Abstract

With the reversal of supply and demand in the real estate market, the land market has been impacted since 2021. The national land transfer transaction value fell from 8.04 trillion yuan in 2020 to 5.06 trillion yuan in 2023, with a cumulative decline of 37%. Correspondingly, the land transfer income in government funds fell from 8.71 trillion yuan in 2021 to 5.80 trillion yuan in 2023. Since the second half of 2023, central and local governments have密集ly introduced a new round of policies to stabilize the real estate market, accelerating the construction of a new development model for real estate. Against this backdrop, what new changes have emerged in the overall situation and regional structure of the land market? Under the constraints of the downturn in the real estate market and the task of local debt resolution, how should the current difficulties in local finances be resolved? This article comprehensively reviews the new changes in the land market in 2024, analyzes the impact of the current downturn in the land market on local finances, and explores ways for the land finance to break free from difficulties from a long-term perspective.

I. Characteristics of the land market operation in 2024: low supply and demand, decline in both volume and price, regional concentration, and high inventory

1. Overall, the most prominent feature of the current land market is the difficulty in inventory reduction, especially residential land facing "supply and demand dilemma". On the demand side, the new round of inventory reduction policies in 2024 still need some time to take effect on the promotion of commercial housing sales, and the demand for residential land market remains relatively low. In 2023, the national land transfer area decreased by 19.0% compared to the peak in 2020; among them, the proportion of residential land transfer transaction area from 35% to 20.3%. Since 2024, although the second-hand housing market has been active, the sales of new residential buildings have not yet stabilized and rebounded, and the decline in land transfer payments continues to expand year-on-year. From January to May 2024, the land transaction payment of 300 cities decreased by 30.5% year-on-year, and the residential land transfer payment decreased by 38.3% year-on-year. On the supply side, under the requirement of "housing determines land", the supply of residential land has contracted. The inventory reduction cycle of commercial housing in first and second-tier cities has been extended, and the stock of residential land has continued to accumulate, with more cities slowing down the supply of residential land. Looking at the annual land supply plans disclosed by various regions, in 2024, the total planned supply area of residential land in 17 concentrated land supply cities decreased by 16.2%, among which the planned supply area of residential land in Nanjing, Suzhou, and Ningbo decreased by more than 50% compared to the 2023 plan, and the planned supply area of residential land in Guangzhou decreased by 34%.

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2. In terms of quantity and price, in 2024, both the land transaction area and the average price have declined, and the premium rate has been operating at a low level. First, the volume of residential land transactions has shrunk, and the failure rate is high. From January to May 2024, the transaction area of various types of land decreased by 18.7% year-on-year, and the reduction of residential land was more obvious, with a total transaction land area decreasing by 29.9% year-on-year. In 2023, the failure rate of residential land in 300 cities was as high as 17.2%, close to the high point of 19% in 2021. Second, the land transaction price has fallen, and the average premium rate has always been at the bottom. Since 2024, the sentiment in the land market has remained low, and in May, the average premium rate of various types of land was 1.8%, lower than the 5.9% of the same period last year.

3. Looking at the regional distribution, the scope of land acquisition has become more concentrated, and second-tier cities have given way to first-tier cities. Although the growth rate of land transfer payments in first-tier cities has been declining year by year, the negative impact on cities below the second tier is greater. The proportion of land transfer payments for residential land in first-tier cities among 300 cities increased from 10.9% in 2019 to 18.9% in 2023. From January to May 2024, the land transfer payment of various types of land in 35 large and medium-sized cities decreased by 30.1% year-on-year, with most cities such as Nanjing (-72.6%), Qingdao (-69.0%), and Tianjin (-52.5%) experiencing a significant year-on-year decline in land transfer payments.

4. Looking at the main body of land acquisition, the share of real estate companies in land acquisition has continued to shrink significantly. First, the high inventory of land in real estate companies limits the willingness to purchase additional land. In 2022, according to the National Bureau of Statistics, the area of land to be developed by real estate development companies reached 498 million square meters, a historical high; the proportion of land transaction payments by real estate development companies among various types of land transaction payments decreased from 23.0% of the previous year to 15.1%. Second, the pressure of debt and cash flow on real estate companies has increased, limiting their ability to acquire land. The current low real estate sales have not been fundamentally resolved, and the operating cash flow of real estate companies is tight. From January to May 2024, the land acquisition amount of TOP100 companies decreased by 26.7% year-on-year, and the land acquisition of leading real estate companies has generally shrunk significantly. Third, the development capacity of urban investment companies is not as good as that of real estate companies, and the start rate of land already acquired is low, making it difficult for urban investment to continue to support the bottom.

5. The downturn in the land market is expected to further reduce land finance revenue in 2024. Since there is a time lag for real estate to be transmitted to the land market, and the land transaction payment is paid in installments, it leads to the land transfer income that is collected into the treasury. According to the land transfer income payment into the treasury in the first four months, it is estimated that the national financial land transfer income in 2024 will be 4.70 trillion yuan, a decrease of about 1.1 trillion yuan, a year-on-year decrease of 19.0%.

II. Impact of the downturn in the land market on local finances: three major impacts

Since 2021, the decline in land revenue has lasted for a long time, the decline is deep, and the regional impact is great. "Land finance" has fallen into a dilemma, resulting in three major impacts: it has intensified the tight balance of local finances, the risk indicators of local debt have risen passively, and the stability of local financial operations has decreased.1. From the perspective of fiscal revenue and expenditure, the sluggish real estate market has led to a reduction in local financial resources, limiting the capacity for fiscal expenditure. On the revenue side, local finances have become less dependent on land finance and more reliant on transfers from higher levels, putting pressure on the central government. On the expenditure side, the difficulty for local finances to implement proactive fiscal policies has increased, affecting the achievement of some public policy goals. The direct allocation of net land revenue to education funds, agricultural and water conservancy construction funds, housing security expenditures, etc., has weakened the ability to support key livelihood areas, and government fund expenditures corresponding to land transfer income have been restricted.

2. Looking at local debt, debt risk indicators have been passively raised, necessitating appropriate adjustments to debt warning indicators and debt reduction cycles. Firstly, the decline in local financial resources has passively increased the visible debt ratio, which can easily exceed the risk warning line. In 2023, the visible debt ratio of all 31 provinces increased, which is significantly related to the explicitness of implicit debt, but the debt ratio increase is greater in areas with a sluggish land market. Secondly, the decline in government fund budget expenditures has increased the pressure of interest payments on visible debt. In 2023, in nine key debt reduction provinces such as Qinghai, Tianjin, and Inner Mongolia, the proportion of special debt interest to government fund expenditures exceeded 10%. Thirdly, the devaluation of land assets held by urban investment companies has increased the difficulty of refinancing. In 2023, the land assets of urban investment companies decreased by 34.5%, and the decline in asset quality will lead to an increase in the debt ratio and a decrease in credit.

3. From the perspective of grassroots operations, while the overall operation is stable and risks are controllable, some local grassroots financial security may face certain difficulties. Firstly, the retention ratio of land transfer income in county-level finances is relatively high, and the impact of the decline in land finance on grassroots government financial resources is relatively greater. Secondly, the decline in land transfer income at the city and county levels may lead to a decrease in the level of treasury security. Thirdly, the decline in land transfer income has led to some areas compensating for insufficient revenue through "arbitrary fees" and other means, which may damage the business environment and must be resolutely stopped.

III. Where will land finance go in the future? Five suggestions

The transformation of future land finance should focus on "solidifying the foundation, opening up sources, improving efficiency, reforming, and debt reduction" to create a combination of fiscal, financial, land, state-owned assets, and social security policies.

1. "Economic foundation solidification": In the short term, it is necessary to stabilize the real estate economy to alleviate the impact on local finances, and real estate policies should continue to ensure supply, promote demand, and stabilize housing prices. In the medium and long term, the role of fiscal support for scientific and technological innovation should be leveraged to promote industrial structure transformation, cultivate new tax sources, and promote the transformation of China's economy from debt and investment-driven to industry and technology-driven.

2. "Revenue source opening": Stabilize the macro tax burden, focusing on how to make up for the trillion-yuan gap in land revenue, including optimizing tax cuts and fee reductions, promoting tax cuts and fee reductions from focusing on scale to focusing on efficiency, expanding the scope of consumption tax collection and gradually decentralizing it to localities, exploring digital taxes, and adapting to the development of tax sources in the digital economy era.

3. "Streamlining and improving efficiency": Focus on increasing support for livelihood security and consumption, leveraging the multiplier effect of public service expenditure on expanding domestic demand, dynamically optimizing various fiscal subsidy standards and qualification screening mechanisms according to economic development conditions, cleaning up excessive livelihood commitments, and straightening out the pricing mechanism for quasi-public services. Strengthen expenditure efficiency performance assessment to improve fiscal expenditure efficiency.

4. "Debt reduction transformation": Reasonably balance short-term debt reduction with long-term development. For some local governments that are currently under great pressure to reduce debt, consider adopting three methods to alleviate local pressure and avoid liquidity risks: the central government issuing national debt to lend to localities, policy financial institutions lending to local governments, and continuing to issue special refinancing bonds. Adhere to the approach of "canceling a batch, integrating a batch, and transforming a batch" to continue promoting the transformation of urban investment platforms and further resolve implicit debt risks.

5. "Linked reform": Improve the government performance assessment system, promote a new round of fiscal and tax system reform, further clarify the relationship between the government and the market, and between the central and local governments. Establish a standardized capital budget and debt budget to solve the problem of local fiscal expenditure constraints and fundamentally ensure the stable operation of local finances.Risk Warning: The deterioration of new housing sales, the intensification of cash flow tensions for real estate companies, and the increased downward pressure on the land market; the operation of the land market since the beginning of the year is difficult to predict the overall trend for the whole year; some cities cannot represent the overall situation of the country.

Table of Contents

I. What are the new changes in the land market in 2024? Four characteristics

II. What are the impacts of the land finance dilemma on local governments? Three major impacts

III. How can land finance get out of trouble in the future? Five suggestions

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I. What are the new changes in the land market in 2024?

The difficulty in real estate inventory turnover and the land market, especially residential land, face the pressure of contraction on both the supply and demand sides. Since 2021, the real estate market and the land market have been trending downwards. In response to the impact of real estate, the central government proposed to accelerate the construction of a new model for real estate development, forming a new mechanism of linkage among "people, housing, land, and money". In the past year, the central and local governments have optimized real estate policies, and measures to ensure housing delivery and inventory reduction have been introduced intensively. However, the real estate market and the land market are still operating at the bottom. On the one hand, although the restrictions on demand in real estate policies have been reduced, the confidence of residents in buying houses and the willingness of enterprises to take land have not fundamentally improved. On the other hand, the change in land supply structure reflects the transformation of the economic development model, with industrial land and infrastructure land supporting the upgrading of manufacturing and the protection of people's livelihoods, and the supply plan for residential land is facing a reduction.

To avoid confusion, in this article, "land transaction price" refers to the amount of land transfer transactions, which is different from the "state-owned land use right transfer income" in the government fund budget (also known as "land transfer income"), which is the amount accounted for on a cash basis and entered into the national treasury. Generally speaking, the "land transaction price" counted by the natural resources department has a certain leading nature compared to the "land transfer income" counted by the Ministry of Finance. First, the "land transaction price" is slightly smaller in scope, including only the income from land bidding, auction, and listing, and agreement transfer, while the "land transfer income" also includes additional land price payments, land allocation income, and other income. Second, the "land transaction price" is paid in installments.

(1) Weakness in both supply and demand: demand is still relatively low, and supply restrictions are expandingOn the demand side, the stimulating effect of the new round of inventory reduction policies on commercial housing sales has not yet been reflected, and the demand for residential land market remains sluggish. Since 2021, the transaction area of residential land has shrunk, dragging down the growth of land transfer payments. According to statistics from the Ministry of Natural Resources, in 2023, the national land transfer transaction amount was 505.93 billion yuan, a decrease of 37.1% from the peak in 2020; the land transfer area was 2.55 billion square meters, a cumulative decrease of 19.0% from 2020. Among them, the transaction area of residential land (including comprehensive land) was 451 million square meters, a cumulative decrease of 56.3% from 2020, and the proportion of residential land in the total land transaction area decreased from 35% to 20.3%. In 2024, the downward pressure on the real estate market continues, with the cumulative year-on-year decline in the national commercial housing sales area and sales amount exceeding 20% from January to May; the price of newly built commercial residential and second-hand residential housing in 70 large and medium-sized cities fell by 0.7% and 1.0% respectively, both hitting a new high since 2015; the inventory reduction cycle of newly built commercial residential housing reached 22.1 months, also exceeding the peak in 2015. The decline in commercial housing sales has dragged down the demand for residential land, and the year-on-year decline in land transfer payments continues to expand. From January to May 2024, the land transaction amount in 300 cities decreased by 30.5% year-on-year, and the residential land transfer payment decreased by 38.3% year-on-year.

On the supply side, under the requirement of "land determined by housing", the supply of residential land in many first and second-tier cities in 2024 has decreased significantly. As early as 2017-2019, the supply of residential land was linked to the digestion cycle of commercial housing inventory, and five types of regulatory targets were implemented, restricting some third and fourth-tier cities with an oversupply of commercial housing. In 2021, 22 key cities implemented the "two concentration" system, limiting the number of residential land supply batches to no more than three times a year. At the end of 2022, according to the principles of "housing determined by people" and "land determined by housing", the land supply plan was linked to the operation of the land market, and it was necessary to refer to the transaction volume of residential land in the past three years. In 2023, the "pre-supply land list" system was implemented, and the land supply rhythm in various places could be flexibly adjusted according to market demand. At that time, the stock of residential land in many first and second-tier cities, including Guangzhou and Shenzhen, continued to accumulate, the inventory reduction cycle was extended, and the area where the supply of residential land slowed down began to expand. In 2024, according to the annual land supply plan disclosed by the land planning authorities in various places, the total planned supply area of residential land in 17 concentrated land supply cities decreased by 16.2%. Among them, the supply area of residential land in Nanjing, Suzhou, and Ningbo decreased by more than 50% compared to 2023; the supply area of residential land in Guangzhou decreased by 34.0% year-on-year, which was the first decline in the past five years.

(2) Both quantity and price fell: the transaction area and average price both declined, and the premium rate operated at a low level.

In 2023, the land transaction was "less quantity and higher price", and in 2024, the land transaction was "both quantity and price fell". In 2023, 18 out of the 22 cities that implemented concentrated land supply and concentrated announcement had canceled the land price limit, restoring the "highest bidder wins" model. Coupled with the impact of the increased proportion of transactions in high-quality plots in core areas, the transaction price of residential land in 2023 increased by 3.9% year-on-year, and the floor price increased by 7.1% year-on-year. In 2024, policy factors receded, land prices turned from rise to decline, and the market returned to "both quantity and price fell". From January to May, the transaction area of various types of land decreased by 18.7% year-on-year, and the average land price decreased by 14.4% year-on-year; the transaction planned construction area of various types of land decreased by 21.5% year-on-year, and the transaction floor price decreased by 11.6% year-on-year. The reduction of residential land was obvious, with the total transaction land area decreasing by 29.9% year-on-year, and the average land price of residential land decreasing by 12.0% year-on-year.

Land market sentiment indicators such as premium rate and flow rate show that the land market is still sluggish. First, the average premium rate of land transactions has been at the bottom since it peaked in April 2021. The land premium rate is the percentage by which the transaction price of land bidding exceeds the land cost price. In 2023, concentrated land supply cities successively canceled the land auction price cap, and the premium rate temporarily rebounded. However, since 2024, the overall land auction has been cold, and the average premium rate of various types of land transactions in 300 cities in May was 1.8%, far lower than 5.9% in the same period last year. Second, the flow rate of residential land remains high. In 2023, the flow rate of residential land in 300 cities was as high as 17.2%, second only to the peak of 19% in 2021. Although the adjustment of the pre-announcement system has increased the flexibility of land supply, the demand for land is cold, and the flow rate in cities below the second tier is high. From January to May 2024, the flow rates in first-tier, second-tier, and third and fourth-tier cities were 5.1%, 10.7%, and 25.4%, respectively.

(3) Urban differentiation: the regional scope of land acquisition is more concentrated, and the proportion of land acquisition amount in first-tier cities has increased.

Looking at the cities, the impact on the land market in cities below the second tier is greater, and the proportion of land transfer payments in first-tier cities has increased year by year. In 2021, the growth rate of land transfer payments in cities below the second tier turned negative first, and in 2022, the land transfer payments in first-tier cities also turned to negative growth. However, due to the relatively small decline in the land transfer payments of residential land in first-tier cities, the proportion of land transfer payments in first-tier cities has increased year by year, from 10.9% in 2019 to 18.9% in 2023. From January to May 2024, the land transfer payments for residential land in first-tier, second-tier, and third and fourth-tier cities decreased by 19.6%, 43.6%, and 36.8%, respectively. The proportion of land transfer payments for residential land in first-tier cities reached 18.9%, an increase of 3.6 percentage points compared to 2023.The current downward pressure on the land market is being transmitted from low-tier cities to high-tier cities. From January to May 2024, the land transfer payments for various types of land in 35 major cities decreased by 30.1% year-on-year. Specifically, among second-tier cities, except for Wuhan and Jinan which saw positive growth, the land transfer payments in Nanjing (-72.6%), Qingdao (-69.0%), and Tianjin (-52.5%) saw significant year-on-year declines. Among first-tier cities, Beijing's land transfer payments from January to May increased by 38.0% year-on-year, while Guangzhou and Shenzhen saw year-on-year decreases of -79.1% and -34.1% respectively, with only 2 and 1 residential land transactions completed.

(IV) Land Acquisition Enterprises: Real Estate Companies' Land Inventory for Development Reaches a New High, Reducing New Land Acquisition

The continuous significant negative growth in commercial housing sales and the difficulty in inventory turnover have affected the willingness of real estate companies to acquire new land. According to the National Bureau of Statistics, in 2022, the area of land for development by real estate development companies reached 498 million square meters, a historical high, indicating an increased difficulty in the turnover of existing land reserves. As a result, the area of new land purchased by real estate development companies has significantly contracted. In 2022, the land transaction payment was halved to 916.4 billion yuan, accounting for 15.1% of the total transaction payment, down from 23.0% the previous year. The land acquisition amount of the TOP100 real estate companies in 2022 decreased by 48.9% year-on-year. Although the decline narrowed in 2023, the sluggish real estate sales have not been fundamentally resolved. Since the beginning of 2024, the enthusiasm for participating in land auctions and acquiring land has been significantly insufficient among central enterprises, state-owned enterprises, and private enterprises. From January to May 2024, the land acquisition amount of the TOP100 companies decreased by 26.7% year-on-year, with leading real estate companies significantly reducing their land acquisition, such as Poly Development, China Resources Land, and China Merchants Shekou, which saw land acquisition amounts decrease by 72.0%, 64.7%, and 59.7% respectively compared to the same period last year.

The significant reduction in land acquisition scale by real estate companies makes it difficult for local urban investment companies to support the market alone. Over the past two years, local urban investment companies have frequently acquired land to support the market. However, due to their inferior operation and development capabilities compared to real estate companies, most of the land remains undeveloped. Moreover, under the requirement of local debt resolution, urban investment companies urgently need to activate existing assets, and there is uncertainty about whether they can continue to support the market. From January to May 2024, in the 22 concentrated land supply cities, the proportion of residential land acquisition amount by local state-owned capital was 20%, lower than 26% in 2023. Due to the lack of interested companies to support the market, the number and area of residential land listings in the first round of land auctions in various regions were relatively small. The residential land area introduced by Beijing, Shanghai, and Guangzhou from January to May only accounted for 9.7%, 5.5%, and 6.5% of the annual plan, respectively.

II. What impact does the land finance dilemma have on local governments?Nationally, in 2024, the Ministry of Finance disclosed that the revenue from the transfer of state-owned land use rights from January to April decreased by 10.4% year-on-year. Since the land transaction price has a certain leading significance relative to the land transfer revenue collected by the finance, it is expected that the national fiscal land transfer revenue will reach 4.70 trillion yuan in 2024, a decrease of 1.1 trillion yuan, a year-on-year decrease of 19.0%.

Locally, from January to April 2024, out of 31 provinces, 12 provinces experienced a year-on-year decrease in general public budget revenue. The general public budget revenue of three major economic provinces, Henan (-4.5%), Guangdong (-2.2%), and Fujian (-0.8%), saw a negative year-on-year growth, while Zhejiang (0.5%), Jiangsu (1.7%), and Shanghai (2.0%) saw slow year-on-year growth. Among the provinces that have announced the progress of government fund revenue, Jilin (-38.7%), Gansu (-37.6%), and Jiangxi (-21.0%) saw a significant year-on-year decline in government fund revenue. According to the land transfer transaction data from various regions, from January to May 2024, 27 provinces saw a year-on-year negative growth in land transfer price, with the number of provinces experiencing negative growth increasing by 4 compared to the whole year of the previous year. Fifteen provinces saw a year-on-year decline in land transfer price of more than 30%, with significant declines in Anhui (-60.7%), Guangdong (-57.5%), Guizhou (-56.7%), Sichuan (-42.7%), and Jiangsu (-42.6%). The continued sluggish land market, the "land finance" dilemma, will lead to an increased tight balance in local finances, a passive rise in local debt risks, and a decrease in the stability of local fiscal operations.

(I) Local Revenue and Expenditure: Tight Fiscal Balance

From the perspective of revenue, the sluggish real estate market has led to a decrease in local government land finance revenue, a reduction in available financial resources, and an increased dependence on central government transfers. Land transfer revenue is positively correlated with the fluctuations of the real estate market; the higher the dependence on land revenue, the greater the volatility of fiscal revenue. In 2022, national land transfer revenue decreased by 23.2% year-on-year, and continued to decline by 13.2% in 2023. Despite the land market having undergone more than three years of deep adjustments, land finance remains crucial for local governments. The national land finance dependence ratio decreased from 37.6% in 2020 to 26.6% in 2023, while the local land finance dependence ratio decreased from 54.6% to 41.7% over the same period, with four-tenths of local fiscal revenue still directly related to land. In some western provinces, although the scale of land finance revenue is not high, the dependence on land finance at all levels of finance is relatively high. For example, in 2023, Guizhou's land transfer revenue was equivalent to 9.2% of its GDP, ranking first in the country; Guiyang's land transfer revenue accounted for 56.6% of the two budget revenues, ranking first among all provincial capitals. If local governments overly rely on "land finance" and neglect the cultivation of new tax sources, local finances will lack a stable foundation for growth, which is not conducive to the stability of the public finance system.

Regionally, the decline in land finance revenue is "from north to south", with northern tail provinces falling first and then recovering, while southern economic powerhouses are still in the bottoming-out phase. Against the backdrop of the overall decline in the land market, there are also differences in the operating rhythm of land transfer revenue peaks and troughs among provinces. Northern provinces, especially those at the tail end, saw a general decline in the land market early on, with Tianjin, Shanxi, Henan, and Qinghai's land transfer revenue peaking as early as 2019, and Hebei, Inner Mongolia, Heilongjiang, Liaoning, and Jilin's land transfer revenue peaking in 2020, showing marginal stabilization or a narrowing decline in 2023 after years of decline. Southern provinces fell later, with Jiangsu, Zhejiang, Anhui, Hubei, Hunan, Fujian, Guangdong, and other southern provinces' land transfer revenue generally peaking in 2021, and still in the bottoming-out phase in 2022 and 2023. Since 2019, all 31 provinces have seen varying degrees of decline in land transfer revenue, with Guizhou (-8.8%) and Sichuan (-11.0%) seeing relatively small cumulative declines, while Yunnan, Heilongjiang, and Qinghai saw cumulative declines of up to 70%. In 2023, the decline in land transfer revenue in major economic provinces was significant, with Guangdong (-52.5%), Henan (50.4%), Shandong (-41.8%), Fujian (-41.4%), and Zhejiang (-37.6%) seeing cumulative declines of more than 30% from recent peaks.

From the perspective of expenditure, related expenditures arranged in the past based on land transfer revenue may be affected. As land prices fall and the profitability of land transfer decreases, local government expenditures are forced to tighten, and related livelihood and construction expenditures may decrease. First, the net land profit is directly allocated to education funds, agricultural water conservancy construction funds, housing security expenditures, etc., weakening the support capacity for key livelihood areas. Second, land transfer revenue is an important item in the government fund budget revenue, and its significant decline leads to a compression of government fund budget revenue, and a decrease in funds transferred to the general public budget. In 2023, the scale of funds transferred from the government fund to the general public budget in Guangdong, Shanghai, and Shandong decreased by -53.8%, -28.2%, and -17.9% year-on-year, respectively.

(II) Local Debt: Some Debt Risk Measurement Indicators Passively Rise

First, the local government debt ratio is passively raised, easily exceeding the risk warning line. In 2023, the explicit debt ratio of the 31 provinces all increased, with regions experiencing a sluggish land market seeing a larger increase in their debt ratio. Tianjin is the only province with an explicit debt ratio exceeding 300%, entering the red warning interval. Second, the decline in government fund budget expenditures and the relative rigidity of debt interest payments lead to a climb in the government debt interest expenditure ratio. In 2023, Qinghai, Tianjin, Inner Mongolia, and other 9 key debt-reducing provinces saw the ratio of special debt interest to government fund expenditures exceed 10%. Third, the devaluation of land assets increases the difficulty of debt financing for urban investment companies. Land is often the core asset of urban investment platforms, and the decline in land value and the reduction in future land expected returns lead to a decline in asset quality, which in turn leads to an increase in the debt ratio of urban investment companies. In 2023, the land assets of urban investment companies decreased by 34.5% compared to the previous year, while the growth rate of urban investment company land assets was as high as 8.0% in 2022. In 2023, the proportion of land assets in the total assets of urban investment companies was 2.2%, a decrease of 1.3 percentage points compared to the previous year.(III) Fiscal Operation: Some local grassroots finances face difficulties, and phenomena such as "arbitrary fees" have emerged

From a static perspective, the "land finance" dilemma affects the stable operation of grassroots finances. First, the proportion of land transfer income retained in county-level finances is relatively high, and the impact of the land finance dilemma on the financial strength of grassroots governments is greater, putting grassroots fiscal operations under significant pressure. Taking Shandong as an example, in 2023, the proportions of state-owned land transfer income at the provincial, municipal, and county levels were 0.8%, 34.8%, and 64.4%, respectively. In contrast, the concentration of land finance revenue at the district and county levels in western provinces is even higher. For instance, in Guizhou, the proportions of state-owned land transfer income at the provincial, municipal, and county levels in 2023 were 0.0%, 20.5%, and 79.5%, respectively. Second, the decline in land transfer income at the city and county levels may lead to a decrease in the level of treasury security. Land transfer income is a large, predictable source of revenue for city and county finances, which is crucial for maintaining the liquidity of treasury funds.

From a dynamic perspective, the downward trend in land transfer income has led to phenomena such as "arbitrary fees" in some areas to compensate for insufficient revenue, increasing revenue fluctuations. To cope with the decline in "land finance," some local governments may take measures such as intensifying the disposal of state-owned assets and conducting突击 fines to alleviate fiscal pressure. In 2023, the fines and confiscations in Guangxi and Jiangxi accounted for 7.7% and 6.5% of their general public budget revenues, respectively. Chongqing, Guizhou, and Yunnan also saw rapid growth in fines and confiscations, with year-on-year increases of 22.4%, 13.2%, and 9.0%, respectively. Such突击 fines and fees not only weaken the effectiveness of tax cuts and fee reductions, damage the business environment, but also reduce the quality of local fiscal revenue and affect the stability of fiscal operations.

III. How will land finance get out of the dilemma in the future?

Land finance, as a product of the times, will inevitably change with the evolution of the era. In the past, "land finance" and "land finance" made positive contributions to promoting local economic development. However, the current "land finance" is unsustainable, not only due to changes in the supply and demand relationship in the land market leading to a decline in revenue but also due to the high-quality development requirements for the transformation of China's economic development model.

In the future, as economic growth continues to shift gears, the growth rate of fiscal revenue will decline, and the pressure of expenditure rigidity will increase. Moreover, implicit financing methods will be gradually cleaned up, making the fiscal revenue and expenditure situation of local governments even more tense. The transformation of land finance in the future should have a broad perspective and a global view:

First, it is not only necessary to consider how to compensate for the reduced land transfer income but also to consider how to improve expenditure efficiency, define the scope of expenditure, reduce unreasonable expenditures that are increasing standards and expanding scope, and more importantly, to clarify the boundaries between government and market, clarify government functions, and promote the reform of the fiscal and tax system.

Second, it is not only necessary to consider the issue of real estate but also to consider how to stabilize the fiscal situation by stabilizing the short-term economic situation and achieving fiscal sustainability by promoting the transformation of economic development methods in the medium and long term.

Third, it is necessary to distinguish between short-term and medium to long-term issues, prevent short-term issues from becoming long-term, and avoid using methods to solve long-term issues to solve short-term issues. The overall background of economic downturn leads to many methods that can be adopted during the upswing period being unusable during the downturn period. Currently, local governments are facing issues such as the decline of land finance, the rigidity of debt reduction, and the rigidity of the "three guarantees," which affect their ability to develop the economy. If short-term issues are not resolved, they will become long-term. For the current situation where some local governments are under great pressure to reduce debt, measures such as the central government issuing national debt to lend to localities, policy-based financial institutions issuing loans to local governments, and continuing to issue special refinancing bonds can be considered to alleviate local pressure, avoid liquidity risks, ensure "three guarantees" expenditure, and swap time for space to reduce debt in development.

Fourth, it is necessary to prevent local governments from taking a series of possible contractionary actions due to the decline of land finance, including "arbitrary fines and fees." During the rapid decline of land finance, short-term issues can be resolved by the central government's national debt lending to localities.Specifically, efforts should be made in five areas: "strengthening the foundation, expanding sources, improving efficiency, debt restructuring, and reform" to create a combination of policies in finance, banking, land, state-owned assets, and social security.

(1) "Economic Foundation Strengthening": Steady economic growth is the foundation for the sustainable development of public finance.

Firstly, in the short term, it is necessary to stabilize the real estate economy to mitigate the impact on local finances. Real estate policies should continue to ensure supply, promote demand, and stabilize housing prices. In terms of purchase restrictions, first-tier cities need to further relax restrictions, such as lifting restrictions on suburban areas and increasing housing purchase quotas city-wide; in terms of mortgage loans, localities should adjust down payment ratios and mortgage interest rates in a timely manner based on "city-specific policies" to boost residents' willingness and confidence to buy homes, avoiding the toothpaste-style policies that trigger residents' wait-and-see sentiment; in terms of government land reserves, increase the central fiscal support for localities to alleviate local financial pressure and promote the smooth progress of land reserve work; in terms of supply, transfer high-quality land plots, cancel unreasonable planning restrictions, and change some commercial land in core areas to residential land to meet residents' demand for good locations and high-quality commercial housing.

Secondly, in the medium to long term, a new model for the healthy development of real estate should be constructed, while leveraging the role of fiscal support for scientific and technological innovation to promote industrial structure transformation, cultivate new tax sources, and promote China's economy from being driven by debt and investment to being driven by industrial technology.

(2) "Revenue Expansion": Stabilize the macro tax burden and optimize the implementation of tax reduction and fee reduction, and promote tax system reform.

Firstly, stabilize the macro tax burden and promote tax system reform to create a strategic buffer space and time for the transformation of land finance. It is necessary to moderately consider the national conditions and practical constraints of China as a large country and more pragmatically build a local tax system based on shared taxes rather than a local tax species system. Pay more attention to the precision and structural nature of tax reduction and fee reduction, shifting from a quantity and scale-based approach to an efficiency and effect-based approach. Gradually standardize the basis for the introduction of tax reduction and fee reduction, gradually clean up the "patches" formed by phased tax reduction and fee reduction, and accelerate the legislative progress of value-added tax, consumption tax, land value-added tax, and other tax species.

Secondly, the consumption tax collection link should be moved back and gradually transferred to local governments to enrich the financial strength of local governments. The scope of taxation should be expanded from mainly tobacco, alcohol, and automobiles to high-pollution and high-energy-consuming consumption and high-end service industries, and the tax collection link should be moved from the production link to the consumption link. Promote the reform of personal income tax. Completely move from a combined collection model of classification and comprehensiveness to a comprehensive collection model, reducing the burden on the working class while strengthening tax collection, with a broad tax base, low tax rates, and strict tax collection. Strengthen the tax collection efforts on new economic activities such as live broadcasting and high-income groups such as entertainment stars.

Thirdly, standardize non-tax revenue and reasonably divide state-owned assets and related income. Timely identify and eliminate unreasonable non-tax revenue, further improve the efficiency of non-tax revenue collection and management, and optimize the revenue structure of local governments. Actively explore the division mechanism of state-owned assets and related income between central and local governments, and on the basis of clearly defining the ownership of various state-owned assets, inhibit local protectionism and abnormal development of the land market through reasonable division of property rights and setting up reward and punishment mechanisms.

Fourthly, prudently explore and study new tax species such as digital asset tax and digital service tax. Explore data finance, reform the tax system, and adapt to the development of tax sources in the era of the digital economy. Based on the direction of data assets on the balance sheet, promote the assessment and authorization operation of government data assets, and cultivate new financial sources by transferring state-owned data development rights. Build a unified national data factor market and encourage state-owned enterprises to use data assets for financing.

(3) "Efficiency Improvement through Expenditure Reduction": Focus on increasing livelihood protection and consumer support, and improve the efficiency of fiscal expenditure and the fiscal multiplier.Firstly, leveraging the multiplier effect of public service expenditures to expand domestic demand is crucial. Continuously improving the level of public services such as social security, education, and healthcare plays a significant role in increasing the income of disadvantaged groups, enhancing the sense of acquisition among residents, and boosting their confidence. The fiscal expenditure structure should continue to increase investment in livelihood areas.

Secondly, focusing on guiding and stimulating consumption is essential to shift fiscal policy emphasis from a heavy focus on investment to a balance between consumption and investment. Fiscal expenditure policies should pay particular attention to low-income groups, as they have a higher marginal propensity to consume, and increasing their income can have a more pronounced economic stimulus effect. Specifically, cash subsidies could be distributed to certain groups to promote a rapid recovery in consumption, implemented through a proportionate sharing mechanism between central and local governments.

Thirdly, establishing a screening mechanism and infrastructure for subsidy groups is necessary. The personal income tax APP platform could be used to declare personal income, even if no personal income tax is payable, to encourage declarations that serve as a basis for direct subsidies. This would allow for dynamic screening of subsidy groups based on income distribution and standards.

Fourthly, dynamically optimizing various fiscal subsidy standards and qualification screening mechanisms according to economic development conditions is important. It involves cleaning up excessive livelihood commitments and straightening out the pricing mechanism for quasi-public services.

Fifthly, strengthening expenditure efficiency performance assessment is key. Local fiscal performance assessment indicators should reflect the efficiency of public service expenditures more, incentivizing local governments to improve the efficiency of public service expenditures. It is also essential to establish and improve fiscal expenditure supervision and inspection mechanisms to monitor every aspect of fiscal expenditures, ensuring the compliance and effectiveness of funds.

(IV) "Debt Transformation": It is necessary to coordinate debt resolution with stable development and promote the transformation of urban investment platforms.

Firstly, balancing short-term debt resolution with long-term development is essential. Currently, the risks of local government debt, financial risks, and social risks are intertwined, making the intensity and pace of handling these risks particularly critical. In the short term, it is important to avoid triggering disposal risks. For local governments currently facing significant debt resolution pressures, measures such as the central government issuing national bonds to lend to localities, policy banks providing loans to local governments, and continuing to issue special refinancing bonds could be considered to alleviate local pressures, avoid liquidity risks, ensure "three guarantees" expenditures, and trade time for space. At the same time, the precision of short-term debt resolution measures should be improved, shifting from provincial units to city and county units for precise control of debt risk levels and determining new government investments to prevent the impact from being too widespread and triggering regional systemic risks.

Secondly, promoting the transformation of urban investment platforms is crucial. This involves suppressing the breeding ground for hidden debt through the linkage of institutional and mechanism reforms. Adhering to the approach of "canceling a batch, integrating a batch, and transforming a batch," orderly promote the integration and reorganization of urban investment enterprises within the region. Urban investment companies need to plan and layout their business directions in combination with local resource endowments and industrial foundations, and also pay attention to preventing new risks that may arise during the transformation process.

(V) "Linked Reform": Promote a new round of fiscal and tax system reforms to establish standardized capital budgets and debt budgets.

Firstly, clarifying the relationship between the government and the market, defining the scale of the government, and avoiding the unlimited expansion of expenditure responsibilities is important. Some responsibilities and expenditure responsibilities should be centralized to the central and provincial governments to reduce the expenditure pressure on local governments and city and county governments, as detailed in "Where is the new round of fiscal and tax system reform heading?". Currently, there are still areas such as national defense security, diplomacy, major river management, and income distribution where responsibilities and expenditure responsibilities are delegated to localities. It is necessary to avoid transferring central responsibilities and shared responsibilities to localities through transfer payments, effectively reducing the actual expenditure pressure on local governments. In the future, the central government's direct expenditure responsibilities in areas related to overall interests should be gradually increased.Secondly, establishing standardized capital budgets and debt budgets alongside the current four recurrent budgets can strengthen the budgetary constraints on government investment and financing, thereby enhancing the efficiency of such activities. The financial requirements for government investment projects, debt plans, and sources of repayment should be uniformly incorporated into the capital budget. There should be a strengthened link between the capital budget and the recurrent budget. Local finance departments should, based on their local fiscal revenues and expenditures, as well as the government's debt situation, reasonably estimate and control the overall budget scale and the upper limit of the capital budget to ensure fiscal sustainability. They should also have the power to veto any new government investment projects that exceed the capital budget limit, have unsound financial foundations, or lack reliable future repayment mechanisms.