In Depth: Can Revival of Land Purchase Bonds Ease China’s Property Slump?

[para. 1] After a five-year hiatus, China has resumed allowing local governments to use special-purpose bonds for land purchases, primarily targeting idle land. This policy shift is closely watched as it may revive the property sector and ease financial stress on local governments. [para. 2] On March 5, Guangdong's provincial government issued two bonds on the Shenzhen Stock Exchange, raising 30.7 billion yuan ($4.3 billion). These seven-year notes are aimed at acquiring 86 idle land plots across 19 cities, with repayments planned to come from future land sales. [para. 3] According to Wind Info, the bonds saw high demand, with bid-to-cover ratios of 17.78 and 18.39. [para. 4] This indicates strong market appeal, as noted by a bond analyst. [para. 5] Guangdong, China’s largest provincial economy, is the first to use these special bonds for idle land acquisition following the central government's directive in late 2024.

[para. 6] In contrast, Beijing allocated 11.69 billion yuan in bonds in December to secure new land reserves, while Guangdong uses funds to reclaim unused plots from developers. [para. 7] The land reserve special bonds were first introduced in 2017 to allow local governments to purchase land and prepare it for development amidst a booming property market but were halted in 2019 due to concerns over local government debt. [para. 8] Between 2017 and 2019, issuance of these bonds amounted to 240.7 billion yuan, 589.3 billion yuan, and 676.5 billion yuan respectively. This accounted for significant portions of the annual special bond quotas, with land sales increasing significantly during this period. [para. 9] Since 2021, China's property market has faced financial difficulties, leading to proposals for local governments to acquire idle land, despite ongoing funding challenges.

[para. 10] The Ministry of Finance allowed the reuse of special bonds in October 2024 for the acquisition of idle land, potentially helping balance market supply-demand and reducing liquidity pressures for developers and governments. [para. 11] Following the positive reception of Guangdong’s bond issuance, other regions are likely to issue similar bonds, with cities like Changsha, Huzhou, Huaibei, and Lichuan already planning to buy idle land using land reserve bonds. [para. 12] Analysts predict bond issuances could rise to 600 billion to 1.2 trillion yuan by 2025, between 12% and 24% of the 2024 national land sales revenue.

[para. 16] The State Council allowed Guangdong to pilot this initiative without needing central government approval, resulting in proposals for over 246 projects worth more than 58.8 billion yuan. [para. 19] However, the initiative currently benefits state-owned enterprises, not private developers who face difficulties in securing financial support. Private developers are often burdened with debt and legal issues, hindering their access to special bond funds. [para. 23] Local governments and Local Government Financing Vehicles (LGFVs) now play a significant role in land acquisitions, as private developers face financial constraints, impacting local revenues.

[para. 24] National land sales revenue decreased significantly from 8.03 trillion yuan in 2020 to 3.68 trillion yuan in 2024, while LGFVs' involvement increased. Many LGFVs, however, lack the real estate expertise needed to develop acquired properties. [para. 27] A large portion of land acquired by LGFVs remains undeveloped, with only 20% fully constructed by mid-2024, according to China Real Estate Information Corp. [para. 29] LGFVs' funding sources vary widely, from fiscal allocations to expensive private finance.

[para. 32] Guangdong’s special bonds rely on future land sales for repayment, but with current property market stagnation and low GDP growth, the revenue may not meet projections. The issuance documents highlight risks related to repayment, market volatility, and project implementation.[para. 37] Nonetheless, analysts believe that the main goal of restarting these bonds is to stabilize the real estate market while ensuring bond revenues cover both principal and interest, particularly in provinces with high development potential.