China’s central government is doing what it can to limit state land sales in a bid to control rising property prices, but it’s also denting local government revenue at a time when it needs it, according to Societe Generale’s Wei Yao.
In 2010, China’s local governments earned 2.9 trillion yuan ($441 billion) on land sales. Half of that was pure revenue, the other spent on relocating people, according to Yao. But now that headline number is set to drop to 1.9 trillion yuan ($289 billion), a significant cut seeing that China wants more spending than last year out of its local authorities.
From Wei Yao:
The central government has sent an ultimatum to local authorities, demanding that: 1) land price appreciation has to be capped; and 2) at least 10% of such revenues have to go towards the 10mn units of affordable housing projects. This is going to be the biggest struggle for those local governments with less income to reap, but more targets to meet.
Local government expenditures are set to rise by 11% in 2011, with the government projecting local revenues rising 8% and central government transfers popping a big 15.3%.
It’s questionable whether that headline central government number won’t actually go higher in the end. If there’s a sharp decline in revenues from land sales, China’s central government may need to pour more money into its local governments.
That hasn’t been a problem in the past, because growth has always beat projections, according to Yao. But if the PBOC’s tightening process causes problems, this time could be different.
From Societe Generale:
Photo: Societe Generale