Provincial government land sales - the view from the Ministry of Finance
Reliance by local government on sales of land to finance their spending comes at a cost in terms of social and economic stability. A research institute under the Ministry of Finance has recently published a review of some of the key issues. The main findings from their report, as translated by me, are:
As land is a scarce resource, reliance on land sales as the basis for local government finances is inherently unstable. What will local government’s rely on for finance when they have sold all the land?
A second reason for instability is that there is a strong link between demand for land and the situation in the property markets. A downturn in the property markets will mean less demand for land and a shortfall in local government’s finances (which is exactly what is happening now).
The scope for massive profits from land sales encourages local governments to break laws and regulations to sell land. This has negative consequences for social stability (peasant farmers whose land has been requisitioned are not normally happy people) and for food security (less agricultural land means less food supply).
Revenue sharing arrangements for different types of tax (for example corporate tax), whereby local government only gets to keep a fraction of the revenue they collect (the rest being transmitted up the the next level of government), encourage local government to focus on land sales as a revenue source. The same system also encourages local government to keep revenue from land sales off-budget - and so out of the hands of higher-level local and national governments.
These factors have contributed to a surge in revenue from land sales by local government, both as an absolute number and as a percentage of total revenue. In 1987, revenue from land sales by local government was Rmb230m, less than 0.1% of total local government revenue. In 2006, land sale revenue was Rmb860bn, 35% of total revenue.
Furthermore, the reliance on land sales as one the mainstays of local government finance contributes to pressure on the price of land - as local governments try and secure the best price. The knock on effect is higher house prices, which changes Chinese people’s saving and consumption behaviour. As Chinese people have to save more and consume less if they are to have any hope of affording to buy a house, this contributes to the imbalance in the overall economy.
The authors note that the slowdown in the property market as a result of last year’s macro-economic tightening and this year’s economic slowdown have brought these problems to a head. But they also believe that they cannot be addressed in isolation from thinking about the entire system of local and central government finance, and the relations between the different layers of government.
You can see the report in Chinese here: http://www.crifs.org.cn/0416show.asp?art_id=3105
Agriculture, Fiscal Policy, Property, Regional, Social Policy
The Ministry of Finance appears to have highlighted all of the critical issues; nevertheless, the operative observation seems to be while all appear to understand that local land sales are bad economics, there does appear to be a viable alternative on the horizon for local governmental units. Unfortunately, as with all Ponzi schemes, hindsight trumps in situ metaknowledge.
Sorry, haste makes waste: in rereading my comment, I inadvertently left out the critical word “not” in the phrase “there does “not” appear to be a viable alternative on the horizon for local governmental units.”