Cash-strapped local governments in China artificially boosted their revenues last year by selling swaths of land to their own investment vehicles, an official think-tank said, raising concerns about the extent of their financial woes.
More than half of the Rmb2.2tn ($316bn) in residential property plot sales by local Chinese authorities in 2022 were made to local government financing vehicles (LGFVs), according to a report published last week by the Chinese Academy of Fiscal Sciences, which warned some transactions “might be fake”.
The report suggested local governments had overstated their revenue after LGFVs, which are responsible for financing infrastructure construction, stepped in as the biggest land buyer. “Local authorities have a strong incentive to sell assets at inflated prices or have LGFVs purchase land to artificially prop up fiscal revenue,” the think-tank said.
Land sales are a crucial source of revenue for China’s local governments, which are responsible for everything from roads to healthcare and education but whose budgets have been hit hard by the Covid-19 pandemic and a property market crisis.
The report and the suggestion that LGFVs have helped prop up land sales suggest their financial challenges are more dire than even official statistics suggest.
Local governments reported the biggest decline in fiscal revenue in decades last year as Beijing’s zero-Covid policy stifled growth and forced them to foot the bill for mass testing and quarantines. Spending on healthcare added “significant uncertainty” to their fiscal budgets, the think-tank said.
“Local governments have run out of options to have a balanced budget,” said Bo Zhuang, a Singapore-based economist at asset manager Loomis Sayles.
Income from land sales, the biggest source of the cash that local authorities raise directly, plunged 23 per cent in 2022 as debt-stricken private developers stepped back, home sales sank and Beijing tightened credit.
Local authorities have also faced a jump in outlay. Many have increased wages in an effort to stem corruption, with personnel expenses rising more than a third in the four years to 2020. “It is increasingly difficult to control government personnel spending,” the think-tank said.
Their budget problems are exacerbated by a surge in debt service costs. Interest payments accounted for 4 per cent of total fiscal income last year, up from 2.6 per cent in 2019, according to the think-tank. In under-developed western provinces local authorities were spending up to a third of income paying interest, it said.
“That has undermined fiscal sustainability,” the think-tank said.
This is the context in which many turned to LGFVs, long a tool for local authorities to raise money for infrastructure projects without having to take debt on to their own balance sheets
Official data show LGFVs accounted for a record 54 per cent of the total value of China’s residential land sales last year. The spending boom was fuelled largely by debt. Some cities then logged the sales in their books before refunding LGFVs so the latter could bid for land in future auctions, the report said.
“We were basically faking land transactions so our government budget would look good,” said an official in the central city of Zhengzhou, where LGFVs accounted for four-fifths of transactions in its latest land auction last month. “That will cause bigger pain in the long run.” The city of Zhengzhou did not respond to a request for comment.
Many LGFVs are ready to cut back on land purchases as they have made it a priority to pay down debt, analysts say. This year, Moody’s estimates that a record Rmb4.7tn in LGFV bonds will come due this year, up from Rmb3.7tn in 2021 and Rmb1.2tn in 2017.
“We are not going to bid for another plot until we reduce our leverage to a reasonable level,” said Li Wei, an executive at a Henan-based LGFV that spent more than Rmb300mn on land purchases last year.
