Local governments move to save real estate, and themselves

Fons1 via Flickr The Golden week has been an opportunity for local governments all over China to start to get the real estate industry moving again. China Stakes gives a nice overview of those efforts. Expo's, new policies and subsidies local governments are trying to revive an industry that has been in the doldrums since last year.
Of course, real estate is in an important industry in any country, but in China it has a few special characteristics that are important to understand, so we can understand the extra value real estate has for local government entities.
Tax payers most likely disagree, but China's central government is a relatively underfunded administration. Tax is being collected on a local level and then local tax officers have to pass on most of the tax revenue to both provincial and then central tax officers. Because that is a relative small part of the national economy, funding for important sectors like education and health care is relatively scarce.
That does not mean that the total of income for the government is equally low. When you look at the total picture, all governments together do earn a decent portion of the national economy. But most money comes from land rights and other real-estate related fees, that stick with the local governments.
Since money equals power, much of those government revenue stay at a local level and the central government has to beg often lower authorities for support. When the central government started to curtail lending in real estate a few years ago, it had at least a double agenda: it was also an effort to restrain the power of the local authorities.
That was fine with the local authorities as long as those policies were not effective, but over the past year real estate did get a severe beating. Panic is, as China Stack shows, mainly a local feature, while the central government has no plan to loosen their rules, now they have become effective.
That turf battle between central and local governments is as important to understand to explain what is happening in China's real estate.

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