Cross-posted from Investing in Chinese Stocks.
China Economic Weekly （中国经济周刊） and China Economic Research Institute （中国经济研究院）teamed up to study China’s 23 provinces’ exposure to land prices. Zhejiang topped the list as most exposed.
First some background. China $3 trillion local government debt stirs alarm
Analysts said this suggested China is not on a verge of a fiscal crisis – the figure is less than half the debt burdens in Japan and Greece where public finances are strained – but warned the world’s second-biggest economy needed to urgently reduce debt if it wanted to safeguard growth and financial stability.
This is especially because the long-awaited report showed some governments were using new loans to repay more than a fifth of their debt, and that authorities still relied heavily on selling land to pay off old loans.
…About 37 percent of debt owed by provincial, city and county governments are backed by land sales revenues, it said. Of all debt directly incurred by China’s central and local governments, 5.4 percent are overdue and have not been repaid.
A $6.8 Trillion Price Tag for China’s Urbanization
“Urbanization has relied on land conversion and land financing, which is causing urban sprawl and—on occasion—ghost towns and waste. Land conversion has added to inequalities and has fed social unrest among farmers whose land has been expropriated,” said Sri Mulyani Indrawati, managing director and chief operating officer at the World Bank, in a speech in Beijing on March 25. “In the future, a higher portion of local expenditures needs to be financed through local revenues, such as phased-in property taxes and adequate charges for urban services.”
…To date, China’s localities have turned to debt—often backed by land sales–to finance operations. The median debt-to-gross domestic product ratio of all of China’s 30-some provinces is 31 percent, with a high of 79 percent in the poor southwestern province of Guizhou, notes a March 25 report by Moody’s Investors Services. “Many provinces are reliant on land sales for a large portion of their revenues. While this revenue source has proven to be quite lucrative, it has also been highly volatile and therefore not a reliable source for debt repayment,” the report cautions.
Land sales and debt backed by land sales fuels urbanization which then fuels land prices. A virtuous cycle that turns vicious if it reverses and the cities haven’t moved on to a new revenue model.
Where Is China’s Debt Bomb Hiding?
A final concern is the degree to which provinces rely on land sales for their revenue. Again, Zhejiang, Jiangsu, and Chongqing are among the most dependent, with Fujian and Shandong rounding out the top five. (Tibet relies less on land sales than any other region in China.) “While this revenue source has proven to be quite lucrative, it has also been highly volatile and therefore not a reliable source for debt repayment,” warns Moody’s.
One way to make indebtedness less of a risk would be to allow municipalities or provinces to issue bonds, particularly to help cover infrastructure projects that may not provide returns for many years (to date, bond financing by local governments is largely barred). “It’s not fair if projects that will benefit future generations are funded only through the tax payments of the current generation. So it’s OK to issue some bonds but under strict conditions,” said Chinese Finance Minister Lou Jiwei at a recent conference in Beijing, reported China Daily on March 26.
In sum, many of China’s localities and provinces are heavily reliant on land sales for financing both their operations, which includes urbanization drives that lift GDP, as well as debt repayment. The new report, below, shows that the places most reliant on land sales are also in several cases experiencing the largest housing bubbles.
Select parts of (Google Translated) article follows: 23省份土地财政依赖度排名：浙江依赖度第一
“Report” shows, from the “promised land revenue to repay the total debt,” the absolute value, such that the total debt, the rank order of Beijing, Zhejiang, Shanghai, Sichuan, Liaoning, Hubei, Guangdong, Chongqing, Shandong, Tianjin , Fujian, Jiangxi, Hunan, Anhui, Hebei, Guangxi, Heilongjiang, Shaanxi, Jilin, Hainan, Shanxi, Gansu, Jiangsu, unpublished data.
From the land of financial dependence, namely “land sinking in the government bears the responsibility to repay the debt in proportion”, the rank order of Zhejiang, Tianjin, Fujian, Hainan, Chongqing, Beijing (estimate), Jiangxi, Shanghai, Hubei, Sichuan , Liaoning, Guangxi, Shandong, Jiangsu, Anhui, Heilongjiang, Hunan, Guangdong, Shanxi, Jilin, Gansu, Hebei, Shanxi.
There are also at least 23 provinces, 1/5 of the repayment of the debt by selling land
Zhejiang, Tianjin, 2/3 of land revenue to repay debt depends
“Report” shows that 23 provinces, Zhejiang Province ranked first with 66.27%; ranked second in Tianjin, 64.56%. In other words, Zhejiang, Tianjin two governments bear the responsibility to repay the debt, the share has 2/3 of the land to repay depends.
Zhejiang Provincial Audit Department audit released announcement made clear that a higher reliance on debt repayment local land revenue. By the end of 2012, Zhejiang province, city and county government bears the responsibility to repay the debt, the promised land transfer revenue sources for the debt service debt balance was 273.944 billion yuan, accounting for city and county levels of government bears the responsibility to repay the balance of 413.391 billion yuan of debt of 66.27%.
Zhejiang is ground zero for the housing bust. Hangzhou is in Zhejiang. The city I posted on yesterday, Yuyao,where home prices are sinking fast is in Zhejiang. Ningbo, home to the bankrupt developer Zhejiang Xingrun, is in Zhejiang. In a bit I’m going to post a news story on Haining, just north of Yuyao, which reportedly has 8 years of housing supply.
What happens if real estate prices don’t recover and/or land sales dry up? Bank loans? Central government aid? That works if the real estate slowdown or a real estate crash is temporary. If it is long-term, Zhejiang faces much higher debt servicing costs. If the late 1990s early 2000s are a model (when the central government bought up the bad debt from the banks and recapitalized them), maybe the central government will take up all the debt and then reissue it as muni bonds that each province must repay, then sell them off to private investors, creating a muni bond market.
Top-ranking Beijing ranked first in absolute “commitment to the land transfer income to repay the total debt”, but did not give its statistical deadlines in the same relative ratio of the total debt. In recent years, Beijing’s land kings continue to emerge, according to the Beijing Municipal Audit Bureau, as of the end of 2012, the size of their land revenue used to repay debt reached 360.127 billion yuan, ranked first in 23 provinces. As of June 2013, the Beijing Municipal levels of government debt outstanding was 649.6 billion yuan, the average annual growth of 33% in the last three years. Accordingly, estimates that by the end of 2012, the size of local government debt at 600 billion yuan in Beijing should be up and down, sinking land that Beijing’s share in the overall debt should be 50% to 60%.
The smallest proportion of the three provinces, namely Gansu (22.4%), Hebei (22.13%), Shanxi (20.67%). This means that even a small degree of dependence on the land sinking provinces, but also at least one debt 1/5 to rely on the land to repay.
These last three provinces are not economic leaders at the moment. Shanxi was, but coal prices have cratered. Hebei and Gansu are underdeveloped.
There is one bright spot in the report:
However, Guangdong exception. Large-scale land insolvent Guangdong, ranked No. 7, but the land sinking ranked 17th in the proportion of the entire debt. It is understood that the total economy of Guangdong ranked first in the country long-term, well-developed private economy, especially the real economy developed, effectively easing the finances of local government land hunger.
Why isn’t Guangdong in trouble? Maybe because their highest ranking official was Wang Yang, who is expected to rise into the Politburo Standing Committee on the next go around. He guided the province to greater economic freedom until being promoted to Vice Premier in 2013. He was praised for his “Guangdong Model” and has said, “We must hasten the development of small government and a great society.” That smaller government didn’t require as much reliance on land sales.
