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Economy

Chinese localities selling off land faster

With party reshuffle looming, economic stability becomes top priority

Local governments in China often sell land to fund public spending.   © Reuters

SHANGHAI -- Local governments in China are stepping up land sales, a pillar of their income, seeking funds for economic initiatives in advance of the central government's leadership reshuffle this fall.

Space in a planned residential section of a mixed-use facility in Beijing's Fengtai district, slightly southwest of the city center, recently sold for approximately $40,000 per 3.3 sq. meters -- roughly on a par with land in central Tokyo. The facilities are planned to be built several kilometers from a high-speed-rail station.

The local government put the residential block on the market for 5.25 billion yuan but ended up getting a higher-than-expected bid price of 7.87 billion yuan after a fierce 68-round bidding war among 10 real estate companies. While such major cities as Beijing are trying to defuse a housing bubble with sale regulations, "buyers remain nevertheless," in the words of a spokesperson for a real estate company.

In China, local governments supply land to the market. Land sales across 300 major cities in the January-July period grew 43% on the year to 1.84 trillion yuan ($278 billion), beating the 32% growth recorded last year, according to property researcher China Index Academy. The area sold declined slightly, but hungry developers drove unit prices up.

Beijing led the 300 cities with 130 billion yuan in land sales, followed by Nanjing with 100 billion yuan and Wuhan with just shy of 80 billion yuan. For each, the figure was about double that of a year earlier. Nationwide, there were 10 or more sales individually worth over $900 million.

Driving growth

President Xi Jinping's government is prioritizing economic stability leading up to the Communist Party congress. Selling land helps local governments with two goals: stabilizing supply and demand for real estate amid a bubble and funding infrastructure spending and other projects that propel growth.

Chinese real gross domestic product grew 6.9% on the year for the April-June period, notching a 1.7% quarter-on-quarter rise that bested the 1.3% for January to March. Infrastructure spending, which grew at a 20%-plus clip, supports that growth, and local governments cover much of the capital for such projects.

Land sales make up a third pillar of income for local governments, after tax revenues and federal aid. Figures differ widely by region, but land sales contribute as much as a fifth of income overall.

China does not recognize private land ownership. Local governments have come to earn great amounts of money by seizing farmland and then selling use rights in the name of developing new cities. This system makes localities more reliant on land.

And as suppliers of land for development, local governments can be said to depend on rising real estate prices for public finances. While the central government wants to combat the real estate bubble with regulations and financial tightening, localities are more timid. They have also fought the central government's long-considered plans for a real estate tax, fearing the effect on land prices.

Growth in personal consumption has also come to be supported by the wealth effect accompanying increases in land prices. The central government is caught on a tightrope between securing income for local governments and deflating the real estate bubble.

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