Is the Chinese government sharpening the knife for real estate companies?

Over the last few years the Chinese real estate sector has been buoyant to say the least despite attempts by the Chinese government to rein in both domestic and international investment. There are very few occasions in China when the government does not get its own way although, despite the fact laws and regulations have been brought in to “soften the sector”, so far they have had limited impact.

It seems as though the Chinese government has now taken on a new strategy with China Central Television repeating a number of unsubstantiated claims against various Chinese real estate companies. These claims, surrounding an alleged $628 billion in unpaid land taxes, have been refuted by the Chinese real estate sector and even the government has accused the television company of misunderstanding the tax situation.

What is the confusion?

The allegations surround a law which requires Chinese real estate companies to pay land appreciation tax when 85% of developments have been sold on any new development. It seems as though 45 Chinese real estate companies have now been implicated in this growing scandal and the fact the allegations have been repeated more than once on television does not bode well for the future.

Quote from PropertyForum.com : “If you look at the basic figures in relation to Chinese property prices you will see a 9.1% year-on-year increase in September against an 8.3% year-on-year increase in August.”

In public the Chinese government has accused the television company of misunderstanding the tax laws in question but so far there has been no let-up in the pursuit of the real estate companies. Many are now suggesting that the Chinese government may be behind these allegations and could eventually use them as a means of reducing the power and influence of the real estate giants. Time will tell what impact this has upon the Chinese real estate sector but the fact the sector has been the main area of growth of late has set alarm bells ringing.

What will the Chinese government do next?

There are suggestions that the government will let the situation fester for some time to come and then eventually “bow to public demand” to investigate the real estate companies. Whether or not it actually finds any illegal activity remains to be seen but the perception that the sector could be cheating the state out of billions of dollars in taxes could well turn the tide of public opinion against these corporate giants.

The reality is that the Chinese government has warned real estate companies time and time again to rein in their spending and desist in pushing prices higher and higher. So far the real estate companies have proven to be very stubborn but if these allegations, that the Chinese government could be behind the television whispering campaign, are correct then we could have a serious battle on our hands.

Conclusion

It is worth noting that not only has the Chinese real estate sector been a major growth component of the Chinese economy of late but it is also a major element of the worldwide economy. A slowdown in investment by Chinese real estate companies in China and other areas of the world would have an impact upon economic growth and the availability of investment funding. Will the Chinese government and real estate companies come to some kind of mutual arrangement to avoid a full blown battle or should we ready ourselves for a Corporate v State battle royal?