OPINION

More Regulations for Real Estate. Now What?

Due to China's latest moves to rein in property prices, the mainland stock exchange on March 4 saw plunges of stock prices in sectors like real estate, building materials, cement, coal and steel. Without a doubt, the real estate sector still plays a predominant role in China's economy and investment market.

When people expected prices for new commercial housing and renting to be boosted by the 20-percent personal capital gains tax levied on second-hand home sales, the stock market responded in the opposite.

The new policies prescribed that tax and housing authorities should cooperate closely to levy personal capital gains tax on home sales. If original values can be verified by historical information on tax collection and housing registration, personal capital gains tax should be levied at 20 percent of the transaction income.

In most cases, a capital gains tax was slapped on real estate, stocks, bonds, precious metals and artwork.

In the United States, sellers will pass on the tax to purchasers and get anticipated returns in a bull market. In a bear market, sellers have to face reduced returns or even a loss.

The rigid demands of the real estate market are mainly dependent on economic development and the population, while the prosperity of the property investment market is primarily decided by the amount of money and investment income available. In some sense, a capital gains tax will increase the uncertainties for investment. Now, people who intend to invest in the property market have to take potential risks deriving from the 20-percent tax into consideration. If buyers are reluctant to shoulder the tax, or investment income can't cover all the transaction costs, investors would think twice before making a decision.

There is no theoretical and realistic foundation for the saying that the tax will push up the property market. With the 20-percent capital gains tax levy, people will undoubtedly turn to the new housing market to avoid unnecessary expenses. On the other side, investors will take a wait-and-see attitude. If there is a surge in currency issuance and the inflation rate, they will throw themselves into the property market without hesitation; if money supply is tightened and inflation is under control, they will look elsewhere.

Dongguan is a case in point. When the 20-percent personal capital gains tax was first levied in 2007, second-hand housing transactions encountered a downturn, but later experienced a quick recovery. In 2009, the loose monetary policy, which was targeted at fighting against the global financial crisis, managed to eliminate all the negative impact of the real estate regulations.

With the 20-percent personal capital gains tax, how will markets around China respond?

As more and more people settle down in first-tier cities, buyers will go ahead with their home purchasing plan. By the end of 2012, more than 80 percent of housing loans went to first-time homebuyers, indicating that rigid demand is a major drive behind the real estate market. The same is true in Beijing and Shenzhen. Since bubbles have burst in third- and fourth-tier cities, the use of the new tax is limited. In contrast, second- and third-tier cities, which want to match first-tier cities in property transactions, will descend into fierce competition for capital and consumers.

Escape clauses should be put in place in the implementation of the personal capital gains tax. For instance, people who only own one home and have kept it for over five years should be exempted from the 20-percent tax when they sell it to buy a bigger one. For people who own more than three homes or sell their homes within a year after buying them, a differentiated tax rate system ranging from 10 to 45 percent should be implemented.

This way the capital gains tax can effectively regulate capital income and avoid harming innocent home purchasers.

This is an edited excerpt of an article by Ye Tan, a business commentator, published in the website of Caijing Magazine 

THE MARKETS

Full Mark in 2012

On March 4, Standard Chartered PLC announced the 10th consecutive year of income, profit and dividend growth.

With operations in many of the world's most dynamic economies, the company now has 26 markets delivering over $100 million of income.

Total group income was up 8 percent to $19.07 billion.

Performance in African and Chinese markets was particularly strong. Business income from the Chinese mainland has exceeded $1 billion for the first time.

The Greater China region is growing strongly. Hong Kong, Taiwan and the mainland registered $4.9 billion in income, nearly one quarter of the group's total.

Hong Kong continued to perform well, with income up 10 percent to $3.35 billion. It is benefiting from renminbi liberalization and plays a unique role as a hub for trade and investment flows into and out of the region.

The Chinese mainland has become the largest generator of network income, and as the region continues to grow and converge, the company will continue to benefit from the trade and investment links across Greater China. Today, Standard Charter PLC has 100 branches and sub-branches across 25 cities in China.

Tumbling Profits

HSBC reported a pre-tax profit of $20.6 billion for 2012, down 6 percent from 2011.

Gross revenues rose 7 percent to $63.5 billion in 2012, over half of which came from the faster-growing areas.

HSBC raised dividends by 10 percent to $0.45 per share, and total dividends stood at $8.3 billion for 2012.

"Whilst the operating environment for financial institutions remains difficult, our core business will continue to reap the benefits of recovering economic growth in China's mainland and its positive impact on other faster-growing regions," said HSBC in a press release.

"We expect developing economies, led by China, to continue to grow briskly at 5.4 percent, while developed economies should see more gradual growth of 1 percent. We forecast growth of 8.6 percent in China in 2013."

NUMBERS

$25.75 bln

Transaction value of mergers and acquisitions (M&As) in February

$132.8 mln

Share purchase of Zhaopin.com, a Chinese job website, by Seek Ltd., Australia's No.1 job portal

$375.87 mln

M&A transaction value in the real estate sector in February

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