The rapid development of residential high rises in Shanghai illustrates China's urbanization. According to experts, a property tax will curb housing prices and reduce the widening income gap, as the tax money collected could be used to build public housing. [Photo / Bloomberg]

BEIJING - China's soaring property prices will hinder the country's urbanization and also exacerbate the income distribution gap, Li Daokui, an adviser at the People's Bank of China, said on Tuesday at a financial forum in Beijing.

Li urged the government to make adjustments to the property development system to ensure healthy economic growth for the next decade.

Housing prices in China's 70 major cities rose by 6.4 percent in December from a year earlier, compared with a 7.7 percent increase in November, according to figures released by the National Bureau of Statistics on Monday.

Despite the slowing annual growth rate, property prices still posted their fourth straight month-on-month rise, with the gain in December standing at 0.3 percent.

"If China's housing prices continue to rise, the process of urbanization will significantly slow down," said Li.

Urbanization has become an important tool to stimulate domestic demand and will continue to be a big driver of economic growth in the future.

The country's urbanization rate is currently 47 percent, increasing by about 1 percentage point each year, but is still lower than most developed and developing economies.

The rate could rise to 65 percent by 2020, provided the nation continues its current urbanization policies, according to China Development Report 2010 by the China Development Research Foundation, a government think tank.

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"The surging housing prices magnify the problem of China's current income distribution system," Li said.

The government has made great efforts to deepen reforms to income distribution, viewing a stronger middle class as an important indicator of social fairness and justice and a major factor in boosting domestic demand and narrowing the income gap.

"But, if people transfer all their savings deposits to real estate, causing property prices to go up, it will actually exacerbate the income distribution gap," said Li.

Since April 2010, the central government has launched three rounds of tightening measures to curb the excessive rise in property prices, including suspending mortgages for third-home purchases, hiking minimum downpayments to at least 30 percent, and restricting the number of apartments a family can purchase.

However, Premier Wen Jiabao said in December that current measures to curb the property market were not sufficient and reiterated his goal for prices to return to a "reasonable level" during his term, which ends in 2012.

Li suggested China should levy a property tax at a rate of 0.1 percent, but added that it is simply unrealistic to count on taxation to bring down housing prices.

Some cities, including Chongqing and Shanghai, have said they are planning to introduce a residential property tax this year.

"The collected taxes should be handled by local governments. For example, taxes collected in the Pudong district of Shanghai should be handled by the Pudong district government, not the municipal," he said.

"The money collected should be used for improving public administration and building low-cost housing projects."