BEIJING -- Local governments in China are increasingly relying on land sales to cover budget deficits, a move that could exacerbate the downward pressure on land prices and hurt the overall economy.
Municipalities' dependence on proceeds from property sales is tied to China's unique land ownership system. Because individuals are not allowed to own land, farmland and other properties in rural areas are collectively owned, while land in the cities is owned by the state. And with a limited amount of space available for urban development, local governments often expropriate farmland for a pittance and then sell the usage rights to developers for quick cash.
Income from such sales jumped 40% on the year to 1.08 trillion yuan ($173 billion) in the January-March quarter. The figure for 2013 was a record of more than 4.1 trillion yuan, up about 40% from the previous year.
Localities experience a chronic shortage of funds because the central government monopolizes revenue sources and they are basically prohibited from issuing their own bonds. Local government expenditures exceeded revenue by roughly 30% for the January-March quarter, partly due to programs for the poor. Expenditures grew by 13.3% on the year while revenue rose just 11.8%.
Municipalities had more than 10 trillion yuan in liabilities as of last June, leaving them little choice but to sell land to stay afloat. But not only does the sale of land for real estate development breed corruption among government officials, it can also push down residential land prices.
In the past, local governments sought to prevent price erosion by holding back land for development when the real estate market showed signs of cooling down. But as their dependence on land sales grows, they need to sell more property, thus exerting more downward pressure on prices.
Inventories are growing in the housing market. Unsold homes during the January-March quarter rose more than 20% on the year. And the uptrend in housing prices has slowed recently.
If housing prices start to fall sharply, the country's economy will be hit hard. Since many affluent Chinese acquired their wealth through real estate investments, a drop in housing prices could dampen investment and consumption and lead to real estate loans turning sour.
China's leadership under President Xi Jinping intends to build housing for low-income households and conduct urban development in inland areas as part of its urbanization plan. While the main objective is to narrow the economic gap between urban and rural areas by raising the living standards of farmers, many in China hope the government's measures will shore up the real estate market.