Description
China’s boom-and-bust housing market is partly driven by local governments’ heavy reliance on expanding the real estate market to provide a major source of income. Since 2022, the downturn in the housing market has hurt local government finances and exposed a vulnerable system in need of reform.
Chinese local governments create revenue from land through two channels: selling land usage rights and collecting land and property-related taxes. The first channel allows local governments to “rent” out land to buyers who have the right to use and benefit from it while the government still retains ownership. Skyrocketing land prices over the last two decades led to a ballooning property sector, helping local governments sustain their public spending. The share of land sale revenue in total local government revenue increased from almost 20 percent in 2012 (2.7 trillion yuan) to 30 percent in 2021 (8.7 trillion yuan).
Revenue from property-related taxes generated about 19 percent of total local government General Public Budget revenue in 2021, which pays for social programs. Combined, revenue from selling land use rights and collecting land-related taxes accounted for 38 percent of total fiscal revenue for all local governments in China in 2021.
Since 2022, tightening financing restrictions on developers has triggered the most serious housing slump in China since 1998. Local governments have faced difficulty selling land; the total land sale revenue dropped to 6.7 trillion yuan in 2022 and further down to 5.8 trillion yuan in 2023, a third lower than the peak in 2021. Overall government land-related income decreased from 38 percent of total local government revenue in 2021 to 27 percent in 2023.
Beijing responded by launching several rounds of stimulus measures but has so far failed to arrest the declines in land sales. Serious reforms are needed to address local governments' deep reliance on real estate. Local governments need more stable sources of income than land revenue to sustain their spending in the long term.
This PIIE Chart is adapted from Tianlei Huang’s Working Paper, Why China’s Housing Policies Have Failed. Produced and designed by Nia Kitchin.
