping’s hands.
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The resolution continues by saying that China
has ushered in a great leap from standing
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up, getting rich and getting stronger. Standing
up, getting rich, and getting stronger represents
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three people: Mao Zedong made China stand
up, Deng Xiaoping made China rich, and Xi
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Jinping made China strong. This statement
makes Xi Jinping stand shoulder-to-shoulder
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with Mao Zedong and Deng Xiaoping.
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Another goal of this historical resolution
is to reshape and unify the ideas of the top
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elites of the Chinese Communist Party, that
is, to “pinch Mao and Deng together.”
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In the Mao era, China was governed by communist
fundamental principles. Those were expanded
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in Deng’s era to combine the market economy
with the communist one-party political system.
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In the era of Xi Jinping, the Communist Party
once again began to monopolize and control
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all parts of the country, including the market
economy. The market economy is allowed to
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exist, but only under the strict control of
the government. You can develop only as the
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government allows you to develop. There will
be no more disorderly expansions like the
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big ecommerce platforms such as Alibaba. And
those who have benefited most from the market
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economy are now under the tightest scrutiny.
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That scrutiny has now extended to the real
estate market in China, especially after the
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near collapse of Evergrande and the end of
a market built on the notion of growing big
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by borrowing big. That Xi Jinping is reigniting
a conversation that had been put on hold for
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a decade, then, is not surprising at a time
of clear power-grabs by Xi and his leadership
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team. What is surprising is his willingness
to compromise and scale back that tax.
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The Wall Street Journal says that, according
to people familiar with the matter and with
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internal discussions, most of the feedback
Xi received about his real estate tax plan
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was negative, from not only regular Party
members but also the Party elites.
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There are many reasons for the antagonism
toward the new tax. One reason comes from
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older Party members who benefitted from real
estate purchases at a time when prices were
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low and favorable to Party members but who
now say they cannot afford the additional
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taxes. Many of those Party members own multiple
properties and so may face a substantial tax
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bill. Who are the people likely to own multiple
properties and so be most affected by this
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real estate tax? CCP officials and wealthy
citizens. CCP officials gained multiple properties
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as a perk of the power they held. The wealthy
purchase homes as an investment.
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Speculation about the original tax plan indicated
that a 0.7% rate was possible, a rate that
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would have yielded 1.8 trillion yuan (or $281
billion) of tax revenue in 2020 and that could
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generate revenue equal to roughly 75% of land
sales revenues, money that could be re-invested
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into the public services and infrastructure
that are desperately needed to boost the Chinese
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economy and ensure the safety of its citizens.
Over time, the tax could help local governments
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reduce their reliance on those land sales.
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But, according to CNBC writer Evelyn Chang,
“A nationwide property tax would likely
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require disclosures of business and government
leaders’ real estate holdings, which means
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such a policy could meet resistance even as
the country has been cracking down on corruption.”
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Revealing just how deeply the Party elite
have benefitted from those positions may be
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a problem not just for them but for Xi Jinping
as well.
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In addition to pressure from the Party elite,
and his own personal interests, Xi must also
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consider the catastrophic consequences that
a sudden increase in real estate taxes could
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bring to the economy. These consequences stem
from a core reason for the real estate tax,
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one Xi announced in August when he said that
pursuing “common prosperity” in China
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would mean reducing “excessive” income
and encouraging the wealthy to give back.
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The intent of “common prosperity,” is
“to recreate a lot of new middle-class people
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who have affordable housing and affordable
health care and affordable education. And
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in order to do this you need to make sure
that housing is for living—that is, not
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speculation or for investment.”
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Theoretically, China’s real estate bubble
will reduce once a real estate tax is imposed,
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because people will no longer hold houses
for investments, instead allocating funds
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to other investments, such as capital market
investments. According to China’s central
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bank, Chinese citizens currently have nearly
60% of their urban household assets held in
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real estate with only 20.4% allocated to financial
assets like stocks and bonds. U.S. households
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have, on average, over 40% of their wealth
in financial assets.
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But if common prosperity and the real estate
bubble were the only concerns, real estate
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taxes would not have been placed on hold for
a decade. This topic would have been addressed
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at the height of China’s real estate bubble,
not as the bubble began to burst.
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Instead, Xi Jinping is levying real estate
taxes in order to solve financial difficulties.
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The central government has no money, and its
reliance on land sales cannot continue indefinitely.
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Then came the Evergrande disaster with secret
dealings that led to their loans being paid
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on time—a situation that strongly suggests
some level of government bailout—and billions
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being funneled into Chinese banks to prevent
a collapse of the market. The government is
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out of money and quickly running out of options.
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But while the addition of real estate taxes
may curb real estate speculation and drive
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prices down, if housing prices fall too sharply,
many residents' mortgages will default. The
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logic is simple. When house prices fall many
people will not be able to afford a mortgage
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because real estate is their biggest asset,
especially if they use one house to pay for
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another house. For others, they will simply
walk away from a devalued house. For example,
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if you borrowed $5 million on a 30-year loan
but, two years later, found that the home
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was now valued at just $3 million, would you
continue to pay on the loan and take the $2
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million loss? Or would you default and walk
away? Many will walk away, leaving the banks
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in possession of billions in bad debt and
a number of houses that are not worth the
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money that was lent.
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Up to 80% of some Chinese households’ wealth
is tied to real estate; when real estate depreciates,
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people’s core assets will shrink and their
spending power will drop sharply, driving
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the entire economy into a sharp decline. This
is the rhythm of economic collapse. Xi Jinping
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is nicknamed Chief Accelerator of China meaning
he is pushing China over the cliff in an accelerated
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way. But, this time, even the chief accelerator
saw the cliff just ahead of him.
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That’s all for today. Thanks for watching
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