China property: tax authorities’ enhanced oversight of land-sale revenue seen as ‘mixed bag’, and runaway prices may drop

New means of collecting revenue from land sales in China aims to help central authorities better trace the flow of funds and defuse debt risks at local levels

Move means developers will have ‘less financial flexibility’ in buying land

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Under a revamped method of collecting land-sale revenue in China, central authorities will be better able to trace the flow of funds and defuse debt risks. Photo: Bloomberg

Published: 6:00pm, 8 Jun 2021Updated: 8:45pm, 8 Jun 2021

A new plan that will require land-sale revenue in China to be paid to and managed by tax authorities rather than local-level land departments will be a “mixed bag for China property”, according to analysts, as Beijing moves to stabilise runaway home prices and defuse local financial risks.

The revamped collection method, which will allow central authorities to better trace the flow of funds, will be rolled out in a pilot programme from July 1 in seven regions, including Shanghai, Inner Mongolia, Zhejiang, Hebei and Yunnan. And it will be extended nationwide from next year.

The arrangement will force property developers to make land-purchase payments directly to tax bureaus instead of land agencies, thus making it harder for local authorities to play with the funds, such as by using them to shore up indebted local government financing vehicles (LGFVs).

Money in tax administration accounts are generally under the central government’s oversight, and thus off-limits for local cadres to use directly. However, the new set-up does not change the fact that land-sale revenue still belongs to local governments, and Beijing will not take a cut.

The move follows last month’s symposium on work related to real estate tax reform and reflects the central government’s determination to both deflate the property bubble and tackle local implicit debt piles, which could be even higher than the confirmed size of 26 trillion yuan (US$4.06 trillion), the analysts said following last week’s announcement by the Ministry of Finance.

Citing the “mixed bag” implications, Raymond Cheng, head of Hong Kong and China research at CGS-CIMB Securities, said that land prices could be eased in the medium to long term, while a strict implementation of the new policy “will prevent developers from delaying payment of land premiums in the future by negotiating with local governments”.

“This means that developers will have less financial flexibility [in terms of] buying land,” he said.