China property crisis: Beijing’s crackdown on local government land buying may deprive market of lifeline | Land Portal
  • A land buying binge by local government-backed companies may slow, depriving China’s bruised real estate sector of a potential lifeline
  • In the first nine months, land sales plunged 60 per cent as private developers who are struggling to pay their debts stayed away

Main photo: A land buying binge by local government-backed companies may slow down after Beijing warned against the practice, depriving China’s bruised real estate sector of a potential lifeline. Photo: Reuters

A land buying binge by local government-backed companies may slow down after Beijing warned against the practice, depriving China’s bruised real estate sector of a potential lifeline.

The Ministry of Finance said government-backed entities would be strictly prohibited from purchasing land by raising debt last week, describing the practice as a “sham”.

“[Local governments] should not increase land revenue in a sham way on the backs of government-backed companies to remedy local coffers,” it said in a notice outlining a range of stringent controls on official spending on October 14.

While the aim of the crackdown is to ensure a more stabilised financial system and healthier local fiscal income and debt in the long run, it could deal another blow to China’s crisis-gripped 18.2 trillion yuan (US$2.5 trillion) housing industry.

“This is targeting those state-owned companies and local government financial vehicles (LGFVs) purchasing land more actively than before to support the land market,” said Tommy Wu, senior China economist with Commerzbank.

“The problem is these transactions will create hidden debts for local governments, and this is something that the central government does not want to see.”

Land sales contributed 8.7 trillion yuan to the coffers of local authorities across China last year, making up 42 per cent of their revenue, excluding funding from the central government.

In the first nine months of this year they plunged 60 per cent to 2.16 trillion yuan as private developers who are struggling to pay their debts shunned land purchases.

Land acquisitions by LGFVs, meanwhile, rose to 250 billion yuan in the period.

“Things are likely to be opaque if a local government sells land to its or other local governments’ financing vehicles or SOEs,” said Wu. “It is like from transferring from one’s left pocket to the right pocket.

“The financing vehicles can borrow from local banks for land purchase, and local governments may be liable for them indirectly through implicit guarantees. It means local governments are effectively borrowing more and this will put more pressure on the country’s financial system in a hidden manner.”

In the short run, the tightened regulation of LGFVs could lead to a further freeze in the slumping land market and exacerbate mainland China’s housing crisis.

“Some LGFVs are not really aiming to develop the land, so removing them from the market is good for the long run,” said Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institute.

“But because fewer players can snap up land, we could see development and investment in the property sector further drop next year. It is a difficult time for the Chinese real estate sector.”

Developers have been caught between falling sales and a debt crisis catalysed by Beijing’s “three red lines” policy, which limited borrowing and helped push China Evergrande Group and peers such as Sunac China Holdings and CIFI Holdings into default.

“The central government would rather use conventional measures, such as lower mortgage rates and lifting purchase caps, to support the real estate market, rather than stimulating it with hidden debts that will add risks to financial stability,” said Wu.

“This is also not in line with the ‘high-quality development’ proposed by President Xi Jinping at the 20th Party Congress.”

The People’s Bank of China announced last Thursday that cities where new home prices fell from June through August can reduce mortgage rates for first-time buyers.

A day later, the central bank said it would lower the interest rate for housing provident fund loans by 0.15 percentage points for first-time homebuyers from October 1, while the Finance Ministry said residents who buy new homes within one year of selling their old one will be refunded personal income tax on the sale.

Market observers, though, are not expecting a recovery in the embattled property sector any time soon.

“We don’t think previous quick fixes such as liquidity injections and city-level easing will be as effective this time at reversing the downward trend, given homebuyers’ dented confidence and the mounting pressure on economic growth and the job market,” said Stephen Cheung, an analyst with Morgan Stanley in a research note on October 9.

“We do not expect any material change in the government’s stance on housing in the foreseeable future.”

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