Credit Report Shows Guangdong Govt Land Sale Addiction

If a 40 percent jump in home sales can bring a 62 percent rise in local government revenues, then how do cities function when the real estate market slows down. That’s the question that Guangdong, and many other places in China need to answer following a recent credit report.

As reported in The Wall Street Journal, the southern Chinese province of Guangdong, which is among the country’s most developed areas, just completed a credit check, and the results give many observers cause for concern.

In order for the province to be able to sell bonds independently (most Chinese government bonds are sold through the central authorities), Guangdong was required to undergo a credit check and publish the results of that investigation. The report by Shanghai Brilliance Credit Rating & Investors Service Co., was released publicly on Tuesday and show – even to longtime China observers – a surprising level of dependence on the property market for government revenue.

For 2012 – the most recent year for which full figures are available – more than half of the province’s revenue came from land sales, and that level of dependence was actually below the national average.

Home to major economic centres such as Guangzhou and Beijing, and benefitting from its geographic and cultural proximity to Hong Kong, Guangdong has many advantages, and these assets are reflected in the AAA credit rating it received from Shanghai Brilliance.

However, when home sales surged 40 percent in 2013, local government revenues went up 62 percent, compared to 2012. Spending in 2013 climbed 55 percent, to quickly soak up any excess funds.

As to where those funds were spent, about 35 percent of fixed-asset investment in the southern Chinese province went into real estate. According to JP Morgan, China’s national average for fixed-asset investment into real estate was 25 percent.

The big question mark for Guangdong is what is happening to local government finances this year as property sales slow and the ability to raise funds from land auctions suffers.

Average new home prices in Shenzhen, the first-tier city closest to Hong Kong and arguably the province’s economic hub were down 0.2 percent in May compared to April, and transactions slowed still further.