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The China real estate collapse leads to a hard landing scenario is getting scary, but I think it's mostly a problem for hard pressed local governments
12/08/2011 4:11 pm EST
The Financial Times reports that Guangzhou, China’s third largest city, has cancelled or scaled back land auctions four times last month.
If you’re worried that Beijing’s moves to slow growth in order to control inflation may have gone too far, this isn’t good news.
One scenario for a hard landing that takes growth in 2012 way below the current consensus projections of 8% or so has a collapse in the real estate sector stalling the economy and leading to a huge retrenchment by banks and local governments. Land sales account for about 40% of local government revenue in China. Local governments use the money to finance large infrastructure projects. No land sales, no revenue, no infrastructure spending. Falling land prices would be a big bad deal for banks, which typically have accepted land as collateral for loans to local governments.
In the first nine months of 2012 the Guangzhou government collected just $2.2 billion in revenue from land sales. That is just a bit below the target of $7.8 billion for 2011. The government raised $7.1 billion from land sales in 2010.
Last week, the government of Guangdong province—Guangzhou is the provincial capital—estimated that the debt owned by its city and county governments at the end of 2010 was $117 billion. Nationwide, Beijing estimates that local debt at the end of 2010 was $1.7 trillion.
Beijing could fix this problem, short of a financial crisis, with structural reform to the way that China collects taxes. Most locally collected taxes—such as the VAT (value-added tax)—go straight into the treasury in Beijing. Last year more than 60% of the taxes collected by Guangzhou went to Beijing.
But rather than handing local tax revenue back to local governments, Beijing has decided that the solution is to let local governments sell bonds. In November Guangzhou sold about $1 billion in bonds as part of a pilot project that has let a few cities issue debt for the first time since 1994.
More debt. That’s the fix?
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