Hard Landing Ahead for China’s Local Governments?

March 1, 2013, 5:05 PM

Hard Landing Ahead for China’s Local Governments?

China’s use of land sales to fund local governments is no longer on such solid ground, according to a top legislator.

Just a few days ahead of the annual session of China’s National People’s Congress, which gets under way on Tuesday, Li Shenming vented his frustration with the government’s investment-driven economic growth policies and its reliance on selling land-use rights to fund local government operations.

He called for urgent changes and suggested that time was growing short for a policy shift.

“It’s getting so bad that if (local governments) don’t sell land, they can’t even pay salaries,” said Mr. Li, a member of the legislature’s Standing Committee, a grouping of its senior members.

“How long can this ‘land fiscal policy’ last? Another five years?” he moaned in front of an audience at a financial forum.

Local governments generally rely on land sales — and taxes on property transactions — for a hefty chunk of their revenues. That often makes them a reliable friend of property developers and makes them more than a little eager to eager to sell off land.

But that formula has been sorely tested as the central government continues itsprolonged clampdown on property speculation, banning purchases of multiple homes and squeezing credit to property developers. Revenue from land sales fell 14% nationwide last year, official data show, due to the central-government campaign.

The constant push for more land sales ensures lots of development projects – some of them of questionable economic value. It supports an economic growth model that relies on investment for economic growth, and has been widely criticized as one that won’t be sustainable over the longer term. And it often leads to forced evictions of farmers or urban residents to make way for development projects, at timesendangering social stability.

Mr. Li, who is also an economist and the vice president and deputy party chief of the Chinese Academy of Social Sciences, a top state think-tank, estimated that proceeds from land sales account for over 40% of revenue for most local governments.

Economists have called for broad reforms of China’s fiscal policies by giving local governments more authority in setting taxes, and allowing them to expand trial projects setting annual taxes on property values, rather than just property sales. The tax reform is currently being tested in Shanghai and Chongqing.

China’s legislators gather for a two-week session that generally is confined to endorsing policies set by Communist Party heavyweights but also allowing legislators to blow off a bit of steam. If Mr. Li’s pre-session outburst is an indication, land policies could be a steamy topic.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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