Tax to the rescue
Following on from our analysis of the recent legislation concerning foreign investment in Chinese Real Estate, this month saw further announcements from the central government, aimed at curbing land development. However, in this instance, it was the use of taxes on land transactions rather than curbs on specific investor groups, which are being used to control the perceived over-investment in fixed asset infrastructure and property. The government is aiming at two objectives: the first, to cool a perceived overheating in development and second, to create the basis for more equality and better compensation for those who lose their land to developers. However, the success of these two policies might be mutually exclusive.
The new policies announced by the Ministry of Land and Resources in September cover two principal issues. First, the compensation payable to those persons who lose their land to new developments, will be doubled (a precise figure was not given). This is expected to benefit mainly farmers in rural areas surrounding urban and industrial expansion. Second, land fees for new construction projects will also be doubled from the current range of RMB 5/sqm to RMB 70/sqm (depending on location). The policies also state there will be a tripling of taxes on the purchase of urban land (currently just RMB 1.2/sqm). It is envisaged revenue from land taxes will be shared by the state and local governments. It is unclear on what basis such sharing will be worked out.
The introduction of such policies comes against a backdrop of continued growth in demand for development land, which has been hard to reign in, either through fiscal measures or more direct legal restraints. The annual report from the above ministries on land use shows the extent of this problem. In 2004 the Ministry of Land and Resources reported that 267,800 hectares of agricultural land was used for development, of which 125,100 hectares was used for industrial and mining purposes, 56,500 for urban construction and 25,500 for village construction, with the remainder on infrastructure projects. The corresponding figure for 2005 jumped to 432,000 hectares, a 61% increase. Of this figure 151,100 hectares was used for industrial and mining purposes, 98,200 for urban construction and 66,600 for rural construction, with the remainder on infrastructure projects.
Keep it coming
A glance at the figures shows it¡¯s not difficult to see continued acceleration in both urban and rural construction which jumped 74% and 161% respectively. Quite apart from the loss of agricultural land, such rapid growth in urbanization is throwing up challenges across a variety of different areas. These include efficient use of assets, both financial and physical, appropriate distribution of wealth and compensation and environmental considerations. While last month¡¯s announcements on controls of foreign investment are likely to have a very benign effect on China¡¯s rapid urbanization, the use of these key ¡®at source¡¯ taxes and compensation, if implemented properly, are likely to be much more deeply felt. It is the introduction of market orientated forces to both control investment and benefit the government directly through increased revenues.
The revenue aspect of these changes could be pretty dramatic. In 2005 granted land in China was 163,200 hectares which produced corresponding fees of some US$68.8 billion. Of this 57,200 hectares were granted by public auction, tenders and listing which produced US$49 billion (some 71% of the total revenue). It is not possible to extrapolate what the potential effect of central and local government revenue will be from these increased fees, save to say it should be substantial, permitting a sharp reduction in land issuance while maintaining or even raising gross income from this source. Such a move is to be applauded. However, a second aspect which will be the real challenge, will be ensuring the new regulations concerning compensation for those losing land, can also be effectively implemented. Collecting fees and taxes for your own use and ensuring fees are properly paid to others, are two very different issues.
Watch out the tax man¡¯s about
By restructuring the sharing of tax revenues between central and local governments and substantially raising tax thresholds, it appears the central government is creating a viable market driven response to the problem of over-investment in land development. How the market reacts in terms of re-pricing assets, slowing investments or simply accepting smaller profit margins, will be interesting to observe. Some sources have quoted possible price rises of up to 60% for new industrial developments. Whether this will actually be the case, remains to be seen. What is for sure, according to these measures, market response and government interests should be more effectively aligned.
