Local governments in China rely heavily on land revenue

Local governments in China rely heavily on land revenue


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. In 2022, the downturn in the housing market 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 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 37 percent of total fiscal revenue for all local governments in China in 2021.

In 2022, tightening restrictions on developers led to a record number of debt defaults and triggered the most serious housing slump in China since 1998. Local governments faced difficulty selling land; the total land sale revenue in 2022 dropped to 6.7 trillion yuan, a 23 percent decline from the prior year. Government land-related income decreased from 37 percent of total local government revenue in 2021 to 31 percent in 2022. Beijing responded by suspending financial restrictions on developers to spur the economy. But to avoid further downturns, serious reforms are needed to address local governments' deep connections with 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.

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