1. 14 June 2010
Asia Pacific/China
Equity Research
Real Estate
China Property Policy Outlook: 1
Research Analysts
THEME
Jinsong Du
852 2101 6589
jinsong.du@credit-suisse.com
Property tax: would it crash the market?
Raymond Cheng, CFA
852 2101 6945
raymond.cheng@credit-suisse.com
Figure 1: China’s proposed solutions to its housing issue
Ronney Cheung
852 2101 7472
ronney.cheung@credit-suisse.com Property tax
(near-term) Investors/
Asia Property Research Analysts speculators
Ernest Fong
(Head of Asia Property Research) Double wages
Anand Agarwal
(five-year plan)
(India)
Middle class
Raymond Cheng
(China) Public housing
Jinson Du (long term but start now?)
(China) Low-income population
Cusson Leung
(Hong Kong) Source:Credit Suisse research
Teddy Oetomo China has decided to extend the holding tax for commercial properties to
(Indonesia)
investment-purpose residential ones. Many industry experts and popular media
Tricia Song believe that the property tax could cause China’s residential property prices to
(Singapore)
drop 40% or more.
Chai Techakumpuch
(Thailand) ■ The implementation may signal a bottoming; a crash is unlikely. We
Tan Ting Min believe the potentially upcoming implementation of property tax may signal a
(Malaysia) bottoming for China property stocks’ prices, and it is unlikely to crash the
Sidney Yeh physical property markets. The property tax is just one component of China’s
(Taiwan) property policies, and it should mainly affect near-term sentiments. China’s
housing solutions are likely to combine property tax with the wage increase
Research Assistants measures to increase housing affordability and the large-scale construction
Ronney Cheung of public housing for lower income population.
(China)
Joyce Kwock
■ Other countries’ experience also shows a property tax usually does not
(Hong Kong) crash property markets. We draw this conclusion after studying the
implementation of property tax in recent decades in many countries,
especially South Korea and Mexico.
■ China’s planned property tax seems to have limited monetary impact in
its current form. Our scenario analysis of Shanghai’s proposal shows that it
should only be 5-6% of average mortgage payments – an impact even
smaller that that caused by a major interest rate increases.
This report is the first of our China Property Policy Outlook series.
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR
OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683.
U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.

2. 14 June 2010
Focus charts
Figure 2: Relative performance (%) of Credit Suisse China Property indice performance vs MSCI China (1 March to
current) – property tax has been the key factor
(%)
5 24th Mar : Chongqing government announced its has s ubmitted its proposal of the implementation of property tax
0
12th May : Media reported that Shanghai
government is in the progress of drafting the
-5
property tax proposal - details include the
possibility of property tax to be levied at 0. 8% p. a
-10
-15 8th Apr il : Rumour that property tax
will be firs tly implemented in the 4 first tier cities
17th April : State Council iss ued 10 tightening
-20 17th May: An assistant manager of NDRC cit ed that
measures but no mentioning of the property t ax was in plac e.
property tax will not be implemented at least in 3 yr's time
-25 24th May : NDRC refuted the c omment above
Mar 10 Mar 10 Mar 10 Mar 10 Mar 10 Apr 10 Apr 10 A pr 10 Apr 10 May 10 May 10 May 10 May 10 May 10 Jun 10
CS China P roperty Share Price Index (rebased)
Source: Datastream; Credit Suisse research
Figure 3: South Korea – price index before and after Figure 4: Mexico – property price index before and after
implementation of property tax implementation of property tax
De c 08 = 100 (Peso/sqm)
12 0
12,000
10 0 11,000
Property tax 10,000
first introduced
introduced
80 9,000
8,000
60 7,000
6,000
40 5,000
Property tax
revised 4,000 Property tax first introduced
20 3,000
2,000
0 1994 1996 1998 2000 2002 2004 2006 2008
Ja n- 8 8
Ja n- 9 1
J an- 9 2
Ja n- 9 5
Ja n -9 9
Ja n-0 3
Ja n-0 6
Ja n-1 0
Jan - 86
Jan - 87
Jan - 89
Jan - 90
Jan - 93
Jan - 94
Jan -96
Jan -97
Jan -98
Jan -00
Jan -01
Jan -02
Jan -04
Jan -05
Jan -07
Jan -08
Jan -09
Source: Government websites Source: Government websites
Figure 5: Valuation summary – China developers
Share Target +/- Mkt Current (Disc)/ +12M (Disc)/ Yield P/B Net
Price Price Cap NAV Prem NAV Prem Core PE (x) (%) (x) Gearing
Company RIC Rating (HK$) (HK$) (%) (US$b) (HK$/sh) (%) (HK$/sh) (%) FY09 FY10 FY11 FY09 FY10 FY10 (%)
China developers
China Overseas Land 0688.HK O 14.60 17.70 21 15.3 16.88 (14) 19.68 (26) 15.9 15.4 13.4 1.4 2.5 59.5
China Resources Land 1109.HK O 14.50 17.00 17 9.4 21.66 (33) 24.29 (40) 22.5 15.2 12.2 1.6 1.9 44.5
China Vanke - A (Rmb) 000002.SZ O 7.15 9.50 33 10.1 8.50 (16) 10.50 (32) 14.8 11.0 10.7 1.0 2.2 34.6
China Vanke - B 200002.SZ O 7.53 7.90 5 1.3 9.66 (22) 11.93 (37) 13.7 10.1 9.9 0.9 2.0 34.6
Evergrande 3333.HK N 2.39 2.40 0 4.6 5.97 (60) 6.09 (61) 137.1 4.4 4.1 0.1 0.6 20.4
Greentown 3900.HK U 8.35 8.30 (1) 1.6 15.95 (48) 16.62 (50) 15.6 9.1 6.9 3.6 1.2 169.1
Guangzhou R&F 2777.HK N 9.88 9.80 (1) 4.1 15.80 (37) 17.80 (44) 11.1 7.7 6.8 4.1 1.4 109.7
Hopson 0754.HK N 8.93 9.90 11 1.7 22.00 (59) 24.80 (64) 5.3 4.7 3.6 2.8 0.5 42.0
Kaisa 1638.HK O 1.59 2.10 32 1.0 4.90 (68) 5.30 (70) 16.8 5.0 8.3 n.a 1.1 58.9
KWG 1813.HK O 4.43 5.90 33 1.6 10.10 (56) 10.70 (59) 14.6 8.6 7.4 1.1 1.0 70.2
Poly (A) 600048.SS O 11.05 17.30 57 6.5 16.70 (34) 19.20 (42) 10.4 10.6 8.0 1.4 1.4 66.5
Poly (Hong Kong) 0119.HK O 7.27 9.90 36 3.0 12.20 (40) 14.10 (48) 25.2 19.6 13.5 0.6 1.2 52.9
Shimao Property 0813.HK O 11.80 14.10 19 5.4 17.66 (33) 20.20 (42) 13.4 9.5 8.5 2.5 1.5 78.5
Sino Ocean 3377.HK O 5.67 8.00 41 4.1 9.60 (41) 11.44 (50) 21.4 12.1 10.6 1.4 1.1 45.1
th
Source: Prices are as of 10 Jun, Bloomberg;Company data, Credit Suisse estimates
China Property Policy Outlook: 1 2

3. 14 June 2010
Property tax: would it crash the
market?
China has decided to extend the holding tax for commercial properties to investment- China has decided to extend
purpose residential ones, to avoid legislation issues for implementing a new property tax. the holding tax for
Several industry experts, including those that we brought to meet investors recently, commercial properties to
believe that the property tax could cause China’s residential property prices to drop 40% investment-purpose
or more. In our opinion, however, property tax is just one component of China’s property residential ones
policies – it should not crash the property market and its upcoming implementation could
actually signal a bottoming in China’s property sector.
Property tax – only part of the housing solution
We expect it to cool the sentiment in the near term for investment and speculation in the We expect it to cool the
property market, but property tax by itself cannot solve the housing issue. sentiment in the near term
for investment/speculation in
The Ministry of Human Resources and Social Security’s proposal to double average
the property market
wages in China within five years, if approved and implemented, should improve the
affordability ratio significantly. The Ministry of Housing and Urban-Rural Development also
announced plans of large scale Public Housing construction. If this plan is implemented
strictly, we should see a surge in public housing supply in the next few years, although the
total amount may stay small in the forseeable future – as of 2009, public housing stock
accounted for less than 5% of total housing stock in China.
Other countries’ experience – it’s unlikely to crash
the market
We draw this conclusion after studying the property tax situation in many countries. South Korea and Mexico’s
Specifically, we studied countries that started to implement property tax only in recent implementaton of property
decades, such as South Korea and Mexico – both started to implement property tax in a tax did not crash the market
hope to reverse the surge of property prices – just like China. Neither of the two countries’
implementaton of property tax caused a crash in the property market.
China’s current plan – limited monetary impact
Based on the current plan’s tax rate, scope and difficulties on implementation, we expect Scenario analysis on
the impact on the property market to be less than what the current stock market assumes. Shanghai’s proposal shows
Our detailed scenario analysis also shows that, even if the full amount of property tax can that the new property tax’s
be successfully collected, the monetary impact on home-buyers should be manageable. net impact to monthly
payment shoud be around
In fact, scenario analysis on Shanghai’s proposal shows that the new property tax’ net
5% to 6% only
impact on monthly payments shoud be only 5% to 6% – an impact even smaller that that
caused by a major interest rate increases.
A gradual reform – no near-term replacement for land
sales
One of the key targets for property tax is to reduce the local government’s reliance on land Local governments may be
sales as the main financing resource. However, this goal cannot be realised in the willing to implement property
foreseeable future, in our view. tax for additional revenue,
but will have to continue to
Land sales has been an important source of revenue for local governments and property
heavily rely on land sales for
tax has been below 4% of local government revenue. Therefore, as discussed earlier in
years to come, in our view
this report, local governments may be willing to implement property tax for additional
revenue, but will have to continue to rely heavily on land sales for years to come, in our
view.
China Property Policy Outlook: 1 3

4. 14 June 2010
Property tax – only part of the
housing solution
We expect the property tax to cool near-term sentiment for investment/speculation in the We expect the property tax
property market. This is likely to be in combination with the wage rise measures to to cool near-term sentiment
increase housing affordability and the large-scale construction of public housing for lower for investment/speculation
income population.
Property tax has undoubtedly been the key factor for
Recently, every new piece
the China property sector’s recent performance of information on the
Ever since Chongqing’s Mayor disclosed on 24 March that the city has submitted a property tax has caused
proposal for property tax implementation to the state council, every new information on China property stock
property tax has resulted in turbulence in China’s property stocks. turbulence
Figure 6: Relative performance (%) of Credit Suisse China Property index performance vs MSCI China (1 March to
current) – property tax has been the key factor
(%)
5
24th Mar : Chongqin g government announced its has subitted its proposal of the implementation of property tax
0
12th May : Media reported that Shanghai
government is in the progress of drafting the
-5
property tax proposal - details include the
possibility of property tax to be le vied at 0.8% p.a
-10
8th April : Rumour that property tax
-15
will be firstly implemented in the 4 first tier cities
17th April : State Council issued 10 tightening
-20 17th May: An assistant manager of NDRC cited that
measures but no mentioning of the property tax was in place.
property tax will not be implemented at least in 3 yr's time
-25 24th May : NDRC refuted the comment above
Mar 10 Mar 10 Mar 10 Mar 10 Mar 10 Apr 10 Apr 10 Apr 10 Apr 10 May 10 May 10 May 10 May 10 May 10 Jun 10
CS China Property Share Price Index (rebased)
Source: Datastream; Credit Suisse research
Why have local governments become much more
interested? This version of property tax is different
The public debate on implementing property tax has been ongoing since 2004 and local
governments have shown no interest in it. Why have local governments become much
more interested in implementing it this time? After Chongqing, many other cities such as
Shanghai, Wuhan and Jinan have also reportedly submitted similar proposals. The key
reason, in our view, is the central government’s decision to extend the holding tax for
commercial properties to investment-purpose residential ones, in order to avoid legislation
issues for implementing a new property tax.
A new property tax needs the People’s Congress’ approval as a formal law, which cannot Local governments were
avoid the debate on whether to remove land premium charges during local government’s previously worried that the
land sales. This is because the land premium payment is widely considered a one-off implementation of property
payment of property use rights/taxes and many believe the formal property tax should tax may take away land
premium payments
China Property Policy Outlook: 1 4

5. 14 June 2010
replace land premium – the key financing sources for local governments. Therefore, local
governments have been against this new, formal property tax.
On the other land, by extending the holding tax for commercial properties (according to a The current version of the
tax law established as early as 1986) to residential properties, local governments can property tax allows local
continue to charge a land premium while gaining an additional type of tax revenue. It is not governments to continue to
surprising that the local governments nowadays are much more interested in implementing charge land premiums while
this version of a property tax. gaining an additional type of
tax revenue
Figure 7: The key messages from the property tax as implemented in 1986
Early establishment of the property tax law and its main points
September 1986 Property tax shall be (A) 1.2% if calculated on the basis of the residual value of a building; or
(B) 12% if it is calculated on the basis of rental
For (A) – the taxable value of the building is subject to a reduction of 10-30% from its original value, the % of reduction
depending on each local government's ruling
The following are exempt from property tax:
1) properties owned and used by government agencies, military units and social organisations
2) State-allocated housing (e.g. those SOE units that were allocated to staff)
3) buildings used for parks, scenic spots and historical sites
4) properties not for operating / investment uses ( i.e. tax is levied on those that are for commercial use only)
5) Others as approved by the relevant or locat authority
Source: State Administration of Taxation
Property tax is likely to become transaction-based
rather than a holding tax
Due to the difficulties in tax administration and collection at the local level, residential Although property tax is
property-related taxes – from land sales markets to secondary housing markets – are all designed to be a holding
collected after transactions are through. According to industry experts, although property tax, it may only become
tax is designed to be a holding tax, it may become feasible to collect upon changes of feasible to collect upon
ownership. In this case, the property tax may actually propel property price appreciation in changes of ownership
the long term, although the negative market sentiment in its implementation causes could
reduce property prices in the near term.
In fact, all residential related taxes currently are transaction-based. The following table
summarises the various taxes for residential properties.
Figure 8: When the land was purchased …
Type Taxpayers Taxation base Tax rate (%)
Deed tax Developers with land use right certificates Cost of obtaining the land use rights 3
Stamp duty (on contract) Developers with land use right certificates Contractual price of the property 0.05
Stamp duty (on land use rights) Developers with land use right certificates Per document Rmb5 per document
Farmland use tax Occupants of the land Usable area of the farmland Rmb5-50 per sq m
Source: State Administration of Taxation
Figure 9: When the property was purchased from developers …
Type Taxpayers Taxation base Tax rate (%)
Deed tax Developers with land use right certificates Cost of obtaining the land use rights 3
Stamp duty (on contract) Developers with land use right certificates Contractual price of the property 0.05
Stamp duty (on land use rights) Developers with land use right certificates Per document Rmb5 per document
Farmland use tax Occupants of the land Usable area of farmland Rmb5-50 per sq m
Source: State Administration of Taxation
China Property Policy Outlook: 1 5

6. 14 June 2010
Figure 10: When the home ownership changes hands …
Type Taxpayers Taxation base Tax rate
Business tax Seller a. General commodity housing: 5.50
If holding period < 5 yrs, then it's 5.5% on the capital gain
If holding period > 5 yrs, then it's exempt from business tax
b. Non-general commodity housing
If holding period < 5 yrs, then it's 5.5% on the sales amount
If holding period > 5 yrs, then it's 5.5% on the capital gain
Personal income tax Seller Capital gain (with document of proof in relation to cost of the property) 20
Sales amount (without document of proof in relation to cost of the property) 1
LAT Seller Sales amount Ordinary housing: exempt;
Non-ordinary housing:
if holding period > 5 yrs: exempt; 3-5 yrs: 50% of tax; <3 yrs: standard cal.
Stamp duty (on contract) Sellers and home buyer Sales amount 0.30
Stamp duty (on land use rights) Home buyer Per document Rmb5 per document
Deed tax Home buyer Contractual price of the property General residential: 1.5
Source: State Administration of Taxation
Limitations determine that property tax itself cannot
be the solution to China’s housing problem
Given the limitations discussed above, we believe the implementation of property tax itself We believe the
cannot solve China’s housing problems. More sustainable measures include the wage implementation of property
increase to raise housing affordability and the large-scale construction of public housing tax itself cannot solve
for the lower income population. China’s housing problem
Recently, the Ministry of Human Resources and Social Security submitted its proposal to
double average wages in China within five years. If this proposal is approved and
implemented, the affordability ratio in China should improve significantly. Earlier this year,
the Ministry of Housing and Urban-Rural Development also announced plans of large
scale Public Housing construction, and signed agreements with local goverments to start
the construction with scale within 2010. If this plan is implemented strictly, we should see a
surge in public housing supply in the next few years, although the total amount may stay
small in the forseeable future – as of 2009, public housing stock took up less than 5% of
total housing stock in China.
Figure 11: China’s proposed solutions to its housing issue
Property tax
(near-term) Investors/
speculators
Double wages
(five-year plan)
Middle class
Public housing
(long term but start now?)
Low-income population
Source: Credit Suisse research
China Property Policy Outlook: 1 6

7. China Property Policy Outlook: 1
Figure 12: A brief history of China’s property-related policies vs property prices and volume changes
(%) (%)
35 Suppress demand (05-07) Stimulate demand (08) 220
2005-07: The 70/90 rule was introduced. 2008: Reduced the dis count to frm 15% to 30% for
210
Required down payment ratio raised from 1st home buyers. Reduced down payment ratio from
200
30 20% to 30% for 1st home buyers. Benchmark 30% to 20% for 1st home buyer. Reduced of deed tax
lending rate raised by 27bpts to 7.47% - a total from 1.5% to 1%. Business tax for individual ppty 190
of six times in 07 transactions is exempt if holding period > 2 years. 180
25 Stimulate demand (98-99)
170
1998: Housing reform: Abolished the
160
state-allocated housing policy & introduced Stablise supply (02-04
20 150
the transfer of state-owned land use rights 2002: Rules regarding grant of Land
1999: Maximum mortgage term extended Use Rights by way of 1. Tender, 140
15 to 30 yrs and max. mortgage financing 2. Auction or 3. Listing for 130
increased from 70% to 80% sale were issued. ) 120
Suppress demand 110
10
End 2009-10: 100
Min down payment is at
90
5 50% of the total land
80
premium. Down payment
ratio = 50% (vs previous 70
0 40%) for 2nd home buyers 60
50
-5 40
30
20
-10
10
0
-15
-10
-20
-20 -30
Mar 99 Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10
YTD GFA sold - yoy % change ASP (residential) - yoy % change - LHS
Source: CEIC, Credit Suisse research
14 June 2010
7

8. 14 June 2010
Other countries’ experience – it’s
unlikely to crash the market
We studied property tax policies in other countries and conclude that property tax should
be a common practice and not a main factor for property price changes.
Figure 13: Property-related tax policies in other countries
Country Type Tax payers Taxable items Taxation base Tax rate (%)
US Property tax Property owners Property Current market value of the property 0.12-3.05
Land Current market value of the land 1
France Land tax Owner of land Land and property Est. rental income 3-10
Residency tax Owners or tenants Property Est. rental income 5-13
England City tax Owners or tenants Residential Current market value of property 0.67-2
Commercial property Owners or tenants Non-residential Est. rental income ~40
tax (non-residential)
Chille Fixed assets tax Owners of all fixed All types of buildings Cost of the building 2
assets (including property)
Japan Fixed assets tax Owners All types of fixed Market value (revalued once 1.4%;capped at 2.1
assets every three years)
Singapore Property tax Owners/Government Private and public Rental income Self-use: progressive:
assigned land lords housing first S$6,000 taxed at
0%; Next S$50,000 at
4%; >S$65,000 at 6%
Other purpose: 10%
Hong Kong Rates Owners Property Est. rental income 5
Goverent rent Owners Property Est. rental income 3
Property tax Owners Property Rental income 15
Taiwan Land tax Land owners Land Government appraisal value 0.2-5.5
Property tax Property owners Property Government appraisal value Residential: 1.2
Non-residential: 1.5-5
Source: Relevant Tax Authorities
Specifically, we studied countries that only started to implement property tax in recent Both South Korea and
decades, such as South Korea and Mexico – both started to implement property tax in a Mexico started to implement
hope to reverse the surge of property prices – just like China. Neither of the two countries’ property tax to try to reverse
implementaton of property tax caused a crash in the property market. the surge in property prices
The property tax in both South Korea and Mexico is based on the value of property and
Neither South Korea nor
collected at a progressive rate, e.g. the higher the value, the higher the rate.
Mexico’s implementation of
For Mexico, the rate is 0.275-1.35% and was implemented in 1999. From the price chart property tax caused a crash
below, it had some impact on price, as reflected by a 4% YoY decline in prices for 2000. in the property market
But the impact seems to have been short-lived, as prices resumed their upward trend later.
For Seoul, it was first implemented in 1988 and revised in 2006. The rate is from 1-3%.
From the chart below, we can see that the implementation of property tax seems to have
not had much impact on property prices, which continued to rise after its implementation/
revision.
China Property Policy Outlook: 1 8

9. 14 June 2010
Figure 14: South Korea – price index before and after Figure 15: Mexico – property price index before and after
implementation of property tax implementation of property tax
De c 08 = 100
12 0 (Peso/sqm)
12,000
10 0 11,000
Property tax
10,000
first introduced
introduced
80 9,000
8,000
60 7,000
6,000
40 5,000
Property tax
revised 4,000 Property tax first introduced
20 3,000
2,000
0
1994 1996 1998 2000 2002 2004 2006 2008
Ja n- 8 8
Ja n- 9 1
J an- 9 2
Ja n- 9 5
Ja n -9 9
Ja n-0 3
Ja n-0 6
Ja n-1 0
Jan - 86
Jan - 87
Jan - 89
Jan - 90
Jan - 93
Jan - 94
Jan -96
Jan -97
Jan -98
Jan -00
Jan -01
Jan -02
Jan -04
Jan -05
Jan -07
Jan -08
Jan -09
Source: Government websites Source: Government websites
China Property Policy Outlook: 1 9

10. 14 June 2010
China’s current plan – limited
monetary impact
Based on the current plan’s tax rate, scope and difficulties on implementation, we expect
the impact on the property market to be less than what the current stock market assumes.
Our detailed scenario analysis also shows that, even if the full amount of property tax can
be successfully collected, the monetary impact to home buyers should be manageable.
Shanghai’s proposal targets only large-size property
with only 0.8% tax rate
The recent public attention on property tax has focused on Shanghai. Shanghai is said to Shanghai is said to have
have submitted proposals to implement property tax. The recently discussed tax rate is submitted proposals to
about 0.6-0.8% – at the low end of the international range. The scope of property tax is implement property tax
also limited to families with more than one property and the taxable property size more
than 70 sq m per person.
Figure 16:The two version of Shanghai’s proposal for property tax – their conditions:
Proposal A – “the milder” plan Proposal B – the “stricter” plan
Implementation date The property would be subject to a property tax if the A property tax would be levied on all properties bought
property is bought after the date of implementation (i.e. irrespective of the date of implementation AND
property purchased before that would not be subject to
property tax) AND
Unit size The purchase is a 2nd purchase with an average unit size The purchase is a 2nd purchase with an avg. unit size >
> 70 sq m per capita or 3rd or more purchase of any 70 sq m per capita or 3rd or more purchase of any unit
unit size (i.e. first purchase would not be subject to size (i.e. first purchase would not be subject to property
property tax)' tax)'
Source: Company data, Credit Suisse estimates
More importantly, since the current version of the residential property tax is an extension
of the 1986 tax law currently used only for commercial properties, the residential property
tax would very likely follow the following principles:
1) The tax is based on the purchase value of the property, rather than current market
value;
2) The taxable amount is 70-90% of the purchase value.
Property tax’s impact would be similar to interest
rate increase for those who buy and hold
For home buyers that have no plans to sell their property in the foreseeable future, the Scenario analysis shows
property tax can be viewed as a payment similar to mortgage payments. that the new property tax’
net impact to monthly
Using Shanghai as an example, the proposed policy implies a taxable unit should be at
payment shoud be around
least 140 sq m for a couple with no children. Therefore, the minimal value of an housing
5% to 6% only – even
unit in Shanghai city area should be around Rmb3 mn in order to be affected by the new
smaller impact than what a
property tax policy. The tables below shows that the new property tax should only be 5%
major interest rate increase
to 6% of average mortgage payments – even smaller impact than what a major interest
can cause
rate increase can cause.
China Property Policy Outlook: 1 10

11. 14 June 2010
Figure 17: Additional mortgage payment incurred based on Proposal A & B of the above
Ppty tax rate 0.60% 0.80% 1.00%
A. Sales amount = Rmb 3mn
Yearly mortgage payment: without property tax - Rmb 134,330 134,330 134,330
Yearly total payment: with property tax - Rmb 140,711 142,870 145,045
Additional payment per year - Rmb 6,381 8,540 10,715
Additional payment per year - % 5% 6% 8%
B. Sales amount = Rmb 6mn
Yearly mortgage payment: without property tax - Rmb 223,883 223,883 223,883
Yearly total payment: with property tax - Rmb 234,518 238,116 241,742
Additional payment per year - Rmb 10,634 14,233 17,859
Additional payment per year - % 5% 6% 8%
C. Sales amount = Rmb 10mn
Yearly mortgage payment: without property tax - Rmb 447,767 447,767 447,767
Yearly total payment: with property tax - Rmb 469,035 476,233 483,484
Additional payment per year - Rmb 21,268 28,466 35,718
Additional payment per year - % 5% 6% 8%
Source: Credit Suisse estimates
Detailed calculation of Scenario A - C above
Figure 18: Property tax impact on mortgage rate for 2nd home buyers – if sales value = Rmb3 mn
Case 1 Case 2 Case 3
Property holding tax (%) 0.60% 0.80% 1%
Property purchase value (Rmb 3,000,000 3,000,000 3,000,000
Before property tax
Mortgage payment per year (for a 25-year mortgage 134,330 134,330 134,330
with interest rates = average of 2007-curent)
After property tax
Property tax needs to be paid ^ 7,200 9,600 12,000
Mortgage payment per year 140,711 142,870 145,045
Increase in total payment per year (Rmb) 6,381 8,540 10,715
Increase in total payment per year (%) 5% 6% 8%
Source: Credit Suisse estimates: ^ assuming there will be a 20% reduction of the original property value
Figure 19: Impact of property tax on mortgage rate for 2nd home buyers – if sales value = Rmb6 mn
Case 1 Case 2 Case 3
Property holding tax (%) 0.60% 0.80% 1%
Property purchase value (Rmb 5,000,000 5,000,000 5,000,000
Before property tax
Mortgage payment per year (for a 25-year mortgage 223,883 223,883 223,883
with interest rates = average of 2007-curent)
After property tax
Property tax needs to be paid ^ 12,000 16,000 20,000
Mortgage payment per year 234,518 238,116 241,742
Increase in total payment per year (Rmb) 10,634 14,233 17,859
Increase in total payment per year (%) 5% 6% 8%
Source: Credit Suisse estimates;^ assuming there will be a 20% reduction of the original property value
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12. 14 June 2010
Figure 20: Impact of property tax on mortgage rate for 2nd home buyers –if sales value = Rmb10mn
Case 1 Case 2 Case 3
Property holding tax (%) 0.60% 0.80% 1%
Property purchase value (Rmb 10,000,000 10,000,000 10,000,000
Before property tax
Mortgage payment per year (for a 25-year mortgage
447,767 447,767 447,767
with interest rates = average of 2007-curent)
After property tax
Property tax needs to be paid ^ 24,000 32,000 40,000
Mortgage payment per year 469,035 476,233 483,484
Increase in total payment per year (Rmb) 21,268 28,466 35,718
Increase in total payment per year (%) 5% 6% 8%
Source: Credit Suisse estimates;^ assuming there will be a 20% reduction of the original property value
For the sell-at-higher-price type, property tax is likely
to be treated as a transaction cost
For home buyers that plan to sell their property in the foreseeable future, the property tax Property tax as part of the
can be viewed as part of the transaction costs. transaction costs should be
manageable as well –
As discussed earlier in this report, the table below shows that currently total taxes for
especially if the costs are
secondary housing transactions should be around 10% of the transaction value or higher
borne jointly by both the
(depending on the capital gains tax). If the home buyer sells the property five years after
seller and the buyer
the purchase, the cumulative property tax should be 2.4-3.2% of the purchase value (with
a property tax rate of 0.6-0.8%). Therefore, property tax as part of the transaction costs
should be manageable as well – especially if the costs are borne jointly by both the seller
and the buyer.
Figure 21: When the home ownership changes hands …
Type Taxpayers Taxation base Tax rate (%)
Business tax Seller a. General commodity housing: 5.50
If holding period < 5 yrs, then it’s 5.5% on the capital gain
If holding period > 5 yrs, then it's exempt from business tax
b. Non-general commodity housing
If holding period < 5 yrs, then it's 5.5% on the sales amount
If holding period > 5 yrs, then it's 5.5% on the capital gain
Personal income tax Seller Capital gain (with document of proof in relation to cost of the property) 20
Sales amount (without document of proof in relation to cost of the property) 1
LAT Seller Sales amount Ordinary housing: exempt;
Non-ordinary housing:
if holding period > 5 yrs: exempt; betw 3-5 yrs: 50% of tax; <3yrs: standard cal.
Stamp duty (on contract) Sellers and home buyer Sales amount 0.30
Stamp duty (on land use rights) Home buyer Per document Rmb5 per document
Deed tax Home buyer Contractual price of the property General residential: 1.5
Source: State Administration of Taxation
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13. 14 June 2010
A gradual reform – no near-term
replacement for land sales
One of the key targets for property tax is to reduce the local government’s reliance on land
sales as the main financing resource. However, this goal cannot be realised in the
foreseeable future, in our view.
As shown in the two tables below, land sales has been an important source of revenue for
local governments, and property tax has been below 4% of local government revenue.
Therefore, as discussed earlier in this report, local governments may be willing to
implement property tax for additional revenue, but will have to continue to heavily rely on
land sales for years to come, in our view.
Figure 22: Top 10 cities’ land sales vs local government revenue (2009)
Land Land sales revenue to the local Local government Land sales revenue / local
sales government (assuming 70% revenue government revenue
City (Rmb bn) allocation) (Rmb bn)* (excluding land sales) (excluding land sales) (%)
Hangzhou 112 79 52 151
Shanghai 103 72 254 28
Beijing 93 65 203 32
Tianjin 74 52 82 63
Guangzhou 48 34 70 48
Chongqing 45 31 68 46
Ningbo 42 29 43 68
Wuhan 36 25 32 80
Chengdu 36 25 39 64
Foshan 34 24 25 94
Source: Company data, Credit Suisse estimates; *assume 70% being allocated to local government
Figure 23: Government’s tax revenue breakdown
Local govt’s (Property + Urban Land tax) /
Year Total tax Local govt’s revenue Property Urban Local govt’s revenue
(Rmb bn) revenue tax revenue (ex. land sales) tax land tax (ex. land sales) (%)
1998 909 295 498 16 5 4.2
1999 1,032 331 560 18 6 4.3
2000 1,267 373 641 21 7 4.4
2001 1,517 472 480 23 7 6.3
2002 1,700 531 852 28 8 4.2
2003 2,047 630 985 32 9 4.2
2004 2,572 786 1,189 37 11 4.0
2005 3,087 953 1,510 44 14 3.8
2006 3,764 1,145 1,830 52 18 3.8
2007 4,945 1,503 2,357 58 39 4.1
Up to 3Q08 4,606 1,426 2,865 49 61 3.8
Source: State Administration of Taxation
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