If the land cannot be sold, how should the "land finance" be maintained?

Economic Observer Reporter Du Tao A county's local finances are facing a dilemma.

According to the county's financial sources, in 2020, the county's land transfer income is about 4.8 billion yuan, but it is estimated that it will be difficult to complete 2 billion yuan this year, and the situation in similar counties around it is roughly similar.

In this region, the amount of land transfer income is higher than that of this level of income. Limited by the decline in land transfer income, the "three guarantees" (to ensure the basic livelihood, wages, and grass-roots government operation) in the land are facing challenges, and the financial person estimates that the fiscal gap at the end of the year may reach 1 billion to 2 billion yuan.

A set of data disclosed by the Ministry of Finance in September showed that local land finances are facing challenges: In August this year, the national land transfer revenue was 570.3 billion yuan, a sharp drop of 17.5% year-on-year, the largest decline since February 2020. From January to August, the income from the transfer of state-owned land use rights in local government funds was 4,711 billion yuan, an increase of 12.1% year-on-year, and this growth rate was significantly slower than 18% in the previous seven months.

Yan Yuejin, research director of the think tank center of the Yiju Research Institute, told the Economic Observer that factors such as the decline in land prices and the decline in land transaction area are indeed easy to put pressure on land income.

Income from land transfer is an important support for local economic growth. In a report released in October, moody's, an international rating agency, argued that in recent years, more than 40 percent of government fund revenues, mainly from land transfers, have been used for local infrastructure projects. The slowdown in the real estate industry and the weakening of land transfer revenues will dampen local governments' infrastructure investment expenditures and weaken local government support for local state-owned enterprises such as urban investment companies, which are the main investors in infrastructure projects.

Does the decline in land transfer fees mean that land finances are facing new changes?

There are fewer land sales, and the "three guarantees" are facing challenges

The above-mentioned county-level financial source told reporters that this year's local non-tax revenue totaled about 1.2 billion yuan, of which net land income was 900 million yuan (in local finance, non-tax income generally includes fines and forfeiture income and land transfer income), according to this progress, it is difficult for land transfer income to reach 2 billion yuan this year, and in 2020, the local land transfer income is about 4.8 billion yuan.

The land transfer fee in the above-mentioned areas includes two aspects: one is the income from direct land sales; the other is the transaction of cultivated land indicators, which are generally indicators in underdeveloped areas and indicators in developed areas, and the red line of cultivated land cannot be touched. The region's arable land trading indicators have sold a lot, and this year's indicators are very few, and the provincial land development group has no indicators for acquiring land.

"On the 15th of this month, I don't know if I can pay my salary on time." The above-mentioned local financial source said that the city is now demolishing the eastern wall between counties and cities to supplement the western wall, so that the wealthy counties and districts can lend money to the counties and districts that cannot be sent down.

It is expected that due to the small income from land transfer this year, the fiscal gap at the end of the year may reach 1 billion to 2 billion yuan, which will directly affect the three guarantees.

The financial personnel calculated an account: in 2021, the available financial resources at this level are expected to be 4 billion yuan, the aggregate expenditure demand is 5 billion yuan, and the financial gap will reach 1 billion yuan. From the monthly ledger point of view, the rigid expenditure of the city at this level is 300 million yuan, of which the wage expenditure is about 200 million yuan per month, and the total amount of operation and social security is about 100 million yuan. The monthly income of the tax department is about 200 million yuan, only the "three guarantees" expenditure, the monthly treasury gap of about 100 million yuan, the pressure on the operation of the treasury is very large.

In fact, in April, the land has already judged that the land income in 2021 is facing challenges, when the number of land sold is only a few pieces, and the land has borrowed money from the city for several months, and then seconded from the platform, operating back and forth.

For example, a local industrial park, which previously invested 100 million yuan in financial funds, is now reported as a special bond project, issued special bonds, and replaced the previous financial investment.

What is important about land income?

According to the Economic Observer, as of late September, the land transfer income of a city in the east in 2021 fell by less than 5% year-on-year, but given the importance of land income, the change is still worth observing.

Moody's report shows that in 2020, land transfer revenue accounted for 29.2% of the total fiscal revenue of local governments in China, and the proportion of land transfer revenue to total fiscal revenue varies widely from region to region, ranging from 52.8% in Zhejiang to 3.8% in Tibet.

The impact of land transfer revenue in local finances is not only limited to the short-term balance of payments, but also affects many aspects such as local debt ratios.

The Moody's report argues that local governments may increase their dependence on debt financing by issuing local bonds, or rely more on urban investment companies to finance infrastructure and support the local economy, which will increase the level of direct debt and contingent liabilities of local governments. Failure to do so will weaken local economic growth.

A financial source at the eastern and municipal levels told reporters that from the perspective of the budget, the role of land transfer income has three aspects: first, it is the source of funds to support urban construction development expenditure; second, it is used to pay the interest of government special bonds, which lack a return guarantee in a considerable proportion; and it can once again be transferred into the budget to balance financial resources.

For many local governments, the income from land transfer has a more important role, that is, to reduce the debt ratio, that is, to expand the comprehensive income and make the denominator larger.

The debt ratio is one of the most important indicators of local government debt, which is the balance of government debt at the end of the year/ the comprehensive fiscal strength of the government. The so-called comprehensive financial resources of local finances are the revenue of the general public budget, the operating budget of state-owned capital and the income of government funds. Among them, the general public budget depends on the growth of tax revenues, the amount of state-owned capital operation budget is very small, and the government fund budget based on land transfer income is very operable.

The above-mentioned municipal financial source told reporters that because the debt ratio of the city where he is located is quite high, he transferred part of the land indicators for 2021 last year to expand the income from land transfer and reduce the debt rate.

The above-mentioned county-level financial person also agrees with this view, and he also believes that in addition to the debt ratio, it also involves the repayment of local debts locked in previous years, and the government at his level will take out funds from land revenue every year to repay debts. "Because of the reduction in land transfer income, there is no good way to make up for it now, and many of the project expenditures originally prepared must be reduced."

Reasons for the decline

Yan Yuejin analyzed that from the perspective of the reasons, the decline in land transfer income has a lot to do with the cooling of the housing sales market. Housing sales have cooled down, the financial pressure of housing enterprises has increased, and the willingness to obtain land is weak. In addition, credit has tightened, and housing enterprises will be more cautious in taking land. Over the past year, regulators have tightened financing in the real estate sector and developers have reduced their pursuit of scale in favor of cash flow. Significantly reducing land acquisition is also an important measure for housing enterprises to reduce debt.

Entering the second half of the year, the transactions of first- and second-hand houses in major cities across the country showed a sharp decline year-on-year, and Yihan data showed that the transactions of new houses in first-tier cities fell by 25% month-on-month and 42% year-on-year in September; the transactions of core second-tier cities, ordinary second-tier cities and third- and fourth-tier cities also fell by 22%, 40% and 31% year-on-year.

Moody's believes in the above report that the impact of real estate regulation measures combined with liquidity pressures will inhibit land transfer transactions. Regulators have tightened real estate financing and home purchase policies in the past 12 months, while Evergrande's financial crisis has increased liquidity pressure on developers, which will further pressure the real estate market.

On October 13, the second batch of centralized land supply in Beijing came to an end, with 17 of the 43 residential lands launched, with a cumulative transaction amount of 51.35 billion yuan, and another 26 lands with a total starting price of 86.9 billion yuan were postponed due to the lack of enterprise registration. In addition to Beijing, Shanghai, Hangzhou, Guangzhou, Chongqing and other cities that have completed the second batch of centralized land supply have also encountered embarrassments such as low participation of housing enterprises and a large number of streaming auctions.

As a result of all of these factors, cash-strapped developers are increasingly reluctant to buy more land, leading to a slowdown in land transactions in the primary market.

According to the Middle Finger Research Institute, the transaction price of the second round of centralized land supply auctions is an average premium of 4.6% over the cost of reserves, significantly lower than the average of 14.7% in the first round of auctions in May. Nearly 52 per cent of land auctions were cancelled, rescheduled or relegated, compared with just 6 per cent in the first round of auctions. Of the plots traded, three-quarters of the plots are sold at the reserve price without any premium.

What else can local finances do?

The above-mentioned municipal financial personnel frankly said that there is no better way to deal with the decline in land transfer income, after all, the house price is down, the land price is down, originally wanted to increase the unit price, now there is a limit on the unit price, the only thing that can be done is to cut the expenditure budget.

According to the reporter's understanding, the above-mentioned local governments are focusing on real estate and land tax clearance in order to increase revenue. On the basis of the early liquidation of real estate and land taxation, establish and improve the database of land and real estate tax sources, supervise and urge township streets and development zones to regularly carry out comparisons based on database information, strictly implement incentive policies, and strengthen the storage of taxes.

"We also found a very important change, this year's large enterprises pay a lot of taxes, the income situation in many places is better, because enterprises pay more taxes, and the growth of local income and financial resources is the dual drive of taxation and land." But if local governments don't have the support of particularly large enterprises and the land is not sold well, 2021 will be very, very sad. The above-mentioned county-level financial source said.