Proceed cautiously on land-based funds

Land-based finance, or extra-budgetary fund, which is the revenue governments earn from allocation of land to developers - seems to have made a comeback in recent months. Local governments benefit a lot from such funds, yet this won't continue for long, says an article in China Youth Daily. Excerpt:

The central government has over the past few years made every effort to do away with land-based finance. Yet facts show that such funds have seen unprecedented growth this year. It is estimated that extra-budgetary funds account for more than 50 percent of some local governments' revenue. Correspondingly, tax paid by construction and realty businesses are the fastest growing sources of revenue for local governments.

But this definitely won't go on for long. Land-based finance works only during urbanization drives. Once China's urbanization process is complete -leaving no more vested land for local governments to allocate - public finance will face natural death.

It also is worth mentioning that real estate developers raise housing prices partly because of soaring land costs. The average citizen won't be happy to foot the bill for local governments' greedy appetite. Furthermore, it is dangerous to turn local governments into profit-making bodies because that would open the door to corruption.

In the long run, local governments are likely to throw themselves into a financial turmoil by nipping their flowers in the bud.

(China Daily 10/13/2009 page9)