OREANDA-NEWS. August 17, 2015. The introduction of a nationwide residential property tax in China would be credit positive for local governments, providing more stable, sustainable and diversified revenues, says Fitch Ratings. That said, the roll-out of the proposed taxes could take time, and the positive impact on local government finances is only likely to be realised over the medium to long term.

Media reports indicate that China has included the discussion of a nationwide residential property tax into its five-year legislative plan. This follows the introduction of pilot projects to tax targeted segments of residential real estate in Shanghai and Chongqing in 2010. There is no specific timeline as yet for whether or when the pilot programmes will be expanded, but legislation will be required to expand the tax nation-wide. As such, discussion within the five-year plan is an important first step to enacting the tax.

Residential property taxes would be a significant and transformational reform for local governments. At the core, it would provide more sustainable finances and diversify tax sources. Residential property taxes would reduce local governments' reliance on land sales which have hitherto been a key source of revenue.

This would in turn reduce revenue volatility. By relying so heavily on land sales, local government finances have depended on developer demand which can be unstable - particularly during property sector downturns. The limitations from the finite availability of land also make this revenue model unsustainable over the long run. Furthermore, securing more sustainable sources of tax revenue is key for local governments with economic growth rates falling to a range between 6%-7%.

Fitch expects residential real estate taxes to eventually be enacted nationwide, though it may take time as administrative processes and policies are finalised. Notably, China lacks a nationwide residential registration database, which could present challenges in enforcing property taxes. Furthermore, it remains to be seen where and how the property tax will be levied. In the Shanghai and Chongqing pilot programmes, the residential real estate taxes focused on wealthier residents, levied on owners with multiple homes in Shanghai and higher-end homes in Chongqing.