【Development Strategy】 Say goodbye to land finance and optimize the local economic development ecosystem

（Original headline: [Development Strategy] Farewell to Land Finance and Optimize the Local Economic Development Ecosystem）

Chen Tao

In recent years, China’s real estate market has continued to adjust, and the supply-demand relationship between buyers and sellers in the housing market has undergone profound changes. This has led the “land finance” model—under which land transfer proceeds once accounted for around 40% of local government fiscal revenue—to gradually fade away, and it may also force local governments to pay more attention to high-quality local economic development and to optimizing the ecosystem for local economic development.

The scale of land transfer income is shrinking year by year. Land transfer income generally refers to the state-owned land use right transfer income in local government special-purpose fund budget. As is obvious, local government land transfer income is highly correlated with the state of the real estate market. After the 1998 housing system reform, China’s real estate market began to take off, and rapid growth emerged after 2003. In 2003, the national scale of land transfer income was 542.1 billion yuan, accounting for about 35% of total local fiscal revenue. After 2003, China’s real estate market continued to rise rapidly, and land finance revenues also “rose with the tide.” In 2021, national land finance revenue reached a peak of 8.5 trillion yuan. Since the fourth quarter of 2021, as China’s real estate market supply-demand situation has continued to adjust, in 2025, national land transfer income has already shrunk by about 40% compared with the 2021 peak. In the near term, catalyzed by a series of real estate policies, adjustments to home prices in cities are also largely in place. Real estate transactions, represented by first-tier cities, have shown some warming; the secondhand housing market has become more active; and some individual properties have seen slight increases, initially showing signs of stabilizing. Even so, we should deeply recognize that China’s real estate market supply-demand situation has undergone fundamental changes, and it is almost impossible for the land market to repeat the past pattern of continuously and rapidly rising trajectories.

The land system is also being adjusted in step. Recently, the Ministry of Natural Resources and the National Forestry and Grassland Administration jointly issued the “Notice on Further Improving the Assurance of Natural Resource Factors” (Natural Resources Fa [2026] No. 38). Involving multiple key elements related to land transfers, it will likely push local governments, from the institutional level, to gradually reduce their reliance on land finance.

First, local governments cannot “sell land” as they wish, and their discretion will be significantly tightened. Local governments cannot decide on their own how to “sell land”; they need to be coordinated at the provincial level. And based on policy directions evaluated at the provincial level, more emphasis will be placed on and guidance provided for the value output of “land.” It is highly possible that the provincial-level coordination will be carried out according to the quality and speed of economic development of prefecture-level cities and the status of population flows, reflecting differentiated arrangements of land supply indicators.

Second, land supply work may shift toward revitalizing existing stock dominated by urban renewal. As a matter of principle, the annual increase in land for urban and rural construction shall not exceed the area of land stock that is revitalized. That is, the more land area that is revitalized, the more land area for new urban and rural construction that local governments can have increased. This, in terms of mechanism and interests, forces local governments to further increase investment in urban renewal projects, and to release the additional area of land for urban and rural construction from more urban renewal projects. Therefore, it is reasonable to expect that starting in 2026, the progress of China’s urban renewal project construction will accelerate, and especially, the value of “old, dilapidated, and small” properties in core urban areas may be recognized anew.

Third, real estate development is constrained. Land for new construction shall, as a rule, not be used for operating real estate development. It is expected that starting in 2026, the supply of newly added residential commodity housing land in each city will be reduced. This will help control real estate supply in terms of total volume and reduce the quantity of newly added commodity housing supply. At present, most cities in China face pressure to work off existing inventory. With commodity housing land indicators reduced, it will help balance supply and demand relations and promote the real estate market to gradually stabilize.

Without a doubt, land transfer revenue is bound to be related to local governments’ fiscal situation and the path of future fiscal revenues and expenditures. On the one hand, the “land finance” reliance objectively formed over many past years cannot be completely changed overnight. Under market pressure and institutional constraints, local governments will also voluntarily reduce their reliance on land finance. Of course, if land transfer income declines, there will inevitably be a shortfall; therefore, it is also necessary to prudently and in an orderly manner address the shocks and risks brought by land finance gradually moving farther away. On the other hand, with land transfer income declining for four consecutive years, local governments will be forced to use fiscal funds more intensively, pay more attention to optimizing and adjusting local industrial structure, strengthen the competitiveness of core industries, and accelerate the cultivation of a good business environment to attract more market players—thereby expanding sources of funds and increasing fiscal revenue through high-quality development of the local economy. If analyzed from this angle, the gradual move away from land finance may be a catalyst for high-quality local economic development.

This column article represents only the author’s personal views.