Page 39 - The South China Business Journal

LGFVs serve as agents for propping up prices. dependent on land sales prior to the pandemic, a
Before the pandemic, LGFVs acquired land at a one standard deviation increase in land dependence
steady rate each year. However, their land purchases was correlated with a 15.5% decrease in housing
increased by 3.6% in 2020, 6.1% in 2021, and a sales value for developers in 2022. In this way, price
striking 22.4% in 2022 relative to 2019, despite management by local governments appears to have
weakening private demand for housing. This prevented developers from lowering housing prices
evidence suggests that LGFVs stepped in to buy to sustain demand, furthering the financial distress
more land to keep land prices stable during the of developers, as evidenced by high-profile debt
pandemic era downturn. defaults by real estate firms, including Evergrande,
Country Garden, and Sino-Ocean.
At the same time, LGFV debt levels (leverage) also
increased. Compared to 2019, LGFV leverage grew Local government fiscal fix highlights deeper
by 1.2% in 2020, 3.1% in 2021, and 4.1% in 2022, problem. Driven by their dependence on land sales
reflecting their aggressive land acquisitions during and land-backed debt for fiscal financing, local
the pandemic. LGFVs also purchased more land governments appear to have played a crucial role
at higher prices than non-LGVFs, suggesting that in shaping China¡¯s real estate market. While past
governments actively managed land prices to protect research has pointed to overbuilding by developers
their debt financing strategies. and speculative homebuying, this study emphasizes
the role of local governments in driving excessive
Manipulated property prices help some local construction. As financial institutions extend debt
firms, hurt developers. Local government efforts secured by land values, local governments are
to prop up land prices had mixed impacts on local further compelled to manipulate land and housing
business. On one hand, firms using land with prices, exacerbating China¡¯s real estate challenges.
artificially high prices as collateral for bank loans The authors conclude that bailing out distressed
saw lower interest rates on their loans. On the developers may provide temporary relief, but a long-
other hand, the higher prices meant fewer buyers term solution requires restructuring local government
for real estate, which hurt developers that needed finances to reduce reliance on land sales and land-
to sell housing to repay their debt. Specifically, in collateralized debt as primary funding sources.
cities with local governments that were more fiscally

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