China scraps tax break on property sales

It will extend subsidies for purchases of cars, home appliances

China scrapped a tax break on property sales and extended subsidies for car and home appliance purchases, seeking to cool speculation while sustaining a recovery in the world’s third largest economy.

The State Council will re-impose a sales tax on homes sold within five years after cutting the period to two years in January, the Cabinet said in a statement on Wednesday. The government will scale back some tax breaks for car buyers, while continuing to fund vehicle purchases in rural areas.

China’s property prices rose in November at the fastest pace in 16 months, a government survey showed yesterday, reinforcing concern that record lending and a US$586 billion stimulus package may lead to asset bubbles.

The nation’s economic growth accelerated to 8.9 per cent in the third quarter, helping Asia to lead the recovery from the global economic slump.

‘The government is clearly in a dilemma,’ said Clement Luk, a Shanghai- based analyst at Centaline Property Agency Ltd. It ‘wants to address the surging property prices and concerns of a bubble, yet it dares not to take drastic measures for fear of hitting the market too hard’.

The government’s reversal of the tax on home sales ‘is much milder than the market had expected’, he said.

China’s economy faces difficulties and challenges next year, the State Council, China’s Cabinet, said yesterday. The nation needs to keep expanding consumption to drive growth, it said.

‘The government is refining its policy to promote domestic consumption,’ Jun Ma, Deutsche Bank AG’s Hong Kong-based chief economist for Greater China, said in a phone interview.

‘The reinstatement of the property tax period to five years is an early signal that the government is concerned about speculative demand in the property market.’

China announced plans to reduce the real estate sales tax and extend preferential lending rates for buyers of second homes in December 2008. Prices in 70 major Chinese cities fell for the first time on record that same month and did not post an increase until June this year, according to government data.

Prices rose 5.7 per cent in November after gaining 3.9 per cent in October, the National Bureau of Statistics said yesterday on its website.

Premier Wen Jiabao said on Nov 28 in Shanghai that the government will support the development of affordable housing for low and middle-income earners, the official Xinhua News Agency reported. Property speculation must also be suppressed to promote a healthy real estate industry, Xinhua cited Mr Wen as saying.

‘The Chinese central government wants to gradually control the bubble in the real estate market,’ Andy Xie, former Morgan Stanley chief Asian economist, said by phone.

‘At the same time, the government does not want to see a sharp fall in property prices after a rapid rise since the sector plays an important role in the country’s economy.’

The government will also scale back preferential tax rates offered for purchases of vehicles with engines of 1.6 litres or smaller, according to the statement.

China in January cut the sales tax on the vehicles to 5 per cent from 10 per cent between Jan 20 and Dec 31. It introduced the incentive to revive demand after car sales rose at the slowest pace in a decade last year. The rate will be 7.5 per cent next year, the statement said.

Government support helped fuel a 42 per cent jump in nationwide vehicle sales to 12.2 million in the year till November, putting China on course to surpass the US as the world’s largest car market.

Source : Business Times – 11 Dec 2009