China’s property overhaul puts strain on local government income

In Beijing, officials were set to auction a plot of land worth at least US$1 billion, a potential windfall for the local government. However, only one developer showed up to bid, leading to the cancellation of the sale. This incident highlights the challenges faced by China's local governments, which have long relied on land sales as a significant source of revenue.

The revenue from these sales has been declining for years, but recent policy changes have exacerbated the situation. China has moved away from a system where developers collect money from buyers before finishing their homes, reducing the capital available to developers and making it harder for them to purchase land, which in turn cuts into a key revenue source for local governments.

Land sales in 70 major cities decreased by 36% in the week following the housing policy overhaul, and Goldman Sachs estimates that China's housing revamp will lead to a 30% drop in land sale revenues in 2026, deeper than the 17% annualized decline in the previous four years. Local governments have been trying to boost tax collections to compensate for the shortfall, including scrutinizing offshore income and selling special bonds.

However, the long-term solution may involve generating more sustainable revenue through taxes from growing industries and rising personal income, as well as securitisation of state-owned assets. This strain on local finances puts pressure on the central government to provide stimulus for the slowing economy. The crackdown on presales is an unprecedented challenge for developers, who rely heavily on proceeds from home sales, which made up more than half of builders' cash inflows at the market peak.

The new mechanism bans developers from withdrawing sales proceeds until the project is completed, causing a significant delay in receiving cash after purchasing land.