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Farmers dig a water well in a field that includes an abandoned building that was to be part of an amusement park called 'Wonderland', on the outskirts of Beijing on Dec. 5, 2011. Construction work at the park, which was promoted by developers as 'the largest amusement park in Asia', stopped around 1998 after funds were withdrawn due to disagreements over property prices with the local government and farmers. Local governments are often dependent on land sales to fund payments on a staggering 10.7 trillion yuan ($1.7-trillion) of debt. (DAVID GRAY/DAVID GRAY/REUTERS)
Farmers dig a water well in a field that includes an abandoned building that was to be part of an amusement park called 'Wonderland', on the outskirts of Beijing on Dec. 5, 2011. Construction work at the park, which was promoted by developers as 'the largest amusement park in Asia', stopped around 1998 after funds were withdrawn due to disagreements over property prices with the local government and farmers. Local governments are often dependent on land sales to fund payments on a staggering 10.7 trillion yuan ($1.7-trillion) of debt. (DAVID GRAY/DAVID GRAY/REUTERS)

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Debt worries grow as China land sales slump Add to ...

Land sales slowed sharply in China last year, according to a series of industry reports that highlight the deepening woes of debt-laden local governments who depend on land auctions as a crucial revenue source.



Nearly 900 land auctions failed last year, about three times more than in 2010, Centaline, a real estate company, said. Meanwhile government revenues from land sales fell 13 per cent in 130 major cities to 1.9 trillion yuan ($300-billion), according to the China Index Academy, a property research group.

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Official data about how the land market performed in 2011 will not be published until later this month, but the industry numbers leave little doubt that there has been a serious downturn since 2010, when land sales surged 70 per cent.



Although weaker sales were expected as a consequence of the government’s sustained campaign to cool the once-bubbly property market, the deterioration appears to have been quite sudden, accelerating at the end of the year.



Centaline noted that one-third of the failed auctions - when bids either failed to materialize or were too low - occurred in November and December alone. Huang Yu, vice-president of the China Index Academy, told state media that the national land market was entering a “deep freeze”.



Wen Jiabao, China’s premier, has repeatedly said that Beijing will not relax its clampdown on the property market until prices have returned to reasonable levels. Prices have started to edge down in recent months, but analysts think the correction will have to intensify before the government eases its restrictions.



The slowdown comes at an uncomfortable time for China’s local governments, hitting them just as the mountain of debt that they racked up over the past few years starts to come due.



“If this continues, it will be a major blow to the financial situation of the local governments,” said Ran Tao, an economic professor at Renmin University in Beijing. “They have become increasingly reliant on land sales for financing, especially for their investment in infrastructure and industrial parks.”



Local governments owed 10.7 trillion at the end of 2010, and 53 per cent of that must be paid back before the end of next year, according to the national audit office.



Analysts have said that the debt load is manageable - it amounts to just about a quarter of gross domestic product. But the shortfall in land revenues will make life more difficult for local governments.



Guan Qingyou, a researcher at Qinghua University, calculates that land sales formed 74 per cent of their revenue base in 2010, up from 10 per cent in the late 1990s. The central government has been gradually implementing tax reforms to give provinces and municipalities additional revenue channels, but direct transfer payments will be needed to plug most of the hole for the time being.



To try to revive land auctions, local governments have recently started to cut prices and break plots into smaller pieces.



However, some of their actions have also run contrary to Beijing’s cornerstone policy of building up more public housing for poorer citizens. The China Real Estate Information Corporation noted that several municipalities had suspended a requirement that developers buying land must also build a certain amount of affordable housing on it.



The decline in land sales revenue would have been even worse but for a commercial property market that has been much more robust than the residential market. But analysts warn a growing supply glut in the commercial sector could soon change that, adding to the headache for local governments.



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