Chinese local government funding vehicles are rushing to buy large amounts of land with borrowed funds, bailing out cash-strapped cities and provinces following an exodus of regional developers indebted private sector.
The spending spike was unleashed before President Xi Jinping was scheduled to be appointed to a unprecedented third period next month and highlight efforts to boost the pandemic-affected economy, which has grown only 0.4% year-on-year in the second quarter.
Local governments have traditionally relied on LGFV to support growth by promoting infrastructure investment. Now, financial means are being called upon to support the real estate sector, which accounts for about a third of total economic output.
According to official data, LGFV’s land acquisitions increased to Rmb400 billion ($58 billion) in the first half of the year, an increase of more than 70% year-on-year in 2021. This despite the overall land purchases, capital is often dominated. of private developers, down by almost a third compared to Beijing prevent real estate speculation.
The sale is intended to help cash-strapped local governments, where land sales are an important source of income. But LGFV, plays the role important role in financing long-term infrastructure developmentare being forced to borrow more from state banks and issue bonds to finance deals.
“I see this as an indirect government bailout that is politically acceptable,” said Andrew Collier, managing director at Orient Capital Research in Hong Kong.
Most LGFVs, often with little experience in real estate development, are leaving their newly purchased plots idle. This, combined with larger housing market crisismeans that the short-term relief that local governments receive from land purchases by financial vehicles will eventually cause bigger problems for China’s already faltering economy.
“Governments are essentially asking LGFVs to pay inflated prices [for land] Collier said.
LGFVs are known for their sluggish financial performance and their emergence as big players in land auctions that came as private developers were forced to make cuts due to the global debt crisis. branch.
Land sales and falling land prices have exacerbated pressure on local governments already grappling with shrinking tax bases amid a broader economic downturn. This has prompted many provinces and cities to ask LGFV to fill the gap left by private developers.
“We have played an important role in keeping the land market and government revenue from crashing,” said an executive at Yueyang Urban Construction and Investment. LGFV, based in central China’s Hunan province, spent Rs 1.3 billion on land purchases in the first half of this year.
Official data shows LGFVs accounted for nearly a quarter of land sales in the first half of this year, compared with 9% in the same period a year ago. This rate exceeds 50% in some small, less developed cities.
But the buying boom has cost LGFVs dearly. To make up for the lack of auction participants, many cities have increased the minimum land auction price. That often forces LGFVs to pay a premium at a time when the market is weakening.
In Weihai, a city in eastern Shandong province, an executive from Huancui District Urban Development Investment said his LGFV paid at least double the market price for a suburban plot late last year. . “We invest for political reasons, not business reasons.
State banks provided the financial firepower for the procurement.
Most LGFVs face cash flow constraints as they derive most of their income from government-backed infrastructure projects with a long-term vision to profitability. Meanwhile, state-owned lenders are willing to provide loans to LGFVs for land as collateral or to buy the company’s bonds in the hope that the government will step in if a crisis occurs.
“We have better access to credit than the government,” said Yueyang Urban Construction and Investment CEO.
But actually building on their newly acquired land remains a challenge. According to China Index Academy, a Beijing-based consulting firm, only about one-fifth of LGFV has real estate development experience.
That has led many LGFVs to abandon development plans. In contrast, private developers often start construction immediately after winning the bid.
In the southern city of Guangzhou, construction has not begun on any of the 10 lots purchased by LGFVs late last year, according to people familiar with the development.
“We don’t know much about real estate,” admitted an executive from Guangzhou Metro Group, which has spent more than Rmb2 billion on land since late last year. “It is in our best interest to hold the land and sell it for a profit when the market recovers.”