Fitch: China's Slowing Land Sales Pressure Sub-Nationals; But Impact Manageable

Fitch Ratings says China's local and regional governments (LRGs) will be able to manage the pressure on their budgetary performance caused by falling land sales revenue. 

Fitch expects the decline in land sales to have greater impact on the lower tier sub-nationals (prefecture or county level) than provincial ones because the former rely more on land sales revenue for their municipal infrastructure projects and debt servicing. But the impact is limited, because the proceeds attributable to LRGs from land sales after deducting costs showed less  volatility than revenue.

In 2013, revenue increased 43% compared to a year before, but the proceeds to LRGs after costs increased 26%; in 2014 revenue increased 3.1%, but proceeds after costs increased 19%.

Furthermore, Fitch expects the recent introduction of a CNY1bn LRG debt swap  programme and a CNY600bn quota for LRGs to issue bonds directly to partly neutralise the impact from slowing growth in land sales. This would ease LRGs' short-term liquidity pressure, and smooth out the volatility in their funding flow.

The Chinese government's total land sales revenue decreased by 21.6% in 4Q14 from a year earlier, compared with an increase of 40% in 1Q14. However, for the whole year the decline was less severe and there was a geographical divergence in 2014, with the land sales revenue in the relatively developed eastern region increasing 7.0%, but revenue in areas in western region that are less developed falling 2.6%.

By province, revenue fell in half of the provinces, including Liaoning, Hainan and Heilongjiang, while revenue rose in the other half of the provinces, including Beijing, Tianjin, Hunan and Shaanxi.