Wednesday, February 4, 2009

Not So Fast, Chongqing

Back in December, the City of Chongqing approved a measure to reduce the tax on housing transactions. At the time it was reported, the stock market reacted by boosting the share prices of housing developers.

I remember being a little surprised at the time that a local government had the power to change tax rates -- particularly in markets in which the Central Government has frequently attempted to exert macro-control. Chongqing is run by Bo Xilai, a "princeling" son of late Party elder Bo Yibo, so, I reasoned, maybe he is given a little more leeway for creativity than the average provincial governor.

Well, apparently the State Council was also surprised by the tax cut, and today, they basically told Chongqing to knock it off. As it turns out, not even princelings have the power to change tax rates without consulting the Central Government.

We know what the Central Government thinks, but what about the tax rebate itself?

One of the arguments against the tax rebate was that it would have little effect on the lives of the laobaixing (common people) -- only the relatively small sliver of society that can afford to buy a home would be helped. However, I would argue the same probably applies to recent tax breaks on autos approved by the State Council.

Another argument, one that stands on firmer footing, is that the State Council still thinks housing prices are somewhat overvalued, and that such policies serve to place an as yet unwanted floor under current prices. And while this would certainly help the share prices of listed housing developers, again, it would do very little to help the laobaixing.

I see a couple of takeaways here:
  • Despite the many arguments about decentralization and loss of influence by the Central Government, they apparently still have the ability to order changes to local policies that run counter to central policy. (Would anyone argue that Chongqing/Bo Xilai has sufficient power to ignore Beijing?)
  • The State Council seems determined that the benefits of economic stimulus not accrue only to the upper class -- or at least that they not appear to do so.

Source: Economic Observer