Over-the-counter Sales of Local Government Bonds Set to Increase as China’s Land Sale and Tax Revenues Drop

Domestic observers expect over-the-counter sales of local government bonds in China to see an increase following a sharp drop in other revenue streams.

Figures released by the Ministry of Finance on 16 April indicate that national standard public budget revenues saw a 6.2% YoY increase
in the first quarter of 2019 to reach 5.3656 trillion yuan.

This included 4.6706 trillion yuan in tax revenues, for a YoY rise of 5.4%, and a deceleration of 11.9 percentage points compared to the same period last year.

Value added tax revenues rose by 10.7% YoY, for a deceleration of 9.4 percentage points compared to the same period last year, while personal income tax revenues dropped by 29.7% YoY, for a deceleration of 50.4 percentage points.

Q1 customs tariff revenues fell by 6.8% YoY, for a deceleration of 13.1%.

Official data further indicates that local government fund budget same-level revenues were 1.3297 trillion yuan in the first quarter, for a YoY drop of 7.1%.

This included a YoY drop of 9.5% in state-owned land usage right transfer revenues, despite a 45.2% rise in expenditures for state-owned land usage right transfer revenue arrangements.

Domestic analysts point out that China’s first and second-tier cities are continuing to impose property purchase restriction policies, while other market uncertainties are impacting investment and purchase expectations, leading to a sharp drop in land transfer revenues.

A research report from the China Index Academy indicates that the land transfer revenues for 300 cities in China during the first quarter totalled 828.1 billion yuan, for a YoY drop of 16%.

Premiums also fell, with the average land transaction premium for 300 cities in China in the first quarter falling six percentage points compared to the same period last year to 13%.

The drop in key sources of government revenue coincided with a surge in the over-the-counter sale of local government bonds.

Sales of local government bonds by Zhejiang province and Ningbo municipality on 25 March proved immensely popular, with Agricultural Bank of China making 310 billion yuan and Industrial Bank Co. around 100 billion yuan in over-the-counter bond sales within the space of just a dozen minutes.

Ministry of Finance official Li Dawei (李大伟) said that the issuance of local government bonds on the over-the-counter market by commercial banks was a major innovation for local government bond issuance.

According to Li over-the-counter sales will be of benefit to further expanding issuance channels for local government bonds as well as broadening the investment choices of China’s wealthy as well as small and medium-sized institutions.

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