The plunging sales of land-use rights, which are the largest source of non-tax revenue for local governments, pose a growing threat to their budgets, which have come under substantial pressure this year as officials have ramped up spending to keep Covid in check.
In the first half of 2022, local governments sold 1.4 trillion yuan (US$211.8 billion) in parcels of land reserved for building homes, down 55% from a year earlier, according to data released Monday and compiled by brokerage China Industrial Securities.
“The recent wave of omicron and the sharp contraction in land sales could lead to a government funding gap of as much as 6 trillion yuan as China’s policymakers have vowed to ramp up fiscal stimulus to shore up the economy,” analysts at Nomura Holdings wrote in a Friday note.
In China, land sales refer to local governments’ leasing of land parcels to companies for a period of years. They are essential to regional economies for two reasons. First, land sales accounted for about 41.6% of their revenue in 2021, a share that would increase if taxes generated from the land were also considered.
Second, local government financing vehicles (LGFVs) – a group of state-owned enterprises (SOE) mainly used to fund infrastructure and public welfare projects – use land value as collateral to borrow from financial institutions.
As China sticks to a zero-Covid policy, local governments have been obliged to pay for sweeping Covid testing and sporadic lockdowns. Slowing economic growth and a nationwide tax refund programme have bitten into revenue, making it hard for them to make ends meet. Several local government officials have told Caixin that their salaries have been slashed.
Some analysts are concerned that sluggish land sales would limit government fiscal stimulus as local governments had lower revenue and weaker capability to finance.
SOEs continued to dominate the land market in the first half of 2022 as cash-strapped private developers were restrained from investing.
Among land purchases made by 50 of China’s largest property companies by sales, SOEs accounted for 73%, according to a Friday report from property consultancy China Real Estate Information Corp (CRIC).
The companies buying most land parcels – China Vanke, China Overseas Land & Investment and and China Resources Land – were all SOEs, CRIC data showed.
Apart from state-owned property companies, LGFVs bought land parcels in the cities where few developers made bids. Some market participants are concerned that such transactions could not generate real income because the parcels just moved from one arm of the government to another arm.
Cities do not face a similar level of hardship from their real estate business. Industry data showed that land sales in first-tier cities – Beijing, Shanghai, Shenzhen and Guangzhou – rose 30% year on year, whereas for smaller cities, they sank by as much as 53%.
The market showed some signs of recovery last month as Covid lockdowns eased and property stimulus measures began to take effect, with the drop in land sales falling back to 36% year on year, far lower than the 72% plunge of the previous month, as one brokerage showed.
However, for smaller cities, slow land market recovery contributes little to local authorities’ coffers because much of the proceeds are used to cover land costs, including compensating families living on land that was collected, analysts at Sinolink Securities wrote in a note.
Property companies will remain cautious about buying land parcels in the second half of the year because cash is still tight as their debts are coming due, CRIC said.
To offset the decline in fiscal revenues, authorities have accelerated issuing government bonds and directed policy banks to fund infrastructure construction.