Say goodbye to land finance and optimize the local economic development ecosystem

Chen Tao

In recent years, China’s real estate market has continued to undergo adjustments. The supply-and-demand relationship between buyers and sellers in the housing market has undergone profound changes, which is causing the “land-finance” reliance model—where land-transfer proceeds once accounted for about 40% of local government fiscal revenue—to gradually move away, and may in turn force local governments to pay even more attention to high-quality local economic development and to optimizing the local economic development ecosystem.

The scale of land-transfer income is shrinking year by year. Land-transfer income generally refers to the state-owned land-use right transfer income included in government fund budget revenue. It is obvious that local government land-transfer income is highly related to the ups and downs of the real estate market. After the 1998 housing system reform, China’s real estate market began to take off, and rapid development emerged after 2003. In 2003, the national scale of land-transfer income was 5,421 billion yuan, accounting for about 35% of total local fiscal revenue. After 2003, as China’s real estate market continued its rapid upward momentum, land-finance revenues also “rose along with the tide.” In 2021, land-finance revenue nationwide reached a peak of 8.5 trillion yuan. Since the fourth quarter of 2021, with China’s real estate market supply-and-demand situation continuing to adjust, by 2025 national land-transfer income has already shrunk by about 40% compared with the 2021 peak. Recently, catalyzed by a series of real estate policies, housing price adjustments in various cities have also essentially been completed. Transactions in properties represented by first-tier cities have picked up somewhat; the second-hand housing market has become active; and some individual properties have seen slight increases, initially showing signs of stabilizing. Even so, we should deeply recognize that the supply-and-demand situation in China’s real estate market has undergone fundamental changes, and it is almost impossible for the land market to repeat the previous trend of sustained, rapid increases.

The land system is also being adjusted in line with this. Recently, the Ministry of Natural Resources and the National Forestry and Grassland Administration jointly issued the “Notice on Further Doing a Good Job in Ensuring the Support of Natural Resource Elements” (Natural Resources Fa〔2026〕38). Several key elements related to land transfers are involved, and at the institutional level they may gradually push local governments to reduce their reliance on land-finance.

First, local governments cannot “sell land” arbitrarily, and their autonomy will be tightened significantly. Local governments cannot decide independently on “selling land”; they need to be coordinated at the provincial level. And judging from the direction of supporting policy measures from each province, more emphasis will be placed on guiding and enabling the value output of “land.” It is quite possible that provincial-level coordination will be carried out according to the quality and speed of economic development in prefecture-level cities and the condition of population flows, thereby reflecting differentiated arrangements for land-supply indicators.

Second, land supply work may shift to prioritizing the revitalization of existing stock through urban renewal. The principle for annual incremental urban and rural construction land is, as a rule, that it must not exceed the area of stock land being revitalized; that is, the more stock land areas are revitalized, the more incremental urban and rural construction land areas local governments will be able to add. This, from the perspective of mechanisms and incentives, requires local governments to further increase investment in urban renewal projects, releasing more incremental urban and rural construction land areas from these projects. Therefore, it is reasonable to expect that starting from 2026, the progress of construction of China’s urban renewal projects will accelerate, and especially the value of “old, run-down, and small” properties in core urban areas may be re-recognized.

Third, real estate development will be restricted. Incremental construction land will, as a rule, not be used for commercial real estate development. It is expected that starting from 2026, the supply of newly supplied residential commodity housing land in each city will be reduced. This will help, in terms of overall quantity, control real estate supply and reduce the amount of newly supplied commodity housing. At present, many cities in China face inventory reduction pressure. With fewer indicators for land for commodity housing, it will help balance supply and demand and promote the housing market to gradually stabilize.

There is no doubt that, at present and going forward, land-transfer income is inevitably linked to local governments’ fiscal conditions and the path of future fiscal revenue and expenditure. On the one hand, the “land-finance” reliance objectively formed over many past years cannot change completely overnight. Under market pressure and institutional constraints, local governments will also independently reduce their reliance on land-finance. Of course, if land-transfer income declines, there will inevitably be a gap; therefore, it is also necessary to prudently and in an orderly manner address the shocks and risks brought about by land-finance gradually moving further away. On the other hand, with land-transfer income declining for four consecutive years, it will force local governments to use fiscal funds more intensively, pay more attention to optimizing and adjusting the structure of local industries, strengthen the competitiveness of core industries for development, and accelerate the cultivation of a favorable business environment to attract more market players—thereby expanding sources of funds and increasing fiscal revenue through high-quality local economic development. If analyzed from this perspective, land-finance gradually moving further away may be a catalyst for high-quality local economic development.

This column article represents only the author’s personal views

(Editor: Dong Pingping)

     【Disclaimer】This article only represents the author’s personal views and is not related to Hexun. This Hexun website has no express or implied guarantees regarding the accuracy, reliability, or completeness of any statements, views, or judgment calls contained in the text. Readers are for reference only and should bear all responsibility themselves. Email: news_center@staff.hexun.com

Report