Jiangsu leads way in move to limit debt risk

The Jiangsu provincial government has decided to take back the authority to approve land transactions from city-level governments starting in October as part of its efforts to control looming debt risks among local governments.

A news release published on Tuesday on the official website of the Jiangsu provincial government indicated that land reserve organizations administered by local governments should truthfully report their debt scales to the provincial finance department.

In addition, "from October 1, local governments cannot decide to sell or stockpile any piece of land without getting approval from the provincial land and resources department", added the news release, citing a guideline issued recently about assessing fundraising scales related to land reserves.

This policy is first of its kind across the nation. It comes amid mounting concerns that local governments depend excessively on land sales for debt payment.

According to the guideline, the annual land-financing amount will be decided by the provincial finance department. The decision will be made based on the debt balance of local land reserve organizations.

"Land reserve organizations should pay off debts in a timely manner, or they will be banned from acquiring new funding if they have overdue payments," said the guideline.

A total of 91 land-reserve organizations in Jiangsu province are officially identified as qualified entities for receiving loans from commercial financial institutions, an insider in the land and resources department of Jiangsu was quoted by Reuters as saying.

Chen Jie, a professor specializing in property research at Fudan University, said Jiangsu's decision is a useful attempt to rein in local governments' excessive land sales and developments, which may lead to huge debt risks.

A total of 2.02 trillion yuan ($3.27 billion) worth of land plots were sold nationwide from January to July this year, up 49.4 percent year-on-year, Finance Minister Lou Jiwei said in a report in late August. The robust gains in land sales have directly filled up the coffers of local governments, which rose 13.5 percent to 4.2 trillion yuan.

"But land reserves will dry up quickly at such a pace and local governments will have nothing to pay back their overdue debts," said Chen.

Although claiming that its debt is controllable and at an "appropriate" level for its economy, Reuters reported that outstanding bank loans raised via 752 local government financing vehicles in Jiangsu reached 770.6 billion yuan by the end of June, compared with its 2.76 trillion yuan of first-half gross domestic product.

Putting the brakes on the land selling spree, while ensuring a sustained development of local land markets, could trigger new problems in the short term, said Chen. "Local governments may invent new financing approaches to meet their vast demand for capital."