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China’s “Subprime Mortgage Crisis” Avoided? Downscaling Real Estate Tax Might Have Saved China - YouTube
Channel: Zooming In with Simone Gao
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Hello, everyone.
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Welcome to Zooming In China.
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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.
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Neither is the resistance.
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Since 2003, well before Xi Jinping’s rule,
the Chinese government has been considering
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this tax.
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In 2011, they implemented pilot programs in
Shanghai and Chongqing, but those programs
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taxed only higher-end apartments 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.
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The pilot program is expected to last for
five years before the government determines
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whether or not to roll the program out to
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.
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So, why would Xi trim down a country-defining
change when he has the power to implement
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and enforce it?
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Might the timing of this change show a compromise
meant to appease Communist leadership ahead
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of the Sixth Plenary Session in which Xi will
likely be granted a level footing with Mao
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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.
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The battles for that session have already
been fought and won by Xi Jinping, as we have
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seen with 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.
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Standing up, getting rich, and getting stronger
represents three people: Mao Zedong made China
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stand up, Deng Xiaoping made China rich, and
Xi Jinping made China strong.
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This statement makes Xi Jinping stand shoulder-to-shoulder
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.
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Those were expanded in Deng’s era to combine
the market economy with the communist one-party
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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.
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The market economy is allowed to exist, but
only under the strict control of the government.
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You can develop only as the government allows
you to develop.
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There will be no more disorderly expansions
like the big ecommerce platforms such as Alibaba.
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And those who have benefited most from the
market economy are now under the tightest
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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.
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That Xi Jinping is reigniting a conversation
that had been put on hold for a decade, then,
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is not surprising at a time of clear power-grabs
by Xi and his leadership team.
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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.
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One reason comes from older Party members
who benefitted from real estate purchases
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at a time when prices were low and favorable
to Party members but who now say they cannot
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afford the additional taxes.
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Many of those Party members own multiple properties
and so may face a substantial tax bill.
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Who are the people likely to own multiple
properties and so be most affected by this
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real estate tax?
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CCP officials and wealthy citizens.
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CCP officials gained multiple properties as
a perk of the power they held.
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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.
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Over time, the tax could help local governments
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.
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These consequences stem from a core reason
for the real estate tax, one Xi announced
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in August when he said that pursuing “common
prosperity” in China would mean reducing
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“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.
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And 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.
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According to China’s central bank, Chinese
citizens currently have nearly 60% of their
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urban household assets held in real estate
with only 20.4% allocated to financial assets
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like stocks and bonds.
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U.S. households 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.
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This topic would have been addressed at the
height of China’s real estate bubble, not
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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.
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The government is 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.
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The logic is simple.
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When house prices fall many people will not
be able to afford a mortgage because real
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estate is their biggest asset, especially
if they use one house to pay for another house.
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For others, they will simply walk away from
a devalued house.
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For example, if you borrowed $5 million on
a 30-year loan but, two years later, found
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that the home was now valued at just $3 million,
would you continue to pay on the loan and
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take the $2 million loss?
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Or would you default and walk away?
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Many will walk away, leaving the banks in
possession of billions in bad debt and a number
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of houses that are not worth the 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.
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This is the rhythm of economic collapse.
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Xi Jinping is nicknamed Chief Accelerator
of China meaning he is pushing China over
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the cliff in an accelerated way.
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But, this time, even the chief accelerator
saw the cliff just ahead of him.
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That’s all for today.
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Thanks for watching Zooming In China.
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