Fitch: Land Sales Cyclicality Adds Pressure on Chinese Subnationals
Sales of land-use rights in China fell by 21.4% in 2015, the most substantial shrinkage since a 14% decline in 2012. This followed the latest data published by the Ministry of Finance. Land sales, representing around 27% of LRGs' aggregated revenue in 2015, play a critical role in funding Chinese LRGs' local infrastructure projects. In addition, land held by local government financing vehicles (LGFVs) is the major collateral for LGFVs to obtain bank borrowing. The stagnant land sales or dwindling prices could have a far-reaching ripple effect.
Fitch considers in our analysis of Chinese LRGs the revenue from land sales as a capital revenue, and therefore the decline does not affect the operating performance of a subnational. Nevertheless, capital revenue has funded a significant part of capex, so a decline in this could either result in a reduction of capex or in higher deficits to be funded through borrowing.
Contracted residential property sales grew by 17% in 2015, and the recovery trend has been reinforced since a trough in February 2015, according to the National Bureau of Statistics. The recovery in residential property sales has mirrored a deceleration in the decline of land sales - from a 36.2% yoy decline in the first two months of 2015 to 21.4% by end 2015 - as a result of the property developers' replenishment of inventory. The shortening of the property de-stocking cycle to 2.5 years from 2.7 in 2014 should stimulate land sales, and Fitch expects the trend to continue in 2016.
Nevertheless, according to data published by the National Bureau of Statistics, the first-tier cities recorded steady growth of around 20% in 2015, while lower-tier cities reported only a minor rise or slipped slightly. Fitch expects the fiscal performance of Tier 1 cities such as Beijing, Shanghai, Shenzhen and Guangzhou will benefit more from the real estate market de-stocking and rising demand for residential upgrades. The provincial LRGs will remain less affected by the land sales cyclicality, as their financing relies more on tax revenue and central government transfers.
The introduction of a property tax could enable LRGs to obtain a more stable, predictable and sustainable funding source - just as Fitch has observed in many other LRGs globally. However, we expect the introduction of a full-blown property tax is less likely in the short to medium term, considering the property tax's potential deterrent effect on land sales, in conjunction with the low return of Chinese real estate.
However, Fitch believes the recent lifting of a ban on LRGs' issuance of municipal bonds, along with the elastic capital expenditure of Chinese LRGs, will mitigate the potential funding gap arising from the volatility in land sales.