New Delhi, Oct 4 (IANS) China’s prolonged property downturn has exposed deep vulnerabilities in a local government financing model that relied heavily on land sales and off-budget borrowing, with the resulting fiscal strain increasingly weighing on businesses, workers and economic growth, a report has said.

For years, land finance gave local governments access to resources and spending flexibility that the formal fiscal system did not provide, according to the East Asia Forum report.

Following the 1994 tax-sharing reform, local governments retained responsibility for a large share of public services and development spending while their revenue-raising powers remained limited.

As a result, they increasingly turned to land-use rights sales and borrowing through off-budget financing vehicles, often using land assets as collateral, the report said.

The model helped fund infrastructure, accelerate urbanisation and support China's investment-driven growth. It also encouraged local officials to compete for investment and economic expansion. However, the dependence on land revenues made local finances highly vulnerable to the property cycle.

At the peak of China's housing market in 2021, broadly defined land-related revenue, including land-sale proceeds and associated taxes, accounted for nearly half of local governments' consolidated revenue, equivalent to around 10 per cent of GDP. By 2025, that share had fallen to about 25 per cent of local revenue, or less than 5 per cent of GDP.

The actual strength of land demand may have been weaker than these figures suggest, as local government financing vehicles themselves purchased large amounts of land, helping to inflate reported land-sale revenues during the property boom, as per the report.

The sharp decline in land-related income has since exposed the scale of debt accumulated by local governments during the boom years. Between 2019 and 2023, debt servicing on official local government debt, including principal and interest payments, increased from around 8 per cent of local revenue before central government transfers to 18 per cent.

The debt burden has also intensified for off-budget borrowing. Much of this debt was raised against land as collateral during the property boom, leaving financing vehicles increasingly exposed as land prices and transactions weakened. In heavily indebted provinces such as Guizhou, local authorities have openly sought greater support from Beijing as their ability to manage mounting obligations has come under pressure.

--IANS

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