The cities of Shanghai and Chongqing led China in introducing its first-ever property tax for home buyers on Thursday, revving up the government's battle to curb record home prices and tame inflation.
To be implemented in the two cities on Jan. 28, the taxes will target higher-end, newly purchased second homes and will require buyers to pay between 0.4 to 1.2 percent.
Property prices, one of two main drivers of China's quickening inflation, have flown high on the government's radar due to Beijing's determination to tame price pressures before they run out of control and stir social unrest.
"It's impossible for housing prices to fall overnight because of the property tax, but it will help to curb speculation in the housing market," Huang Qifan, the mayor of Chongqing, told a news conference.
In separate statements, local governments in Shanghai and Chongqing said the size of the taxes will depend on how values of homes compare with average market prices.
In Shanghai, buyers will pay a tax of 0.6 percent on their new second homes. If values of homes are less than double that of average market prices, buyers need only pay 0.4 percent.
In the western city of Chongqing, taxes are more staggered. Buyers of new second homes will pay a tax of 0.5 percent if homes are valued at two to three times average market prices.
Homes valued at three to four times average market prices will be taxed 1 percent, with the highest tax not exceeding 1.2 percent. All villas and town houses in Chongqing will be taxed as well.
"The property tax, as part of the government's move to tighten control over the housing market, will have a big psychological effect on potential home buyers," said Ge Haifeng, the research head at China Real Estate Index System in Beijing.
"China's housing market may get really quiet in coming months."
Speculation that China could introduce a property tax has helped drag down Chinese stocks 15 percent in the past ten weeks.
Yet the modest sizes of the tax rates drew scepticism from some analysts about whether they would be effective.
Mark Williams, an economist at Capital Economics in London, said although the rates were in line with market expectations, they were not high enough to deter speculators, or implemented broadly enough to be of significance to municipal budgets.
"The fundamental reason why a lot of people put their money in the property market is because they have very few alternative options," he said.
"Savings deposits don't give you much of a return; there's widespread scepticism about equity markets, and so the money goes into property. I don't think this is going to fundamentally change that."
However, He Yifeng, an analyst with Hongyuan Securities in Beijing, said it was too early to judge the success of China's new property tax regime.
"Once the tax is launched, it is quite easy for the government to adjust the rate," He said.
"The tax's effect may be weak at the beginning, but if housing prices remain high, the government can gradually increase the tax rate to depress the prices."
Talk has swirled in China for months that Beijing was ready to let various Chinese cities, including Shanghai and Chongqing, try a property tax before rolling it out to the rest of the country as part of its anti-inflation campaign.
Analysts said Beijing appeared to be sticking to this plan.
In a statement jointly issued by the Ministry of Finance, the tax bureau and the housing ministry on Thursday, the central government in Beijing said China would roll out the tax nation-wide when "conditions are ripe".
The statement said local governments would decide the size of the tax and the date of introduction. It said the tax would narrow China's income gap and the money collected from it would accrue to the fiscal budgets of local governments.
Thursday's measures will end years of debate about whether property taxes should be introduced in the world's second-biggest economy. Opponents had worried they could hobble the housing market.
But with property prices jumping by over a fifth last year despite a steady stream of curbs since 2009, analysts said the government likely felt more needs to be done.
China's annual property inflation ran at 6.4 percent in December, down a touch from November's 7.7 percent, although sequential momentum stayed strong, with prices rising 0.3 percent on a month-on-month basis.
Administrative policy steps are but one of Beijing's many anti-inflation policy tools, including interest rates, reserve requirements and the yuan.
But comments from central bank chief Zhou Xiaochuan on Thursday that it would keep the yuan at a stable level should dash the hopes of investors who had bet on China letting the currency rise at a faster clip to fight imported inflation.
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