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Analysis-Falling $ 1.3 billion in land sales in China to test local finances and economy

By on October 7, 2021 0

BEIJING (Reuters) – Sinking demand at China’s urban land auctions amid a crackdown on borrowing by private developers risks squeezing regional finances, pressuring local governments to seek funding ‘other sources of income to finance investments and support the economy.

FILE PHOTO: A man rides a bicycle next to a construction site near residential buildings in Beijing, China January 13, 2021. Photo taken on January 13, 2021. REUTERS / Tingshu Wang / File Photo

Land sales hit a record 8.4 trillion yuan ($ 1.3 trillion) in 2020, the equivalent of Australia’s annual gross domestic product, bolstering local fiscal budgets in a pandemic year.

But tighter regulations on private developer borrowing since the summer of last year are increasingly eroding demand for land. The value of land sales nationwide fell sharply by 17.5% year-on-year in August, according to Reuters calculations from Finance Ministry data, the biggest drop since February 2020.

Further cuts could force regional governments, which on average depend on land sales for a fifth of their income, to cut spending and investment. Many economists have already lowered China’s GDP growth forecast for 2021, due to the cooling of the real estate market and contagion risks from indebted real estate giant China Evergrande.

To increase income, some local authorities may need to issue more bonds, thereby increasing their debt. They could even speed up plans for a controversial property tax, analysts said.

“In general, the proportion of land sales revenue for local governments in China is quite large, at over 20%, so if land sales decline or their growth slows down, local government spending will come under some pressure. “Said Betty Wang. , senior Chinese economist at ANZ in Hong Kong.

Chart: Monthly land sales in mainland China (billion yuan) –

LOWER DEMAND

In an effort to better control land prices in the country’s most valuable places, and by extension the prices of finished homes, authorities said in February that China’s 22 largest cities can only conduct three rounds of land auction this year.

Authorities have also since capped the highest bids to contain prices, amid a sweeping crackdown across all sectors as President Xi Jinping seeks to correct excesses and imbalances in China’s economy and society. .

But since the first round of auctions in March-June, demand has plummeted as cash-strapped developers have stayed away.

In a series of auctions underway in June-October, around 40% of the plots offered had either been withdrawn or had no bidder as of September 30, according to a Reuters analysis of more than 1,000 public notices. This against 5% of offers not taken in the first round.

Tianjin in northern China sold 40 of 61 plots, while Shenyang, the provincial capital of Liaoning, sold 19 of 46 plots, according to Reuters analysis.

Moody’s predicts that land sales growth will be in the low single-digit range in 2021 before declining in 2022. Sales were up 16% last year.

To offset the decline in land sales, local governments could issue more bonds, but that would increase the prospect of a higher debt burden, Moody’s warned in a report.

Heavily indebted Tianjin and Liaoning could struggle to honor their debts if land sales worsen, according to Moody’s.

STATE SUPPORT

State-owned enterprises have dominated land auctions while private developers have remained on the sidelines, but it is not clear that this is enough to protect local government revenues.

The value of bids won by state-owned enterprises has so far been three times that of private developers in the June-October auctions, marking a departure from past trends. But, as of September 30, the value of their aggregate bids was down 45% to 277.2 billion yuan from the March-June auction.

In the southwestern megalopolis of Chengdu, the state-controlled China Railway Construction Corp has made offers for 15 plots of land and filed a massive 4.28 billion yuan ($ 662 million) deposit.

In contrast, private developers such as Fantasia Holdings Group and China Fortune Land Development spent less on land purchases this year than in 2020, if at all, according to Reuters analysis. Evergrande, through a local developer, bought just one piece of land this year in June, according to the analysis.

The companies did not respond to requests for comment.

Chart: Bids of the top 10 developers at Chinese land auctions (in billions of yuan) –

Seven of China’s 22 largest cities have until the end of October to auction off their land, including Beijing, Shanghai and Hangzhou.

In the longer term, local governments could seek other sources of tax revenue such as property taxes to offset fluctuations in real estate markets, ANZ’s Wang said.

China has been considering a nationwide property tax for more than a decade, but has faced resistance from stakeholders, including local governments themselves, who fear it could erode the value of property. properties or does not trigger a massive sale in the market.

“Start with the pilots, and the rules can be adjusted accordingly,” she said.

($ 1 = 6.4452 Chinese)

Reporting by Ryan Woo and Liangping Gao; Additional reporting by the Beijing Newsroom; Editing by Ana Nicolaci da Costa