Reporters learned that under the influence of declining property market transactions, land auction failures have frequently occurred in many places recently, with average land transfer fees and total volume sharply reduced, while real estate-related taxes have also dropped significantly. Local finances, under the heavy pressure of the "double decline" in these two major revenue sources, are in a difficult and hardly optimistic situation. Some experts believe that if local governments try to prop up the property market at this time, it is tantamount to drinking poison to quench thirst; local finances should break out of the strange cycle of over-reliance on the real estate industry.

Data released by Centaline Property on the 5th showed that the average floor price of residential land in first-tier cities fell sharply by 34% month-on-month in May. The latest data from CRIC Research Center showed that land transfer fee revenue in 10 typical cities in May was 57.8 billion yuan, down 20.3% month-on-month and 24.6% year-on-year, falling into negative year-on-year growth for the first time in 20 months. The data indicate that land transfer fee revenue in many places is significantly weaker than the same period last year. In addition, the frequent land auction failures recently are also strong evidence of the cooling land market.

On the 5th, the Wuhan land auction fell far short of initial expectations, with only 9 parcels sold at the reserve price, while the Jiangxia Wulijie plot was neglected, with no bids and ultimately failing to sell. On May 27, three parcels at the Shenyang Land Trading Center were put up for auction, but because no one registered to participate in the bidding, all three parcels failed to sell. It is worth noting that since May, Shenyang has launched a total of 18 parcels, of which 10 failed to sell. In addition, Changsha and Foshan also experienced the awkward situation of land auctions failing due to no bidders; for Foshan, this was already the second land auction failure within a month.

It is worth noting that these cities are precisely those with a high degree of dependence on land finance. A previous "Analysis Report on Land Finance Dependence of 45 Cities with Property Market Purchase Restrictions" released by Tongce Consulting Research Department showed that four cities—Hangzhou, Foshan, Nanjing, and Changsha—had land finance dependence exceeding 100%, with Foshan reaching 147.5%.

The land market is sluggish, and local governments are under tremendous pressure. According to Ministry of Finance data, local-level revenue for the full year of 2013 was 6,896.913 billion yuan. Meanwhile, revenue from the transfer of state-owned land use rights in 2013 was 4,124.952 billion yuan, accounting for as much as 59.8% of local fiscal revenue (at the same level).

Reporters recently learned from a person close to the Ordos Finance Bureau that land transfer fees in Ordos reached tens of billions of yuan in previous years, but so far this year they are only about one billion, and a considerable amount of land cannot be sold. At the same time, the person said: "These two years are the peak period for debt repayment. Ordos's debt repayment scale this year is as high as about 30 billion yuan. At present, Ordos's fiscal fund turnover is relatively difficult."

In this regard, a reporter from the Economic Information Daily interviewed Bai Jingming, deputy director of the Fiscal Science Research Institute of the Ministry of Finance. He said: "Under the current land bidding, auction, and listing system, the amount of land transfer revenue depends on market supply and demand, and this supply-demand relationship is directly related to the overall economic development mode and economic growth status. Now the economic growth rate has been lowered somewhat. Under such circumstances, the reduction in land transfer revenue is normal; these are all determined by the market."

In addition to the less-than-optimistic land transfer revenue, local tax revenue is also showing a downward trend. Public finance revenue and expenditure data for April 2014 showed that real estate business tax fell sharply by 10.2 billion yuan month-on-month. With both local tax revenue and land transfer fees experiencing a "double decline," it has become an indisputable fact that real estate factors are dragging down local fiscal revenue.

At present, various places are struggling with expenditure capacity due to the impact of the real estate industry and the pressure of local debt. Ministry of Finance data on fiscal revenue and expenditure for April showed that fiscal expenditure in April was only 941 billion yuan, up 1.1% year-on-year, a marked slowdown from the 22.3% expenditure growth in March. The decline in expenditure was mainly reflected in local finances: local-level expenditure growth in April fell by 3.1%, while local expenditure growth in March was 23.5%.

The sluggish property market has put local finances in a difficult position, and how local governments respond is worth deep consideration.

Wang Dehua, a researcher at the National Academy of Economic Strategy of the Chinese Academy of Social Sciences, told the Economic Information Daily: "Some local governments want to intervene in the market through administrative means such as restricting price cuts, hoping to prop up the property market. Whether this judgment holds and whether it can play a role is questionable." Some experts believe that local governments are currently overly reliant on the real estate industry. If they still try to support the market to ensure fiscal revenue, they will sink deeper into the strange cycle, and reforms require enduring temporary pain.

A relevant person from China Bond Rating previously pointed out in an interview with the Economic Information Daily that under the existing fiscal system, land transfer revenue is the source of funds for local governments to carry out infrastructure construction and repay debts. In the short term, local governments' reliance on land transfer revenue has its rationality, but in the long run, this approach is not sustainable, and localities must seek new financing and revenue channels.

Wang Dehua believes that exploring the expansion of the scale of local government self-issued and self-repaid debt is one approach. "The ten provinces and cities piloted by the Ministry of Finance this time for self-issued and self-repaid local bonds did not expand the scale of local government bond financing; it is still within the 400 billion yuan framework set by the budget deficit at the beginning of the year." "I think the scale still needs to be expanded a bit, allowing local governments to replace existing debt through the issuance of government bonds," he said.