2014-04-15

Analysis of China's 23 Provinces Shows Housing Bubble Laden Provinces Are Most Reliant on Land Sales to Repay Debt; Zhejiang Tops the List

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.

Below is the full Google translated article:
" China Economic Weekly "and the China Economic Research joint research and publish: Which is more dependent on the provincial land finance?

"China Economic Weekly" reporter, Chinese economic researcher Liude Bing | authored

23 provinces "land finance dependence" ranking Overview

Beijing land total debt service first, Zhejiang dependence of the first

"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%.

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 Wang continue to emerge, according to the Beijing Municipal Audit Bureau, as of the end of 2012, the size of their land sinking up 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 County, 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.

Land sinking scale and proportion of the overall debt incomplete peer

Guangdong accounted for more than a small amount, less Hainan, a large proportion of the total

In absolute terms, 23 provinces, Beijing, Zhejiang and Shanghai need to rely on revenue from land sales to debt servicing debts top three, namely 360.127 billion yuan, 273.944 billion yuan, 222.265 billion yuan; land compensation debt is the smallest size in Jilin, Shanxi, Gansu, were 58.616 billion yuan, 26.894 billion yuan, 20.654 billion yuan.

"Report" shows that the size of the land and the land sinking in debt service accounted for the overall debt data presented in these two relatively close correlation: the size of the land sinking more than 100 billion yuan in the province, land sinking in the overall debt The proportion is higher. Because it is easy to sell, sell at high prices in order to ensure the solvency of land size, but also more dependent on the land. Zhejiang, Shanghai, Sichuan, Liaoning, Hubei, Chongqing, Shandong, the size of their land sinking columns 2 to 9, the overall proportion of their land sinking in debt were ranked No. 1,8,10, 11,9,5,13 bit. Beijing ranked first in the scale of land sinking, its proportion of the total debt of 50% to 60%, ranking higher.

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.

On the contrary, the size of the land sinking below the 100 billion yuan in the province, the land sinking in debt accounted for most of the entire row behind. But there are exceptions.

Despite the small size of land sinking in Hainan, only 500 billion, but the proportion of land sinking the entire debt was ranked 4th in. In recent years, Hainan's real estate market is very hot, especially in the international tourism island , driven by the concept of social and economic development of Hainan Island high degree of reliance on the real estate industry, this situation is also reflected out of the land on Hainan debt tables.

Guangxi scale land sinking only 700 billion yuan, ranking the 16, but the land debt service ratio as high as 38.09%, ranked 12. Further analysis found that, on one hand, the whole place Guangxi smaller debt, as of the end of 2012, the Tibet Autonomous Region (excluding towns) only 190 billion yuan, ranking in the middle of all the provinces on the list, below average; another On the one hand, Guangxi local debt structure, the main local government debt grew at city level, and Guangxi in debt payments, land purchasing and storage spending big in the actual economy, local government investment in land purchasing and storage of large, will be particularly dependent on revenue from land because the land as government funds fiscal revenues, the main beneficiary of that is the city level and county-level governments.

This directly shows that the more dependent on local land finance, will inevitably push to increase the size of the land, as well as the introduction of high-priced land. As early as in 2010, one of the king Nanning floor price broke through the 10,000 yuan / square meter.

6 Report of the land outside the province dependence How?

Irregularities in some areas using BT (build - transfer) mode

Except these 23 provinces listed, Henan, Guizhou, Inner Mongolia, Ningxia, Qinghai, Yunnan these six provinces, and 23 provinces are not part of the statistics provincial, municipal and county governments, if the land does not exist solvency problem?

"China Economic Weekly" reporter interviewed found that since last year, Henan, Guizhou, Yunnan and other places, land sales situation is very active. Zhengzhou had appeared in several cases a king-level plots; while in Henan Nanyang, Xinyang, and Kunming, Yunnan and other places, have appeared since last year over land disturbance.

On the other hand, "China Economic Weekly" reporter from six provinces in the audit report found the place where land-related debt has been manifested in the form of a face-lift. Such as Guizhou Province audit found that some local violations by BT (build - transfer) mode, to non-financial institutions and individual borrowers, etc. borrowing government debt 40.064 billion yuan, as Xiuwen County Urban Construction Investment and Development Co., Ltd. to sell the land with the expected sources of income as the debt service fund, investment cooperation were signed BT mode 1.202 billion yuan framework agreement with four companies. Henan, Yunnan, Inner Mongolia and other places, there is also a large real situation with land revenue "disguised" to repay local government debt.

Background Report

The past 20 years, with the rise and development of Chinese real estate industry, aspects of China's urban construction, local government funding, quality of life, economic development in rural areas around the city, gained rapid development and greatly improved. Which is the direct contribution of land finance. Land of local government finance new and important source of revenue for urban social and economic development has played a positive role. At the same time, some local governments for economic growth and fiscal revenue considerations and the pursuit of the double, to varying degrees to a "land impulse", which over-reliance on land expenditure finance, even as a place to land revenue The main channels of debt, that is currently being criticized by outsiders "Land fiscal dependency syndrome."

At present, for "over-reliance on local government bonds are financial as well as compressed land market regulation space, kidnapped Chinese economy "and other concerns, the public debate varies, but all the controversy is the lack of quantitative criteria, not a quantitative indicator.

Quantitative indicators is a necessary foundation to analyze and solve problems. Financial terms of the land, with specific quantitative data, you can more clearly understand and analyze the current situation and problems of land finance, in particular to accurately define and determine a reasonable degree of dependence between local debt and finance land for real estate and local policies provide analysis of major issues such as debt ideas and decisions.

Data sources report

From January 23, 2014, the provinces, autonomous regions and municipalities Audit Office (Office) published a succession provinces government debt audit results, which is the country's first centralized provincial audit department announced local bonds.

From the published audit report, the audit department of the provincial audit report on local government debt is basically used the same reporting format: mainly divided into "major initiatives in recent years to strengthen the management of government debt," "government debt scale and structural situation "," the province's government debt burden of the situation "," the main problem in the presence of government debt management "Four section.

In "The main issue government debt management exist," the forum, the main problem the audit department announced three, one government bears the responsibility to repay the debt faster growth, the second is part of the heavy debt burden of local and industry, three local government debt dependence on land revenue higher.

Among them, the third question, namely, "local government debt dependence on higher land revenue," the provincial audit report a problem most attention. According to statistics, 29 provinces (except Xinjiang, Tibet, Hong Kong, Macao and Taiwan) audit notice, when "The main problem in government debt management presence" in the introduction, there are 23 provincial audit department explicitly "local debt-dependent land income to repay "included.

23 provinces audit agency gives the end of 2012, "the land sinking in the government bears the responsibility to repay the debt in proportion" of the specific numerical values ​​or estimates related items are available. This value reflects the proportion of land in the local government debt in the financial, but also reflects the degree of financial dependence of local governments on land. Therefore, we will audit report of "land sinking in the government bears the responsibility to repay the debt in proportion" as "land finance dependence."

Calculation of quantitative indicators report

"Land finance dependence," or "land sinking in the government bears the responsibility to repay the debt in the proportion of" value, which is calculated as follows: the total "commitment to the land revenue to repay all levels of local government debt" (ie numerator), divided by the "provincial cities and counties in three government bears the responsibility to repay the outstanding debt" (ie, the denominator) results.

Specifically, is, first, the delineation of the scope of the provincial audit department "is committed to the land transfer income to repay the debt," the local governments of the provinces and calculate the total. For example, Zhejiang was "provincial, municipal and county government," three levels of government; range Sichuan is "18 municipal, 111 county-level government" (ie, Sichuan Province, 21 cities (prefectures), 183 counties (cities, districts) , there are 18 municipal, 111 county-level government commitment to the land transfer income to repay the debt, others are not counted).

Secondly, the provincial audit department and then the statistics of the province, "provincial cities and counties in three government bears the responsibility to repay the outstanding debt" (there are very few provinces such as Sichuan, the provincial government statistical excluding debt statistics only two counties government).

Finally, will be divided over two statistics, namely, "promised land transfer income to repay the debt" divided by total "provincial cities and counties in three government bears the responsibility to repay the outstanding debt" to arrive "in the government debt-negative Land have the responsibility to repay the debt in proportion, "this value. That is what we call the "land finance dependence."

According to the audit report disclosed above provincial government audit departments and their associated data, "China Economic Weekly," China Economic Research Institute and published a joint study "of 23 provinces 'financial dependence on the land' Ranking Report" (the "Report" ).

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