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Last week, the Ministry of Finance reported a decline in revenue from government land sales in China slowed for the month of March, thanks to various stimulus policies that boosted the confidence of developers. However, data from the same ministry showed that in the first quarter of this year, income from land sales, which is the primary means for local governments to raise funds, decreased by 27% compared to the same period in the previous year.
According to calculations made by Reuters based on data from the Ministry, land sales dropped by 23.2% year-on-year in March, which is less than the 29% decrease in January and February. Xue Xiaoqian, a representative of the Finance Ministry, spoke about the situation a conference in Beijing recently, stating that although the newly introduced policies have helped stabilised the market, it is still a long way away from a full recovery.
A range of policies aimed at both developers and buyers were introduced, resulting in home prices rising at the quickest rate in 21 months, according to official data for March, even though property investment continued to decline. The Chinese economy experienced a faster-than-anticipated growth rate in the first quarter, as the removal of strict COVID restrictions enabled businesses and consumers to emerge to the debilitating effects of the pandemic. However, challenges from a worldwide slowdown indicate that there may be a difficult path ahead.
According to a report from a Chinese think-tank, financially struggling local governments in China sold large portions of land to their own investment vehicles in order to increase their revenues last year. This raises concerns about the severity of their financial difficulties. The report reveals that over half of the Rmb2.2tn ($316bn) worth of residential property plot sales made by local Chinese authorities in 2022 were sold to local government financing vehicles (LGFVs). The report also warns that some of these transactions may be fraudulent.
According to the report, local governments may have exaggerated their income by selling assets at higher prices or having LGFVs buy land, which boosts their fiscal revenue. The think-tank also noted that land sales are essential for local governments in China, as they fund various sectors, including healthcare, education, and infrastructure. However, due to the Covid-19 pandemic and a property market downturn, local government budgets have been severely affected.
The report highlights that LGFVs played a role in boosting land sales, which implies that the financial difficulties that local governments are facing are more severe than what official data shows. Due to the zero-Covid policy enforced by Beijing, local governments experienced a significant drop in fiscal revenue last year, marking the most significant decline in decades. Moreover, the costs associated with mass testing and quarantines, as well as healthcare spending, have added considerable uncertainty to their fiscal budgets, according to the think-tank.
Local authorities have also faced a jump in outlay. Many have increased wages in an effort to stem corruption, with personnel expenses rising more than a third in the four years to 2020.
According to official figures, LGFVs contributed to 54% of China’s total residential land sales value last year, setting a new record. However, this spending frenzy was largely financed by borrowing. The report suggested that some cities even recorded these sales in their financial records before returning the money to LGFVs, which could then use it to bid for land in future auctions.
This story was first published in Reuters
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