The central government is aiming to change the way in which revenue from land sales is collected and monopolize it in Beijing’s hands, as part of the country’s efforts to crack down on what Beijing sees as profligate spending by local authorities using the money they make from land use rights according to Caixin.
Under the new system local governments will transfer the right to collect land sales revenue from their natural resources departments to tax authorities overseen by the State Taxation Administration (STA), according to a recent decree issued by the central government. One city and six provincial-level regions have already joined a pilot program paving the way for national roll-out on January 1, according to the notice.
The reforms are part a plan issued in early 2018 that tax authorities should extend their remit to collecting nontax revenue under in a bid to make collections more efficient and better regulated.
The proposed overhaul of which government departments will collect the more than 8 trillion yuan of land sales revenue will help the central government keep better track of the money and help stop local governments from shoring up their financing vehicles with the funds, as tax authorities ultimately answer to the central government’s State Tax Administration.
Beijing has been working hard to control local government debt for years, mostly hidden off-balance-sheet in local government financing vehicles (LGFVs), companies set up specifically to borrow the money needed to fund spending on public welfare projects and infrastructure, which generally bring in low returns. This situation arose when Beijing banned local governments from issuing bonds to borrow directly.
For more on this and how LGFVs work read this article on China’s shadow banking sector and local debt.
The new measures are an attempt to plug the loopholes where local governments illegally return part of land transfer revenue to LGFVs participating in land auctions, or allow them to reduce or delay payments. Under the new system, local governments will find it more difficult to use land transfer revenue for their own purposes forcing them to be more compliant in terms of using the money.
However the new measures could significantly affect the ability of LGFVs ability to repay debt already owed to local governments and private investors.