2015-02-03

Might As Well Face It, You're Addicted to Land Finance

It was the best of times, last year land finance hit a new high of nearly ¥5 trillion. (去年“土地财政”创新高:地方卖地收入超四万亿)
It was the worst of times, land financing revenue growth collapsed and local government finances face an unresolved predicament. (土地收入增速骤减 地方融资困局待解)

"Daily Economic News" reporter's inquiries learned that the budget report for the local governments forecast land revenue of 4.31 trillion yuan, down 10.1%. Among them, the state-owned land use right transfer income of 3.63 trillion yuan, down 11.8%.
Instead of falling, state-owned land transfer revenue climbed 17%. However, this growth was still a shadow of the 44.6% growth in 2013.

The spike in land sale revenue was the result of the government's crackdown on borrowing by local governments. Even though prices were down, governments were able to raise revenue by increasing land supply. Regular revenue channels brought in only ¥2.6 trillion in revenue. At nearly ¥5 trillion, the land finance reliance ratio was 192% (as the Chinese report it) or a still incredible 66% of total revenues. It gets worse because a big chunk of that ¥2.6 trillion was the result of real estate taxes:
Treasury data show that the local general public revenue (this level) 7.59 trillion yuan. That is, the local land revenue has more than half of the local public revenue.

In addition, land and real estate taxes also include small local taxes. Ministry of Finance data showed: deed 398.6 billion yuan, an increase of 3.7%; land tax 391.4 billion yuan, an increase of 18.8%; farmland occupation tax 205.9 billion yuan, an increase of 13.8%; urban land use tax 199.3 billion yuan, an increase of 15.9 %. Several data add up to 1.2 trillion yuan.

In addition, the real estate business tax 562.7 billion yuan, 296.1 billion yuan real estate business income tax, partly returned to local governments.

The slowdown in land finance comes as local governments face ¥650 billion in maturing debt this year. Cities aren't going to default, but if they don't have excess cash to finance infrastructure and development projects, growth will slow.

Background: May Land Sales Plummet; 300 Cities Down Nearly 40%; Some Cities Have No Sales
f land sales continued at the rate seen in May, the annualized sales would be down 60% from the ¥4.1 trillion sold in 2013. First quarter land sales of ¥1 trillion were on pace to match 2013, but those numbers look good due to sales in January and February. A significant portion of many city budgets is funded by land sales and land sale revenue is also used to back some debt. Even if sales bottom out or rebound slightly, the decline is already large enough to constrain budgets in cities that overly rely on land sales.

June Land Sales Plunge
Even first tier cities are seeing land sales collapse. According to Centaline, through June 16, the four first-tier cities had sold only 8 parcels of land for ¥1.8 billion. The firm forecasts land sales will be below ¥20 billion for the month, the lowest figure in the past several years. Last year, the four cities sold ¥35.7 billion worth of land.

Land sales picked up in the second half of 2014, but they were heavily split. Top=tier cities saw land sales rebound strongly, while bottom-tier cities saw sales drop to zero. The lack of finance will be an issue for cities in the first half of 2015.

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