China Squeezes $1.3 Trillion Revenue Earner to Cool Home Prices
(Bloomberg) -- China is widening curbs on the nation’s soaring home prices by temporarily halting land auctions in some major cities, potentially hurting a key source of cash for local governments.
Several large Chinese cities recently suspended centralized land sales, according to official notices, after attempts to limit the number of auctions per year backfired. China has also stipulated that the price premium for land should be capped at 15%, Citigroup Inc. analysts including Griffin Chan wrote in an Aug. 11 note after market rumors about the policy change.
Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry. Their most recent moves have included halting private equity funds from raising money to invest in residential property developments. Still, land sales generated more than $1 trillion in income for local governments last year, creating a sensitive balancing act for Beijing.
“The government is plugging loopholes in the land market, just like what it did with home-buying rules,” said Yan Yuejin, research director at Shanghai-based E-house China Research and Development Institute. “Before, some local governments raised asking prices for land plots to bypass restrictions on the land price premium; now that’s set to change.”
The land price premium is the extra amount paid by a developer over the government asking price, putting upward pressure on residential values.
Government efforts to cool the home market are beginning to have an impact. Major cities saw home prices grow at the slowest pace in six months in July, climbing 0.3% from June, National Bureau of Statistics figures showed Monday.
In recent weeks, cities including Qingdao, Tianjin, Shenzhen and Huizhou suspended centralized land sales, according to notices on land authority websites or transaction centers. Local governments earned 8.4 trillion yuan ($1.3 trillion) from land sales to developers last year, almost as much as the 10.1 trillion yuan raised mainly from other sources including sales taxes and personal and corporate income taxes.
The policies are in line with Vice Premier Han Zheng’s pledge to avoid using property as a tool to boost the economy. China has also tightened funding channels including bank loans and trust funding as part of a campaign over the past years to reduce risks.
But that commitment could be tested as China faces possible headwinds brought on by a flare up of Covid-19 cases in the nation. The blow to the world’s second-biggest economy from the delta variant outbreak deepened in the past two weeks, according to Chang Shu, Bloomberg chief Asia economist.
China has spent years trying to cool property prices, to little avail. The government needs to tread carefully as the real estate sector now accounts for 13% of the economy from just 5% in 1995, according to Marc Rubinstein, a former hedge fund manager who now writes about finance.
China’s intensified focus on real estate mirrors broader crackdowns on sectors seen as widening social inequities. As the economy slows, the policies underscore President Xi Jinping’s growing resolve to respond to mounting dissatisfaction with hoarded wealth and narrowing avenues for advancement.
“The aim of the government’s policy is to stabilize land and housing prices, instead of allowing market participants to gain additional profit,” Nomura Holdings Inc. analyst Stella Guo said in an Aug. 11 note.
Leading developers may benefit from any potential cap on land price premiums, according to Guo. Rather than by submitting higher bids, they can compete by touting their smarter planning and higher-quality construction, she said.
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