The Role Of Land Sales In Local Government Financing In China

Last month, China launched a national audit of the “land-transferring fees” collected by local governments in the past six years, which totaled RMB 15 trillion, or about $2.4 trillion. The fees—or in other words, the income from land sales—accounts for as much as 35% of local governments’ fiscal revenue in 2013, according to China Business News, a Chinese language finance newspaper in Shanghai.

But selling land is barely a sustainable source of income, as Beijing has set up a mandate to maintain at least 297 million acres of farmland to feed the world’s largest population; and with 334 million acres of farmland available today, there are limits to how much more can be sold.

In addition, local officials also rely on land sales and construction to achieve GDP growth goals, which could cause overcapacity and create so-called ghost towns (commercial or residential projects that have been built but no one is either leasing or buying). The residential housing market is already taking a hit now, and as Beijing reins in the shadow banking business, the financial condition of local governments’ is among the major risks of the Chinese economy, economists say. And that’s why the central government is leading the audit, which will serve as the foundation for rolling out further reforms on taxation and land management.

So to comprehend China’s effort to shift its land policies, one needs to understand how the current system works and what the challenges are. Ginger Zhe Jin, an economics professor at the University of Maryland, is conducting extensive research on the political economy of land sales in China. In this interview with CKGSB Knowledge, she walks us through the some of the issues within the current system and the pros and cons of potential solutions.

Read the interview on CKGSB.com