August 05,2009

Land Prices High? Ask Local Governments Why

By CSC staff, Shanghai

The current real estate market boom is the recipient of much promotion by local governments, who, along with the developers, are the biggest beneficiaries of high housing prices. Local governments earn not only from the selling of land, they also receive income from developer-to-purchaser sales and are directly involved in real estate deals together with state-owned enterprises and banks. As the real economy is not likely to rebound in a short time, the real estate market has become the only market to survive the financial crisis, and one of the few sources of local government revenues.

According to China Business News, by July 10 this year, trade of profit-oriented land on Beijing's land market totaled 534 hectares, involving 31.8 billion yuan. Of the total land sales revenue, the local government got over 14 billion yuan. Usually, after deducting expropriation costs and taxation, local governments' net earnings come to over 40%. According to figures from the Beijing Land Reserve Center, by May 22 land transfer deals in Beijing totaled about 9.3 billion yuan, and the government's net earnings amounted to 2.692 billion yuan, about 30% of the total,.

But boom does not truly describe land sales key cities in China since June. Land price records have constantly been broken every few days in Beijing.

Ren Zhiqiang, president of Huayuan Group, a Beijing developer, said in his blog, "21 parcels of Beijing land were sold in June. Of the total, 10 parcels, mainly in rural areas, sold at the floor price or close to floor price. The other 11 parcels, however, sold at a premium to the floor price as high as about 6 billion yuan,"

A premium that set local government eyes a-twinkle. Within a 50 day period starting from late May to early July, total land sales in Beijing reached 22.5 billion yuan, netting the government at least 11.3 billion yuan, about 226 million yuan a day on average. About 50% of the income from land transference has gone to the local government.

In the first 10 days of July, land transference fees in Beijing totaled about 8 billion yuan, and the government netted nearly 5 billion yuan, accounting for 62% of the total and 500 million yuan a day on average. During these 10 days, big Beijing developers were the land gobblers.

Land transference income is a great comfort to local governments whose fiscal income is otherwise falling. Due to the decline in company earnings, the Beijing government's first half fiscal income totaled 103.33 billion yuan, down 3.5%, year on year. To bring in the budgeted goal of 202.11 billion yuan for the year, second half fiscal income must grow 28.8%, year on year, a severe trial in the downturn.

Land transference income is therefore playing an increasingly important role in lining local government coffers. According to Minister of Resources Xu Shaoshi, such income totaled nearly 1.3 trillion yuan nationwide, and over 960 billion even in 2008, when the real estate market was deep in recession. Between 2006 and 2008, income from land transference in Hangzhou totaled over 100 billion yuan. One developer estimates that land transference fees account for about 25% of 30% of the total fiscal income of the Hangzhou local government.

But the large earnings from land transference have local governments playing a complicated role in the land market. Keeping land prices as high as possible brings in badly needed cash, but those prices will definitely trickle down to the public, whose interests local governments are supposed to be looking out for. 

Also in the public mind is just how local governments are spending the money. Land transference fees usually go to cities' infrastructure construction, and a part of it is now to be invested in affordable housing development. But few governments are revealing any details of the use of this money.

In 2007, the central government released regulations that income from non-tax resources such as land transference should be included in budget management. This policy is not well implemented in a number of regions, however.

According to a recent National Audit Office report, in 10 provincial governments, 23 city governments, and 41 county governments under audit, 84.826 billion yuan of non-tax income was not included in the governments' 2007 budgets. Of that total 62.642 billion yuan derived from land transference.

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