Page 38 - The South China Business Journal

c OMMUNITY NEWS

Propping Up Prices? Assessing

the Role of Local Governments in

China¡¯s Real Estate Market

By the Stanford Center on China¡¯s Economy and Institutions (SCCEI)
onventional supply and demand dynamics
Csuggest that when demand for housing
declines, so should prices. But in China, where
local government balance sheets are uniquely
intertwined with the property market, stable land
prices may be important for local governments
to roll over existing debt and secure new debt
financing. During the pandemic, China saw a
massive drop in housing demand, yet prices did
not fall in parallel. What happened?
The data. The researchers analyzed trends in land
and housing sales volume and prices across 173
Chinese cities from 2017 to 2022, comparing cities
with different levels of fiscal dependence on land Land price and sales growth (2017?2022)
sales and land-backed debt financing over time.
The dataset includes 104,070 land transactions critical role in rolling over debt and securing new
from the China Land Market website and city-level financing. Remarkably, land prices kept rising during
new housing unit transactions from the China Real this period. Even in 2022 when zero-COVID policies
Estate Index System (CREIS). Economic indicators, were most stringent, prices rose 1.2%, reaching
including GDP growth, inflation, and fiscal deficits, 16.4% higher than in 2019. A similar divergence in the
come from the Qiyeyujingtong and China Stock sales volume and prices for housing also occurred in
Market & Accounting Research (CSMAR) databases, this period: in 2022, housing sales were down 30.4%
which track financial and debt metrics across Chinese relative to 2019, but prices were 7.1% higher.
cities. To analyze the link between real estate prices
and financial markets, the researchers gathered Higher fiscal dependence on land sales means
information on bond market characteristics from the disproportionally higher land prices. In 2019,
Wind Economic Database. Annual housing sales and 38.1% of local government revenue came from land
developer balance sheets come from CREIS. sales. The analysis shows that cities with greater fiscal
dependence on land sales prior to the pandemic ABOUT US SERVICES
Land sales and local government finance. In China, saw a larger increase in land prices during 2021 and
land is state-owned, but ¡°land usage rights¡± are 2022, with a one standard deviation increase in land
transacted much like land sales. Local governments dependence leading to a 5.3% rise in land prices BUSINESS START UP
face the challenge of funding infrastructure and in 2022. Cities with higher LGFV debt burdens also Since 2003, CCA-IM (formerly China Centric Associates) has helped 300+ MARKET RESEARCH
other expenditures without collecting property or saw higher land prices than comparable but less North American companies and 40+ PE firms in over 500 projects to Starting and maintaining a Business CCA-IM can provide custom
develop and execute their business strategies in China and Asia in a wide
other local taxes common in advanced economies. leveraged cities. range of industries. Entity in China and Asia is different market research reports focused
Instead, they rely on land sales and land-based but we simplify the process! on the client's specific needs in
China and Asia.
financing for revenue. Since budget laws restrict
direct local government borrowing from banks, In addition to consulting and advisory, we can project manage the SUPPLY CHAIN MANAGMENT HUMAN RESOURCES
localities have created ¡°local government financing execution of your business strategy in China and Asia. CCA-IM is a US and
vehicles¡± (LGFVs). LGFVs are state-owned entities Asia-based team with offices in Cleveland, Ohio, China, Taiwan, and an CCA-IM can support your China and CCA-IM can be your extended
that use land as collateral to borrow from banks and office in Vietnam. Asia supply chain activities. Human Resource team in China
and Asia on an individual
issue bonds. This ¡°off-balance-sheet debt¡± surged projector ongoing basis.
in the 2010s as Beijing tacitly approved its use
for stimulus-driven development after the global OPERATIONS DUE DILIGENCE BUSINESS DISSOLUTION
financial crisis. Local governments, however, faced
increased financial pressure during the pandemic Our on-site team can review US CCA-IM has extensive
experience in dissolving foreign
target's China and Asia operations
due to slowing economic growth and the high costs including manufacturing, sales, and entities and is familiar with the
of enforcing strict health protocols. The researchers quality. changing dissolution
evaluated whether local governments intervened requirements.
in land markets to stabilize land prices given their Housing price and sales growth (2017?2022)
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