Sagging demand at China’s urban land auctions amid a crackdown on borrowing by private developers risks squeezing regional finances, pressuring local governments to scramble for other income sources to fund investments and support the economy.
$1.3 Trillion Fall in China Land Sales
Land sales soared to 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 borrowing by private developers since the summer of last year are increasingly eroding demand for land. The value of nationwide land sales abruptly fell 17.5% on year in August, according to Reuters calculations of finance ministry data, the biggest slide since February 2020.
Further falls could force regional governments, who on average depend on land sales for a fifth of their revenue, to cut spending and investment. Many economists have already downgraded China’s 2021 GDP growth forecast, due to a cooling property market and contagion risks from indebted property behemoth China Evergrande.
To boost incomes, some local governments may be driven to issue more bonds, increasing their debt obligations. They may even hasten plans for a controversial property tax, analysts say.
“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, local government spending will see a certain amount of pressure,” said Betty Wang, senior China economist at ANZ in Hong Kong.
In an attempt to better control land prices in the country’s most valuable locations, and by extension, prices of finished homes, authorities said in February that China’s 22 biggest cities can only conduct three rounds of land auctions this year. The authorities have also since put a cap on the highest bids to contain prices, as part of a vast crackdown across 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 fallen as cash-strapped developers stayed away. In an ongoing round of auctions in June-October, about 40% of the plots on offer were withdrawn or had no bidders as of Sept. 30, a Reuters analysis of over 1,000 public notices showed. That compared with 5% of untaken offers in the first round.