Fall in China’s $1.3t land sales to test economy

Sagging demand at China’s urban land auctions amid a crackdown on borrowing by private developers risks squeezing regional finances, pressuring local governments to scramble for other income sources to fund investments and support the economy.

Land sales soared to a record 8.4 trillion yuan ($1.3 trillion) in 2020, the equivalent of Australia’s annual gross domestic product, bolstering fiscal budgets in a pandemic year.

But tighter regulations on borrowing by private developers since the summer of last year are increasingly eroding demand for land. The value of nationwide land sales abruptly fell 17.5 per cent on year in August, according to Reuters calculations of finance ministry data, the biggest slide since February 2020.

Further falls could force regional governments, who on average depend on land sales for a fifth of their revenue, to cut spending and investment. Many economists have already downgraded China’s 2021 GDP growth forecast, due to a cooling property market and contagion risks from indebted property behemoth China Evergrande.

To boost incomes, some local governments may be driven to issue more bonds, increasing their debt obligations. They may even hasten plans for a controversial property tax, analysts say.

“In general, the proportion of land sales revenue for local governments in China is quite large, at over 20 per cent, so if land sales decline, or their growth slows, local government spending will see a certain amount of pressure,” said Betty Wang, senior China economist at ANZ in Hong Kong.

To better control land prices in the country’s most valuable locations, and by extension, prices of finished homes, authorities said in February that China’s 22 biggest cities can only conduct three rounds of land auctions this year.

The authorities have also since put a cap on the highest bids to contain prices, as part of a vast crackdown across sectors as President Xi Jinping seeks to correct excesses and imbalances in China’s economy and society.

But since the first round of auctions in March-June, demand has fallen as cash-strapped developers stayed away.

In an ongoing round of auctions in June-October, about 40 per cent of the plots on offer were withdrawn or had no bidders as of Sept. 30, a Reuters analysis of over 1,000 public notices showed. That compared with 5 per cent of untaken offers in the first round. Tianjin in northern China sold 40 out of 61 plots, while Shenyang, the provincial capital of Liaoning, offloaded 19 of 46 lots, the Reuters analysis showed.

Moody’s predicts land sales growth will be in the low single-digits in 2021 before declining in 2022. Sales grew 16 per cent last year.