ANALYSIS: Beijing’s Land Finance Policy at an Impasse as Revenue From Land Sales Plummets

A man wears a mask while walking through the Evergrande changqing community in Wuhan, Hubei Province, China on Sept. 24, 2021. Getty Images

China’s land finance policy has plunged into its most severe crisis in nearly 30 years, resulting from a prolonged housing market downturn and a drastic reduction in local revenues, experts have observed.

Land finance can be seen as part of Tax-Sharing Reform, a fiscal and tax distribution system between the central and local authorities, implemented by the Chinese Communist Party (CCP) in 1994. Land finance refers to the local government’s reliance on revenue from the transfer of state-owned land use rights and land-related taxes to maintain local financial expenditures, of which gain from the sale of land accounts for the absolute majority. However, it is now shrinking.

The CCP’s land finance policy allows local governments to sell land as one of their main sources of revenue, thus pushing up land and housing prices and deteriorating the depressed real estate market.

Data released by the Ministry of Finance in May showed that from January to April this year, local governments earned 1,176.1 billion yuan ($170.4 billion) in revenue from the transfer of state-owned land use rights, down 21.7 percent compared to last year.

While in 2022, revenue from state-owned land use right transfer amounted to 6,685.4 billion yuan ($968.9 billion), a 23.3 percent plummet compared to 2021.

Zhang Kai, head of the Land Department of the China Index Academy, a Chinese real estate research firm, told Chinese financial media Yicai on Jan. 10 that although new housing market transactions are still on the highest scale related to the land market, it is heading toward a significant shrinkage, and real estate companies are lacking enthusiasm for acquiring land.

He said this is due to concerns over growing unfinished future housing, unpromising housing prices, and the reduction of residents’ income.

From January to April this year, China’s real estate development investment fell by 6.2 percent year-on-year; the area of new housing construction fell by 21.2 percent; the size of commercial properties sold fell by 0.4 percent, while the size of unsold listed commercial properties increased by 15.7 percent as of the end of April.

Zheshang Securities estimated in a May 19 report that the revenue from land sales by local authorities will remain relatively low in the second half of this year.

Population Factor

An elderly man and woman are pushed in wheelchairs along a street in Beijing on May 11, 2021. Wang Zhao/AFP via Getty Images

With the population turning into negative growth, the era of China’s real estate boom has come to an end, and the land finance model is no longer sustainable, indicated Chinese economist Ren Zeping on April 17 in an article published in Jfinfo.com, a Chinese investment, and financial advisory services platform.

The article said China’s population is now “aging and childless,” with the labor force aged 15-64 having reached its peak. “China officially entered negative population growth in 2022, with its natural population growth rate of -0.6 per 1,000, which hurt housing demand in China.”

China’s local authorities have relied heavily on land finance for a long time, with direct tax revenues from real estate and land concessions contributing more than one-third of fiscal revenue and land prices accounting for about 60 percent of housing prices, Ren said. “However, with China’s population peaking, the real estate sector is at a downward inflection point, and the long-term sustainability of land finance is trivial,” Ren wrote.

The article cited data showing that from 2015 to 2021, China’s land transfer revenue and real estate special tax combined 26 percent to 36.7 percent of local fiscal revenue, but this percentage fell back in 2022 due to the slump land market and the high transfer payments to localities.

Provinces with High Dependence on Land Finance

With its economic advantages, continuous population inflow, and strong demand for land, eastern China has a higher share of land transfer revenue in local consolidated financial resources (i.e., dependence on land finance). At the same time, western and northeastern China is more dependent on the central authority’s transfer payments.

According to a report released last September by two researchers from the China Chief Economist Forum Research Institute, the dependence of China’s provinces and municipalities on land finance ranged from 25 percent to 64 percent in 2021. Among them, areas near to east, such as Jiangsu, Zhejiang, and Hunan, all rely on land finance to a greater extent than 60 percent.

The next is Hubei, Fujian, Shandong, Anhui, Sichuan, Guizhou, and Chongqing provinces (cities), where land finance dependence is more than 55 percent. For the provinces of Yunnan, Gansu, Xinjiang, and Ningxia,  it is between 30 to 39 percent. Tibet and Inner Mongolia have the lowest dependence, with only 29 percent and 25 percent, respectively.

In addition, first-tier cities such as Beijing (41 percent) and Shanghai (41 percent) have a relatively low reliance on land finance because real estate market transactions in these cities are gradually shifting to equities.

What Can Replace Land Revenue?

Since land finance is no longer viable, the question of how to make up for the financial gap caused by reduced land concessions has been a pressing task for local authorities.

Some Chinese financial experts have suggested that China should reduce its reliance on land finance and transform to equity finance and strengthen the market participation of state-owned equity; others believe that China’s land finance should be shifted to tax finance.

An overview of apartment buildings in Xuchang, Henan Province, China on Dec. 14, 2018. Yawen Chen/Reuters

In this respect, Fang Qi, a U.K.-based veteran financial professional, told The Epoch Times on June 10 that the transformation of equity finance could not be feasible.

“The reason is that China has two capital reservoirs: the housing and the stock markets, which have absorbed much liquidity. If [the CCP authorities] rely on the stock market alone, it is not big enough, and the people do not have faith in equity; [for most Chinese people] the house is still a physical thing, while the stock is a bunch of numbers.” Fang said.

“In recent months, the CCP governments have been encouraging people to invest in the stock market, but the effect is inferior.”

As for the property tax finance, Fang believes real estate in the hands of corrupt officials would have almost been sold off or disposed of by legal process, considering that the CCP’s state network can oversee the assets of everyone in China.

However, the implementation still has many problems, according to Fang. “For example, should the previous land lease fee be refunded first? The property rights of China’s housing stock, especially some military and government housing, are complicated and difficult to settle.”

Fang said that the aggravated land finance policy spotlights the ongoing split between CCP’s central and local authorities.

“The [CCP’s] central government does not bail out, so local governments can only find ways to get money: such as selling industries, imposing tougher penalties like confiscating property,” said Fang, adding, if no other way, “they [CCP’s local authorities] can even sell a government employee’s quota (i.e., a title of the official post)” as it always did.

Even in this case, “the central government can do nothing to help out,” said Fang.