On June 24th, the Ministry of Finance announced the fiscal revenue and expenditure situation for May 2024. In the first five months of this year, the revenue from the transfer of state-owned land use rights within local government funds (hereinafter referred to as "land transfer income") was 1,281 billion yuan, a year-on-year decrease of 14%, with the decline widening by 3.6 percentage points compared to the first four months.

The decline in land transfer income varied among provinces. Data from the Yunnan Provincial Department of Finance showed that in the first five months of this year, Yunnan's revenue from the transfer of state-owned land use rights was 11.49 billion yuan, a year-on-year decrease of 22.5%, with the decline widening by 6.6 percentage points compared to the first four months.

Data from the Jilin Provincial Department of Finance indicated that in the first five months of this year, the local land transfer income was 6.29 billion yuan, a year-on-year decrease of 36.5%. This decline has significantly narrowed compared to the first four months (-51.9%).

Data from the Hainan Provincial Department of Finance showed that in the first five months of this year, the local government fund income, mainly from land transfer income, was approximately 9.11 billion yuan, a year-on-year decrease of 12.4%. This decline is essentially in line with the first four months.

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Additionally, according to data from the Yuekai Securities Research Institute, out of the 30 provinces' land transfer transaction payments (which differ from the aforementioned land transfer income and only include installment payments for land auctions and agreements) in the first five months, 26 provinces experienced negative growth, with 15 provinces seeing a year-on-year decrease of more than 30%. Notably, Guangdong (-57.5%), Sichuan (-42.7%), and Jiangsu (-42.6%) saw significant declines.

Luo Zhiheng, Chief Economist at Yuekai Securities, stated that the land market is sluggish, and it is expected that land fiscal revenue may further decrease in 2024. Due to the time lag between the real estate market and the land market, and the installment payments of land transaction prices leading the land transfer income that is collected into the treasury, it is projected that the national fiscal land transfer income for 2024 will be 4.7 trillion yuan, a reduction of about 1.1 trillion yuan, representing a year-on-year decrease of 19.0%.

The continuous decline in local land transfer income is mainly due to the deep adjustments in the real estate market in recent years, with developers facing tight funding and insufficient willingness of residents to purchase homes, leading to a simultaneous decrease in both the volume and price of local land transfers. In response, a series of policies have been introduced from the central to local governments to stabilize the housing market, and the decline in land transfer income has somewhat narrowed.

Luo Zhiheng noted that, overall, the most prominent feature of the current land market is the difficulty in inventory reduction, especially residential land facing a "supply and demand dilemma." On the demand side, the new round of inventory reduction policies in 2024 will take some time to take effect and boost the sales of commercial housing, with the demand for residential land still relatively low. On the supply side, the inventory reduction cycle for commercial housing in first- and second-tier cities has lengthened, and the accumulation of existing residential land continues, with more cities slowing down the supply of residential land.

The decline in land transfer income also exerts certain pressure on local finances. Some local financial officials have admitted that the decline in land transfer income has intensified the contradictions between local fiscal revenue and expenditure.

Luo Zhiheng believes that with the decline in local land transfer income and the reduction in available financial resources, the dependence of localities on central government transfers has increased. Expenditures on people's livelihood and construction, which were previously arranged based on land transfer income, may decrease. Additionally, due to the reduction in land transfer income, some debt risk measurement indicators are prone to be passively raised. The devaluation of land assets also increases the difficulty of debt financing for urban investment companies.In recent years, the continuous decline in land transfer revenue has led many to believe that the "land finance" model is unsustainable. Discussions surrounding the transformation of "land finance" are heating up, with some suggesting that "equity finance" or "data finance" could be used to offset the reduced revenue from "land finance."

Luo Zhiheng believes that the future transformation of land finance should have a broad vision and a holistic perspective. For instance, it is not enough to consider only how to compensate for the reduced land transfer income; it is also necessary to think about how to improve expenditure efficiency, define the scope of expenditure, and reduce unreasonable expenditures that involve raising standards and expanding coverage. Moreover, it is crucial to start from the perspective of clarifying the boundaries between government and market, defining government functions, and promoting fiscal and tax system reforms.

He suggests that in the short term, the real estate economy should be stabilized to mitigate the impact on local finances. Real estate policies should continue to ensure supply, promote demand, and stabilize housing prices. In the medium to long term, a new model for the healthy development of the real estate industry should be established, while leveraging fiscal support for technological innovation to drive industrial structure transformation, cultivate new tax sources, and promote a shift in China's economy from debt and investment-driven to industry and technology-driven.

To compensate for the reduction in land finance revenue, Luo Zhiheng believes that under the premise of maintaining a stable macro tax burden, the collection phase of the consumption tax could be gradually postponed, and a portion of the revenue could be allocated to local governments to strengthen their financial capabilities. It is also advisable to cautiously explore and study new types of taxes, such as digital asset tax and digital service tax. Based on the direction of including data assets on the balance sheet, the government should promote the assessment and authorized operation of government data assets, and cultivate new sources of revenue by granting the rights to develop state-owned data. A unified national data factor market should be established to encourage state-owned enterprises to use data assets for financing.

He also warns against local governments taking a series of contractionary actions in response to the downturn in land finance, including "arbitrary fines and fees." During periods of rapid decline in land finance, short-term issues could be addressed through central government bonds transferred to localities.