Divorce filings have surged like crazy in China over the past week, according to multiple reports. The reason? A new tax on property sales , which seems to have a loophole that lets people get around the tax if they separate from a spouse.

We first mentioned the surge on Wednesday, citing a report in Shanghai Daily.

Yesterday the NYT's David Barboza followed up.

There are two big stories intertwined here.

The first is that China is trying to curb its well-known property boom. There's a widespread belief that many markets in China are in bubble territory, and that a collapse or even a stall would be a catastrophe.

What's interesting about the divorce story is the cat-and-mouse game that's played between Chinese regulators and Chinese citizens/savers/investors who search out aggressive investment returns in the nooks and crannies of the law.

From Barboza's report:

“They always do this,” said Du Jinsong, a property analyst in Hong Kong for Credit Suisse. “When they implement new measures, people are always trying to circumvent the rules.”

...

And in a bizarre twist, marriage registration centers in Shanghai, Nanjing, Wuhan and other big cities were also inundated with couples who admitted they were filing for fake divorces in hopes of avoiding the property tax.

By filing for divorce, many reasoned, a couple with two homes could then claim that each had only one home. That way they could technically avoid having one of the homes classified as a second home, which under the new rules would be subject to the 20 percent capital gains tax if sold. After the divorce and the sale of one of the homes, the couple could file to be remarried.

A key thing to understand is that the Chinese are very limited in where they can get adequate investment returns. The yield on savings accounts is held artificially low. The stock market is difficult for most people to access. So real estate is the natural valve. Then the government tries establishing curbs on real estate investment and how much banks can lend. Then people go through shadow banks. And the cycle continues.

People have been warning about a property collapse for years, and it hasn't happened. But stories like this show the difficulty the government is having in regulating this area of the economy.





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