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Chinese Stimulus Cause For Concern

by Mike Godfrey,, Washington

29 July 2010

After an Article IV consultation with China, the International Monetary Fund (IMF) said that fiscal policy continued to provide important support to the economy and the withdrawal of stimulus would need “calibrating”.

The IMF described China’s policy challenge as a need to “calibrate the pace and sequencing of exit from the fiscal stimulus and credit expansion, while making further progress in reorienting the economy toward private consumption”. The IMF supported a gradual phase out of the fiscal stimulus in 2011, provided the current trajectory for the economy was maintained.

The Chinese property market has been at the centre of concerns in maintaining the delicate course of the “growth trajectory” and the IMF commended China for its pragmatic deployment of a range of “countervailing prudential measures” to contain property price inflation. It thought additional measures could be needed to “address the fundamental causes of property price inflation”, possibly including consideration of a property tax and broader financial market development to provide alternative savings vehicles.

The “countervailing prudential measures” mentioned by the IMF included restrictions on loans to developers and higher interest rates and higher equity contributions for second mortgages to help dampen a market that continued to boom at record levels in the main cities in the latest three months to June 2010.

When, in May, the highest executive body, the State Council, approved proposals from the central economic planning agency to introduce a property tax in carefully graded steps, it became more a question of when rather than if the tax would be introduced.

The property tax could generate an estimated CNY120bn (USD17.6bn) of revenues annually with a tax set in the region of 0.8% of the market value of properties, according to a report by Australia and New Zealand Banking Group Ltd. It is expected that the tax will be levied on people with multiple homes, beginning with the second home.

TAGS: tax | economics | property tax | fiscal policy | real-estate | International Monetary Fund (IMF) | China | inflation

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