Analysis: Fall in China’s $1.3 trln land sales to test local finances, economy

BEIJING, Oct 7 (Reuters) – Sagging demand at China’s city land auctions amid a crackdown on borrowing by personal builders dangers squeezing regional funds, pressuring native governments to scramble for different revenue sources to fund investments and help the economic system.

Land gross sales soared to a file 8.4 trillion yuan ($1.3 trillion) in 2020, the equal of Australia’s annual gross home product, bolstering fiscal budgets in a pandemic yr.

However tighter rules on borrowing by personal builders for the reason that summer time of final yr are more and more eroding demand for land. The worth of nationwide land gross sales abruptly fell 17.5% on yr in August, in line with Reuters calculations of finance ministry knowledge, the most important slide since February 2020.

Additional falls may drive regional governments, who on common rely upon land gross sales for a fifth of their income, to chop spending and funding. Many economists have already downgraded China’s 2021 GDP development forecast, resulting from a cooling property market and contagion dangers from indebted property behemoth China Evergrande .

To spice up incomes, some native governments could also be pushed to difficulty extra bonds, growing their debt obligations. They could even hasten plans for a controversial property tax, analysts say.

“Basically, the proportion of land gross sales income for native governments in China is sort of massive, at over 20%, so if land gross sales decline, or their development slows, native authorities spending will see a certain quantity of strain,” stated Betty Wang, senior China economist at ANZ in Hong Kong.

FALLING DEMAND

To raised management land costs within the nation’s Most worthy places, and by extension, costs of completed properties, authorities stated in February that China’s 22 greatest cities can solely conduct three rounds of land auctions this yr.

The authorities have additionally since put a cap on the very best bids to comprise costs, as a part of an enormous crackdown throughout sectors as President Xi Jinping seeks to right excesses and imbalances in China’s economic system and society.

However for the reason that first spherical of auctions in March-June, demand has fallen as cash-strapped builders stayed away.

In an ongoing spherical of auctions in June-October, about 40% of the plots on supply had been withdrawn or had no bidders as of Sept. 30, a Reuters evaluation of over 1,000 public notices confirmed. That in contrast with 5% of untaken provides within the first spherical.

Tianjin in northern China offered 40 out of 61 plots, whereas Shenyang, the provincial capital of Liaoning, offloaded 19 of 46 tons, the Reuters evaluation confirmed.

Moody’s predicts land gross sales development might be within the low single-digits in 2021 earlier than declining in 2022. Gross sales grew 16% final yr.

To offset poorer gross sales, native governments may difficulty extra bonds, however that might elevate the prospect of a better debt burden, Moody’s warned in a report.

Extremely-indebted Tianjin and Liaoning could battle to fulfill debt obligations if land gross sales worsen, in line with Moody’s.

STATE SUPPORT

State companies have dominated land auctions as personal builders caught to the sidelines, however it’s unsure whether or not this is able to be sufficient to safeguard native authorities revenues.

The worth of successful bids by state companies have been triple that of personal builders within the June-October auctions to this point, marking a departure from previous traits. However, as of Sept. 30, their total bids had been down 45% to 277.2 billion yuan from the March-June auctions.

Within the southwestern megacity of Chengdu, state-controlled China Railway Development Corp positioned bids for 15 plots of land and put down a whopping deposit of 4.28 billion yuan ($662 million).

In distinction, personal builders equivalent to Fantasia Holdings and China Fortune Land have spent much less on land purchases this yr than in 2020, or nothing in any respect, in line with the Reuters evaluation. Evergrande, by way of an area developer, purchased just one plot this yr in June, the evaluation confirmed.

When contacted by Reuters, Fantasia stated it’ll management the tempo of land acquisitions consistent with its debt administration, and that it presently has enough land reserves.

The opposite corporations didn’t reply to requests for remark.

Seven out of China’s 22 greatest cities have till the top of October to public sale land, together with Beijing and Shanghai.

Long run, native governments could search different sources of fiscal income equivalent to property taxes, ANZ’s Wang stated.

China has mulled a nationwide property tax for over a decade however confronted resistance from stakeholders together with native governments themselves, who worry it will erode property values or set off a market sell-off.

“Begin with the pilots, and guidelines might be adjusted accordingly,” she stated.

($1 = 6.4452 Chinese language)

Reporting by Ryan Woo and Liangping Gao; Further reporting by Beijing Newsroom and Clare Jim in Hong Kong; Enhancing by Ana Nicolaci da Costa

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