Land has been an important factor in China's spectacular economic growth. Its ownership by the government has been critical in helping local governments realise revenues to finance the massive infrastructure investments that turbocharged growth for decades. The government generates revenue from land by way of auctioning or tendering land to private people and firms, taxation on various land related activities (transfer deeds, development fees, property taxes etc), and taxes from real estate firms.
Martin Sandbu points to this excellent paper by Sheng Zhongming that highlights the importance of land to the Chinese economy. This is a great primer from a local source about the importance of land and real estate on the country's economy and public finances.
The paper discusses the large effect of a fall in real estate activity on public finances.
After recent adjustments, the annual sales of commercial properties have declined to around 13 trillion yuan, which is considered a sustainable level. The article estimates that if real estate sales remain stable at the 2022 level, there will be a decrease in tax revenue by 0.8 trillion yuan per year compared to the pre-adjustment period. Additionally, land transfer income will decrease by 2.8 trillion yuan annually, and government borrowing, including special bonds and debts of urban investment platforms, will decrease by 3.6 trillion yuan annually. In total, this results in a decrease of 7.2 trillion yuan in fiscal revenue and government financing...
Looking at different regions, the absolute decline in fiscal revenue and financing is larger in eastern and central provinces. Guangdong, Zhejiang, Jiangsu, and Shandong will experience a combined decrease of 700 to 800 billion yuan in local fiscal revenue and government financing. The relative decline in fiscal revenue and financing is higher in central, western, and northeastern provinces. If we put transfer payments aside, some provinces will have to bear a fiscal revenue and financing decline of 30% or more.
Sandbu writes that this reduction in public sector revenues and available government financing by Rmb3.6 trillion each corresponds to 3-4% of GDP each.
Most of this will hit local government budgets, which in 2021 made up about two-thirds of overall fiscal revenue of Rmb30tn. In other words, we could be looking at a permanent revenue loss of 15 per cent, and as much again in curtailed financing, for that government level.
However the paper points to the functioning of land markets and different kinds of revenues from land-related activities. I'll do a graphical summary of the paper. This is a good summary of the importance of real estate activities.
The importance of real estate in fiscal revenue and government financing is mainly manifested through three channels: specific tax types that contribute to real estate industry tax revenue, high-priced real estate land supporting land transfer income, and leveraging land value to drive government financing.
A very high 36.4% of the total budgetary fiscal revenue in the country came from the real estate sector (commercial land development), including 16.9% of all tax revenues and 92.1% of all land transfer income. While only 9.3% of central fiscal revenue and 9.9% of central tax revenue came from real estate, it made up 49.1% of local fiscal revenue. Further on the financing side, issuance of local special bonds and urban investment bonds is highly dependent on land value.
Budget revenue consists of the general public budget (includes tax and non-tax revenues) and the government fund budget (which includes land use rights transfer income and more than 20 other government fund revenues).
Total direct tax revenue related to real estate touched 2.9 trillion yuan, of which 2 trillion yuan belongs to local governments.
Land value tax and title transfer (deed registration) tax make up 41.2% of all real estate related tax revenues, while property tax makes up just 3.6%! The first two go completely to local governments.
The vast majority, nearly 90%, of the land value tax is paid by real estate firms.
In recent years while the proportion of land allotted for real estate development (commercial and residential) has declined, its unit price has risen sharply to ensure that the proportion of land transfer revenues from real estate has remained stable at a very high 90% of all land transfer revenues.
Now let's look at how land is leveraged to raise debt. The paper has a good description of the origins of the land revenue related infrastructure projects financing model
In 1998, the Wuhu Construction Investment Corporation bundled six infrastructure projects and signed a 10-year, 1.08 billion yuan loan contract with the China Development Bank. The loan was pledged against land transfer revenue, and the Wuhu Municipal Finance Department provided repayment commitments to enhance creditworthiness. This infrastructure financing model, which is based on land value, relies on government credit as explicit or implicit guarantees and does not create explicit government debt, became known as the "Wuhu Model" and served as a prototype for subsequent urban investment platform operations. Furthermore, since the promulgation of the new Budget Law in 2014, local governments have been granted autonomous borrowing authority, with special bonds used for projects with stable returns. However, reviewing the fundraising materials for various special bonds reveals that the expected land revenue held by project entities is a significant source of repayment for many special bonds.
The paper points to the land-to-government financing multiplier ((new special bonds + new interest bearing urban investment bonds)/land transfer revenue) of around 1.3 - at the national level, for every 100 yuan of land transfer revenue, nearly 130 yuan of broad government financing is unlocked!
Local government fiscal revenues which consist of three parts (general public budget revenue, government fund budget revenue, and central transfer payment revenue) present a fascinating picture. There is a near perfect inverse correlation between the local government's real estate related revenue and central transfer payments.
The paper categorises the provinces into four groups - those that have experienced land market decline far greater than others (Type I), those where the risk of both government revenue and financing being affected is high (Type II), those where government financing being effected is low but government revenue impact is relatively high (Type III), and those where both the risks of government financing and revenue impact is low (Type IV).
Finally, the paper points to the inflection in the real estate market that saw a sharp decline in real estate construction activity and sales.
Based on this, the paper points to the base case (real estate activity stabilises at the 2022 level), optimistic, and pessimistic scenarios, which point to a combined drop in fiscal revenue and government financing by 7.2, 5.8 and 8.7 trillion yuan respectively. These are huge drops and their impact on economic activity has to be significant.
No comments:
Post a Comment