Tuesday, 23 July, 2013, 12:00am Business › Economy
‘Financial pressure on local governments is only likely to build’
President Xi Jinping has ambitious plans to reform the economy. Ending the land grab among local governments should be top of his list.
For years, escalating land sales have been a valuable source of revenue for cashstrapped local governments. Each time Wenzhou , Fuzhou or other cities agree to a licence for a new highrise apartment block, the local government earns a hefty chunk of cash for the land that is sold to the developer.
Land sales now account for an average of 40 per cent of local government revenue, up from 10 per cent just a decade ago. In some cities, the sale of land is the main source of income. That free income is beginning to decline as governments run out of land and the property bubble runs out of steam.
There is a reason for the giant land grab: local governments are desperate for new sources of revenue to pay for local social services and to keep the engines of the economy churning at high levels.
Local governments are responsible for everything from retirement income to health care for their citizens. Since fiscal reforms in 1994, local governments’ share of the tax revenue has decreased to 40 to 50 per cent but they have been responsible for 70 to 80 per cent of expenditure. Outside fees – mainly from the sale of land – account for the difference.
Take Zen township in Zhejiang, studied by Lynette Ong of the University of Toronto. During one recent fiscal year, the town gave most of its 319 million yuan (HK$400 million) in revenue back to Beijing, keeping just 15 million yuan. To pay for the lion’s share of its 88 million yuan budget, which included urban and rural development, education and health care, the town earned 71 million yuan selling land.
Another big incentive for local officials to sell land is to create glamorous projects to aid their
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chances of promotion. According to Victor Shih from Northwestern University and researchers at Peking University, drawing in revenue from outside the province boosts an official’s chances of being promoted more than increasing gross domestic product. And what better way to show off leadership qualities than a new stadium or the proverbial “bridge to nowhere”?
Now, though, many of the best pieces of land in the city centres have been sold. According to a study by the National University of Singapore, by 2007, the average tract of land sold was 50 per cent farther from the city centre than it had been just four years earlier. That trend has accelerated.
This year, according to local developers, Guangzhou is trying to double revenue from land sales to 48 billion yuan. Guangzhou is now offering three new central business districts, but they are located in less valuable areas on the outskirts of the city centre. Xi’an is asking developers to prepay tax on land the developers haven’t even bid on. “The government is mortgaging against future land sales,” the chief executive officer of one Xi’an developer told me in March. Also – and a bigger concern for China’s economy – there are hints that the escalation of property values and thus land prices is easing. Home prices on the mainland rose for the 12th straight month in May, but the pace of growth continued to fall.
More ominously, the revenue gap is increasingly being filled by China’s growing shadow banking system
The average price of new residential properties in 100 cities rose just 0.81 per cent from April, to 10,180 yuan per square metre. That compared to a 1 per cent gain in April and March’s 1.06 per cent rise.
No one can say for certain whether China is suffering from a property bubble or when it may collapse. But land is not an endless resource. That revenue must come to an end.
What can replace it? Beijing has been testing local property taxes. Apart from bringing much needed income, these taxes would impose a cost of ownership on property, crimping the use of flats as a cheap “bank account”. Owners are baulking but these taxes would be a rational source of income for local governments.
More ominously, the revenue gap is increasingly being filled by China’s growing shadow banking system, in which companies and individuals feed their excess savings into everything from residential buildings to white elephant projects, many backed by local governments through side companies called local government financing vehicles. While it’s nice to see Chinese capital escape the claws of the state sector, the lack of regulation is a real concern.
The past decade’s big land boom has been bad news for rural homeowners forcibly evicted from their ancestral villages. At a recent conference at Sun Yatsen University, activists called for greater protection of the rights of homeowners.
“The effects of urban development, demolition and eviction on tens of millions of Chinese citizens have been profound,” notes Eva Pils, a lawyer and expert on land rights at Chinese University of Hong Kong.
Until there is a new revenue system in place, the financial pressure on local governments is only
likely to build. That means more dangerous financial games by local governments and more
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residents evicted from their homes.
Andrew Collier is the former president of the Bank of China International’s US office. He is currently an independent analyst based in Hong Kong