Chinese Land Sales Falls Significantly, Deepening Local Government Debt Stress

By Fran Wang
Fran Wang
Fran Wang
January 15, 2022 Updated: January 15, 2022

Chinese government land sales fell significantly through 2021, reversing a six-year streak of gains, as a cash crunch gripped the country’s most indebted developers and worsening local governments’ debt stress.

Land sales in 2021 declined over 20 percent on average from a year earlier, with a deeper fall in the main development force of second- and third-tier cities, where sales shrank 25 percent, according to a report released Wednesday by China Real Estate Information Corp (CRIC), which tracks auctions across 300 Chinese cities.

Municipal governments in China have been under heavy economic stress, not only exacerbated by dramatic defaults of homebuilders such as Evergrande, but weighted down by sluggish land sales. Land sales account for an estimated one-third of cities’ fiscal revenue, according to S&P Global Ratings.

The economy of once coal boomtown Hegang, Harbin Province, has been on the ropes for years. On December 23, officials announced the city has frozen hiring and begun fiscal restructuring.

In Shaoyang, Hunan province, officials have auctioned off Evergrande projects in bids to raise money, claiming that neither the government nor Evergrande had money.

Faced with slowing home sales, limited funding options, and rising borrowing costs, many Chinese developers opted out of refilling their land banks last year.

While Beijing is fine-tuning its crackdown on the real estate industry and called on banks to help ensure the sector’s “steady and healthy development,” it has thus far had little effect for market momentum to revive.

Chinese developer Shimao, holding an investment-grade credit rating until a couple of months ago, had put its projects up for sale last week to avoid default.

In December, two major defaults occurred among China’s debt-ridden developers, with Evergrande and Kaisa both missing bond repayments totaling about $500 million.

Land-related development has driven growth in the past but may have fostered debt-fueled investments for those financing vehicles.

As S&P Global Ratings estimated, the outstanding debt from China’s local government financing vehicles (LGFVs) amounted to 43 trillion yuan ($7 trillion) at the end of June 2021, equivalent to nearly half of China’s gross domestic product, with $1.6 trillion of debt maturing this year.

The funds are not included in official balance sheets but are treated in the same way as a government liability by financial markets.

Goldman Sachs reckoned that the total debt of local government financing vehicles rose to about 53 trillion yuan ($8.2 trillion) at the end of 2020, larger than the amount of official outstanding government debt.

These LGFVs are companies set up by governments that raise funds and pay for various projects. They were created during the global financial crisis of 2008 to let local officials evade a central ban on direct borrowing by local governments, enabling municipalities to raise debt quickly for economic stimulation.

Many of them hold assets of dubious quality: highways to nowhere, empty airports and hotels, sprawling shopping districts, and amusement parks.

In Lanzhou, capital of Gansu Province, 14 billion yuan ($2.2 billion) of LGFV bonds are coming due this year, accounting for almost half of the city’s 2021 fiscal revenue, said S&P.

In an April document, the Chinese regime suggested that LGFVs should be allowed to go bankrupt if they lose their ability to pay.

Fran Wang