Ryan Woo and Liangping Gao

BEIJING (Reuters – A sluggish demand at China’s urban land auctions, amid a crackdown against borrowing by private developers, risks squeezing regional funds. Local governments will be forced to search for alternative income sources to finance investments and support their economy.

In 2020, land sales reached a new record of 8.4 trillion Yuan ($1.3 trillion), which is the equivalent to Australia’s annual gross national product. This helped boost local fiscal budgets during a severe pandemic year.

However, tighter lending regulations for private developers have been reducing the demand for land. According to Reuters calculation of data from the finance ministry, the August drop in national land sales was 17.5%, which is the steepest decline since February 2020.

Regional governments that rely on land sales to generate a fifth or more of their revenues could see further falls and have to reduce spending. Due to the cooling of property markets and potential contagion from China Evergrande, many economists already have downgraded China’s 2021 GDP growth projections.

Some local governments might be motivated to increase their debt obligations and issue additional bonds in order to boost incomes. Analysts say they might even accelerate the implementation of a controversial property tax.

Betty Wang (an economist specializing in China at ANZ Hong Kong) stated that “In general the percentage of land sales revenue to local governments in China in China is quite high, at more than 20%.”

Graphic: Monthly Land Sales in Mainland China (billions of yuan) – https://graphics.reuters.com/CHINA-ECONOMY/PROPERTY-LAND/egvbkydgdpq/chart.png

FALLING DEMAND

Authorities in China announced that the 22 largest cities in China can conduct only three rounds of land-auctions in order to control the land price in China’s most desirable locations.

As President Xi Jinping attempts to rectify excesses in China’s society and economy, the authorities also put a limit on the highest price bids.

However, the demand for auctions has declined since March-June’s first round. Cash-strapped developers have stayed away.

A Reuters analysis of more than 1,000 notices revealed that 40% to 40% of plots offered in an ongoing auction took place between June and October. Comparable to the 5% of unsold offers during the first round, this figure is almost 40%.

The Reuters analysis revealed that Tianjin, northern China, sold 40 of 61 plots while Shenyang (provincial capital of Liaoning) offloaded 19.

Moody’s (NYSE) expects land sales to grow by the low single digits in 2021 and then decline in 2022. Last year, sales grew by 16%

Moody’s warns that while local governments may be able to issue more bonds in order to compensate for lower sales of land, it could also lead the country into a greater debt burden.

Moody’s believes that Tianjin (highly indebted) and Liaoning might have difficulty meeting debt obligations, if their land sales decline.

STATE SUPPORT

Land auctions have seen a dominance of state-owned firms, while private developers were left behind. However it remains to be seen if that will suffice to preserve local government revenues.

In the past, private developers have received a greater number of bids than state companies in June-October auctions. This marks a significant departure from previous trends. However, their total bids had dropped 45% to 277.2 million yuan by Sept. 30 from March-June’s auctions.

China Railway Construction Corp (state-controlled) placed bids to purchase 15 land plots in Chengdu’s southwest metropolis. They also required a deposit of 4.28 trillion yuan ($662million).

According to Reuters Analysis, private developers, such as Fantasia Holdings Group, China Fortune Land Development, and China Fortune Land Development, have either spent more on land this year than they did in 2020 or not at all. The analysis revealed that Evergrande purchased only one plot in June this year through a local developer.

Requests for comments were not answered by the companies.

Graphic: Bids of Top 10 Developers at Chinese Land Auctions (in billions of yuan) – https://graphics.reuters.com/CHINA-ECONOMY/PROPERTY-LAND/movankgalpa/chart.png

Up to October 31, seven of China’s largest cities, such as Beijing, Shanghai, and Hangzhou, will be able to sell their land.

Wang from ANZ suggested that the local government may look for other sources of revenue, like property taxes, in order to offset volatile real estate markets.

China considered a nationwide tax on property for more than a decade. However, it faced stiff resistance from local governments and other stakeholders who were concerned that the proposed tax would cause property prices to drop or trigger an up-market.

She said, “Start by the pilots and then rules can be modified accordingly.”

Chinese: ($1 = 6.4452 Chinese