In recent times, the land market has been quiet for many years, the core of the first and second tier cities ushered in a long time “king tide”, the price of the land king, the premium rate of the stage record has been refreshed time and time again, vaguely revealing the real estate market stabilized signals.

Land market partial warming, on the one hand, means that the previous package of real estate incremental policies began to show results, real estate enterprises land confidence and market expectations are recovering; on the other hand, the local government took the initiative to adjust the land supply strategy, focusing on the launch of the core area of high-quality plots of land, and the release of the price limit, the floor area ratio and other multiple restrictions, stimulating the leading real estate enterprises to fill the warehouse willingness.

But the partial warming of the market does not mean a substantial reversal of the land market. Since 2021, the national land premium revenue reached a high point of 8.7 trillion yuan, and since then, the national land sales have declined sharply for three consecutive years, and by 2024, the land premium revenue fell to 4.87 trillion yuan. In particular, some second-tier cities and most third- and fourth-tier cities will face the pressure of digesting stock for several years to come, as the commercial housing market is saturated or even oversupplied due to the previous oversupply of residential and commercial land. Last year, the Ministry of Natural Resources issued a notice requesting a moratorium on the sale of new commercial residential land for cities with high inventory pressure and a depolymerization cycle of more than 36 months, further exacerbating the pressure on land finances.

In the real estate market depth adjustment, market supply and demand has undergone significant changes in the present, the local land financial dependence in the passive gradually weakened, how to make up for the financial gap, land finance, where to go from here, has become the urgent need to crack the problem.

Sharp decline in land transfer revenue

Land finance under pressure

In line with the development cycle of the real estate market, the land market in recent years has also ushered in a cyclical adjustment. 2015, the national land transfer revenue of 3365.7 billion yuan, followed by six years of rapid growth, reaching a peak of 870.51 billion yuan in 2021. 2021 after the real estate market entered a downward cycle, the impact of the land transfer revenue also appeared for three consecutive years of the cliff-like declined, shrinking to RMB486.99 billion in 2024, a 16% year-on-year decline, and a 44% drop from the high point in 2021.

In terms of the scale of land transfer revenue in 2024, the top ten provinces are Jiangsu, Zhejiang, Shandong, Sichuan, Shanghai, Guangdong, Hubei, Beijing, Fujian and Guizhou in order. From the perspective of revenue growth rate, among the 29 provinces that have released data, 22 provinces have negative growth in land transfer revenue in 2024, especially some large economic provinces with significant decline in land transfer revenue. Among them, Jiangsu slid 23.3%, Zhejiang slid 27.0%, Guangdong slid 28.9%, and Hunan slid 36.1%.

If compared with the historical high point of each province, 12 provinces land revenue fell by more than 50%. Among them, the largest drop of 83.4% in Qinghai, 72.8% in Heilongjiang, 68.1% in Gansu, 66.2% in Guangdong, 64.7% in Yunnan, 63.0% in Shanxi, 59.5% in Hunan and 58.0% in Henan.

In the first quarter of this year, stimulated by a series of regulatory policies, the land market as a whole showed a warming trend. The country realized 0.58 trillion yuan of land premium revenue, up 11.33% year-on-year, with an average premium rate of 9.81%, up 5.47 percentage points compared with the same period in 2024. Looking at the national market, regional differentiation was obvious, with first-tier cities and key second-tier cities excelling, with Beijing, Hangzhou, Shanghai, Chengdu, and Suzhou ranking in the top five in terms of land sales, with sales amounting to RMB 62.314 billion, RMB 50.285 billion, RMB 27.194 billion, RMB 25.334 billion, and RMB 14.832 billion, respectively. The overall third- and fourth-tier cities were weak. However, among the third- and fourth-tier cities, Nantong, Jinhua, Changzhou, Yangzhou, Wuxi, Jiaxing and Wenzhou in the Yangtze River Delta city cluster were active, while land transactions in cities in the central, western and northeastern regions continued to weaken. Among all prefecture-level cities, nearly 80% of them received less than 1 billion yuan in land premium revenue in the first quarter.

Despite the decline in fiscal revenues, the rigid expenditures of local governments have not been reduced, but rather increased in some areas, such as social security expenditures, debt payment expenditures and other rigid expenditures. This has led to greater pressure on local governments’ fiscal expenditures, especially when large-scale infrastructure development and public service provision are required, and local finances are stretched. Reduced fiscal revenues, increased pressure on expenditures, pressure on debt repayment, widening of the gap between fiscal revenues and expenditures, increased difficulty in financing, and economic restructuring are pressures that not only affect the fiscal revenues and expenditures of local governments, but may also have far-reaching impacts on local economic and social development.

Land fiscal dependence passively weakened

Land finance dependence has also changed significantly due to the decline in land grant revenue and other factors. From the overall data, in 2021, the national land transfer revenue is 870.51 billion yuan, government fund revenue is 980.24 billion yuan, and general public budget revenue is 202,539 billion yuan, so if we calculate the land finance dependence degree according to the “land transfer revenue/(government fund revenue + general public budget revenue)”, then the In 2021, the land finance dependence degree is 28.96%; by 2024, the national land grant revenue is 4869.9 billion yuan, the government fund revenue is 6209.0 billion yuan, and the general public budget revenue is 219,702.0 billion yuan, which corresponds to the land finance dependence degree of 17.28%. The overall level of land finance dependence decreased by 11.68 percentage points in three years.

In terms of provinces, Jiangsu, Guizhou, Hubei, Chongqing, Sichuan, Fujian, Zhejiang and Shandong have relatively high dependence on land for local finances; some provinces and municipalities have low dependence on land finances and positive year-on-year growth in land transfer revenues, such as Heilongjiang, Xinjiang, Ningxia, Yunnan and Tianjin.

In 2020, southern provinces (e.g. Jiangsu, Zhejiang, Hainan, Sichuan, Fujian) generally have a high degree of dependence on land finance, with some provinces accounting for more than 50% of government fund revenues from land concessions, while northern provinces (e.g. Shanxi, Heilongjiang) have a low degree of dependence, relying mainly on general budget revenues. Entering 2024, the overall land finance dependence of provinces declines, but regional differentiation intensifies. For example, provinces that have traditionally relied on land finance, such as Jiangsu and Zhejiang, are significantly less dependent due to declining land transfer revenues. Only a few cities, such as Fuzhou and Jinan, saw their dependence rise against the trend.

Sub-city view, core city dependence plummeted. First-tier cities land finance dependence is generally less than 25%, Shenzhen is even as low as 2%; second-tier cities intensified differentiation, only a few cities dependence against the trend of growth, second-tier cities in Hangzhou, Nanjing and other dependence fell to 30% to 50%, compared with the high level of 2020 obvious contraction. Among the third and fourth tier cities, Wuhu, Guang’an, Yibin, Yichang and other prefecture-level cities, the ratio of land transfer revenue to government fund revenue is still above 70%, which has become a typical representative of the highest dependence on land finance.

It is worth noting that there is a strong correlation between administrative level and fiscal structure. Among the four municipalities directly under the central government, Beijing and Shanghai, relying on their strong industrial base, maintain the proportion of land transfer revenue in government fund revenue at 15% to 20%, while Chongqing, due to its special geographic and economic conditions, has long been above 50%. The group of sub-provincial cities showed a differentiated trend, with economically strong cities such as Shenzhen and Guangzhou maintaining 30% to 40%, and central and western cities such as Wuhan and Xi’an generally exceeding 60%.

Path to break the dependence on land finance

With the cyclical adjustment of the real estate market, the demand for land for commercial housing is gradually weakening, and the size of the land market will be further compressed. How to make up for the financial gap left by land finance has become an urgent problem to be solved. Combined with local practice and advice from experts, the feasible paths are as follows:

First, stabilize the real estate market fundamentals. The era of high-speed real estate growth has ended, but it does not mean that the real estate market demand has dried up. China’s new urbanization still has a lot of room for development, rigid housing demand and improvement of housing demand is still strong. There is still a large gap in housing demand in first-tier cities and strong second-tier cities due to the continuous inflow of population. Previously, due to the implementation of restrictive measures such as price limit, area limit, plot ratio limit and other restrictive measures in the land transfer, the market is seriously short of medium and high-end residential and “good house” supply, with the introduction of the “good house” standard and the further lifting of various restrictive measures, the demand for improved housing is urgent, and the demand for “good house” has become very strong. With the introduction of “good house” standards and the further lifting of various restrictive measures, there will be an urgent demand for improved housing and a strong demand for land for “good houses”, which will effectively support the land market. As real estate enters the era of inventory, a large number of old districts and dilapidated buildings need to be renewed and renovated, and a large amount of commercial and industrial land needs to be revitalized, which are all new growth opportunities for the land market in the future. After three years of market adjustment, real estate development investment, commercial property sales and other indicators will be effectively supported within a reasonable range and stabilized, land transfer revenue is still an essential source of fiscal revenue for local governments.

In 2025, the central government will “continue to use land to promote the stabilization of the real estate market” as an important goal of the economic work, and introduced a package of incremental policies, the policy effect began to appear, but to achieve the stabilization of the real estate market will require greater policy support. In stabilizing the real estate market, yuekai securities chief economist LuoZhiHeng suggestion, to be taken as soon as possible to protect supply, promote demand and stabilize house price initiatives, vigorously revitalize idle land and acquisition of stock for security housing, first-tier cities as soon as possible to launch high-quality commercial housing in the core, to meet the residents of the multi-level housing demand. Central level can be set up “real estate stabilization fund”, the size of 2 trillion yuan or so, specifically for the delivery of the building, storage inventory and housing enterprises stock of unused land, etc., and at the same time alleviate the pressure on the local government to stabilize the property market, to ensure the sound operation of local finances.

Secondly, actively resolve the risk of local debt. With the land finance dividend fading, relying on the land market mortgage debt and land sales revenue debt repayment model is difficult to continue, the local debt risk manifestation and the expanding demand for public financial expenditure contradictions highlighted. 28 March, the Ministry of Finance made public the latest local government debt balance, as of the end of February this year, the national local government debt balance of 49.29 trillion yuan, compared to the end of 2023, an increase of more than 20 percent. In terms of resolving local debts, on November 8, 2024, the 12th meeting of the Standing Committee of the 14th National People’s Congress passed the “6+4+2” trillion yuan local debt program, and the total amount of 12 trillion yuan has become the most powerful debt program in recent years. Through the implementation of the program, local government debt risk and debt servicing pressure has been effectively alleviated, the fiscal space has been released, and the local economic development momentum has been enhanced.

Again, through the expansion of new tax sources to crack the land finance dilemma. Local governments can combine industrial upgrading, asset revitalization and other multi-dimensional innovation to build a diversified tax system. In terms of industrial upgrading, focus on the development of artificial intelligence, new energy and other strategic new industries to expand new tax sources. For example, through the digital economy industry cluster in Hangzhou, the added value of the core industries of the digital economy will account for 27% of GDP in 2024, contributing more than 30% of the tax revenue; Shenzhen’s annual increase in revenue of about 1.2 billion yuan after the pilot carbon tax levy; Suzhou Industrial Park, through the cultivation of the biomedical industry chain, will see the tax revenue of the relevant industries increase by 23% year-on-year in 2024; Guizhou, located in the central and western parts of the country, is developing a characteristic tax source based on its resource endowment, and the tax revenue of the big data Guizhou, located in the central and western part of the country, has developed special tax sources based on its resource endowment, and the tax revenue of the big data industry has increased from 3.7% in 2018 to 11.2% in 2024, becoming an important tax source for the local government.

Finally, it is imperative to promote the reform of the fiscal and taxation system. In the long run, restructuring the local tax system through tax reform is an important part of solving the dependence of local land finance. Luo Zhiheng also gave good suggestions in the reform of the fiscal and taxation system: firstly, to collect part of the authority and expenditure responsibility to the central and provincial governments, including the upward transfer of social security, food and drug supervision and management, environmental protection and other affairs, to reduce the expenditure pressure of local governments; secondly, to coordinate the backward transfer of the collection link of the consumption tax and the gradual exchange and transfer of the tax to the local government, to supplement the impact of the downward trend of the revenue from land transfer on the local financial resources; thirdly, to improve the VAT offset chain, and gradually clean up the standardized and unreasonable VAT preferential policies. The third is to improve the VAT deduction chain and gradually clean up irregular and unreasonable VAT preferential policies; the fourth is to merge the urban maintenance and construction tax, education surcharge and local education surcharge into a local surtax; and the fifth is to explore the mechanism for dividing state-owned assets and their related revenues between the central government and local governments, so as to alleviate the local governments’ excessive reliance on land finance.