MNI: Falling Land Sales To Sap China Infrastructure Spending

Local governments in China face lower revenues from land sales that squeeze budgets and limit the ability to invest in infrastructure projects that are key to rebound from an expected slowdown in growth in Q4 and next year, advisors told MNI.

Land sale revenues nationwide fell 11.2% y/y in September, down for a second month after the largest decline in near two years in August, data from the Ministry of Finance showed.

A cooling land market that started in Q3 may lead to a fiscal gap later this year, especially for counties around some housing hotspot cities such as Hangzhou, Chengdu and Chongqing, said Yang Xiaoyi, a researcher at BRI Data, an investment advisory firm to local governments, see: MNI:China May Loosen Mortgage Rules In Property Slump-Advisors.

"Such pressure may in turn constrain funding for infrastructure investment and weigh on economic growth," Yang continued.

A slower pace of land sales could impede investment in infrastructure with a potential knock-on effect to GDP growth, other advisors also noted.

ECONOMIC PICTURE

Liu Xiangdong, deputy director of Economic Research at China Center for International Economic Exchanges, agreed that investment initiatives by local governments are possibly impeded by a lack of extra funds that land sales can rake in.

Shanghai and Hangzhou for example recently halted several planned land auctions.

Liu believes Q4 economic performance partly depends on the rebound of infrastructure investment.

"Q4 GDP could still hang on 4-5% if more infrastructure projects can kick off to form substantial work," said Liu. He expects infrastructure investment which recorded 1.5% y/y growth for the first three quarters to recover to the 2019 levels around 3.8% at best. GDP slowed to 4.9% in Q3, a growth pace only matched during Q3 last year under pandemic conditions.

Yao Jingyuan, a special researcher of the Counselor's Office of the State Council, agreed that infrastructure investment is the key as its negative growth is still dragging down the economy if excluding the inflation factor. Housing and land markets will remain stable in Q4 without any further tightening, so to help stabilize growth, said Yao.

China has embarked on significant changes to its economy under a goal of "common prosperity" to redirect investment into green technologies and higher-end manufacturing. At the same time, a tighter grip on real estate financing has sparked debt repayment hurdles for top property developer China Evergrande Group and other companies, further cooling the sector.

CHANGES AHEAD

Declining funds for local government financing vehicles may affect debt raising in the open market and push up finance costs, Yang said.

Infrastructure projects may receive less fund support from the government while finding profitable projects with stable cash flows is a challenge.

Generally, land sale revenues are also used to repay some bond interest, while the funds in smaller cities may cover some daily operational costs too.

Yang and Liu believe the repayment should be secure as the maturing amount is at a relatively low level and these bonds were issued with relatively low interest rates.

"There is room for maneuver, as local governments are allowed to issue some one-year transitional bonds to renew some maturing debts failed to be repaid on time due to less-than-expected land sale income," said Yang.

LOCAL FISCAL PRESSURE

A Moody's report shows that land sale revenues accounted for 29.2% of Chinese local government fiscal revenues in 2020. By region, it varies considerably, ranging from 52.8% in Zhejiang province to 3.8% in Tibet.

Though provinces in east China depend on land sale revenues, they may not be significantly affected as their large tax income from profitable enterprises could help offset a decline, said Liu.

He noted that it is the mid-west region where local governments may struggle to pay bond interests and fund daily operations under declining land sales.

But nationally, the impact of declining land sale revenues is not that significant as it may cause a fiscal gap around CNY1 trillion, Liu added.