Slowing land sales credit negative for Chinese RLGs

    Moody's Investors Service said in a new report that the slowdown in land sales in China (A1 stable) is lowering revenue for regional and local governments (RLGs), but that the budget impact is much more limited than gross figures suggest.
  "Over half of land sales revenue usually goes to compensate households for resettlement, so while gross land sales accounted for 26% of gross RLG fiscal revenue in 2018, after deducting these payments we estimated that net revenue only represented around 14% of net RLG fiscal revenue," said Jack Yuan, a Moody's Assistant Vice President and Analyst.
  "While a more severe downturn in the property market would pose challenges for RLGs, the provinces with the biggest contribution from land sales revenue are those with stronger fiscal profiles, leaving them better positioned to absorb the impact," added Yuan.
  Growth in land sales revenue -- lump-sum payments by property developers to obtain land use rights for 40 to 70 years -- slowed to single digits this year, following more than three years of policy tightening in the real estate sector. As a result, RLG fund revenue growth has also declined to its slowest rate since 2015.
  Moody's base case is for a managed slowdown, with land sales revenue growth likely to stabilize or recover modestly in 2020.
  However, if the property market was to experience a downturn similar to that of 2015 -- which is not Moody's expectation -- RLG budget deficits would widen by around 5% of net fiscal revenue, equivalent to RMB1.1trillion in 2018 budget terms.
  At the same time, the provinces with the highest contribution from land sales revenue, such as Zhejiang and Jiangsu, also tend to be those with stronger credit profiles, partially mitigating the impact of a downturn.