Why land and property still anchor China’s economic transition

The headlines are clean: China is moving past its property-addicted economy. The era of endless land auctions and debt-funded development is, allegedly, behind us. Local governments are pivoting to new growth models, experimenting with tech zones and green industry hubs. On paper, this reads like a long-overdue transition. But that’s not what the foundations say.

Scratch beneath the surface of official rhetoric, and one truth remains stubbornly intact: China’s land finance model—the fiscal machinery where local governments rely on selling land-use rights to fund budgets—is not dead. It is merely quieter, less celebrated, and far more fragile. This isn’t transformation. It’s scaffolding under duress.

Since 2021, Beijing has leaned hard into a new narrative: that China's future lies in high-tech manufacturing, electric vehicles, semiconductors, and low-carbon growth. The Five-Year Plan makes clear that innovation, not speculation, is the new engine. In parallel, the state cracked down on the property sector—curbing developer leverage, limiting mortgage risk, and shrinking the shadow banking links that underpinned real estate speculation.

The language is ambitious. Provincial governments are being encouraged to seed industrial clusters. Municipalities are being told to align with national science and technology goals. Even real estate-linked revenues are being reframed—not as fuel, but as a crutch to be weaned off. Yet the pivot to “innovation-led growth” still lives largely on slides, not spreadsheets.

The deeper you go into China’s administrative tiers, the less the new strategy holds. Local governments—especially outside tier-one cities—are in fiscal survival mode. Their dependency on land sales is not a choice. It’s a necessity.

According to China’s Ministry of Finance, land-use rights sales still account for roughly 30–40% of local fiscal revenue in many provinces. In 2023, land sales revenue officially declined by 13.2%, continuing a multi-year slide. But the underlying dependency remains. Many cities are now relying on state-owned enterprises (SOEs) to participate in land auctions, effectively using government proxies to prop up the system.

This creates a circular risk: the same local governments under fiscal pressure are calling on their own financing vehicles or state developers to bid for land, using borrowed funds, often guaranteed by land assets. It’s leverage hiding inside leverage.

And this is not just about revenue. Land finance also underwrites social obligations. Proceeds from land sales fund everything from metro systems and schools to pension payouts and public sector salaries. Without it, local authorities face delayed projects, unpaid contractors, and citizen dissatisfaction. These are not abstract risks—they’re governance fractures.

At its core, China’s land finance dilemma is a structural mismatch between political ambition and institutional architecture. The country’s governance model splits revenue authority between central and local governments. While Beijing collects the bulk of tax revenue—especially from income and value-added tax—local governments bear the burden of spending. This imbalance has long been papered over by land sales, which allowed municipalities to monetize urbanization.

Now that urban migration has slowed, and property appetite has cooled, that bridge is collapsing. But the underlying fiscal design remains unchanged.

Critically, no alternative revenue stream of equal scale or speed has been introduced. Local governments lack the tools to tax wealth, consumption, or enterprise profit directly. Nor has there been a major redistribution of tax authority from center to provinces. Without structural reform, localities cannot escape the gravitational pull of land finance—regardless of national policy slogans.

This is where the real risk lies: the illusion of strategic departure without the institutional rewiring to support it.

If you want a reference point for what true structural diversification looks like, look to the Gulf. Saudi Arabia and the UAE—two historically oil-dependent economies—have spent the past decade confronting their own resource addiction. But their pivot away from hydrocarbon dependence has not just been about sector storytelling. It’s been about architectural overhaul.

In both states, sovereign wealth funds were restructured to support domestic diversification. Tax policy was introduced (e.g., VAT in the UAE) to broaden revenue bases. Labor market incentives were redesigned to promote private sector hiring. In short, the financial and institutional levers were realigned to match the narrative.

Saudi Arabia’s Public Investment Fund (PIF) has become a central actor in this diversification. It directs investment into sectors like tourism, sports, and green energy—but crucially, its revenue model is no longer tied exclusively to oil receipts. Similarly, the UAE’s Dubai World Trade Centre has pivoted toward technology partnerships and hosted global crypto exchanges, creating real non-oil revenue streams.

By contrast, China’s pivot away from land finance lacks this depth. There is no equivalent of fiscal federalism reform. No independent local tax authority overhaul. No vertically integrated diversification architecture. Instead, we see policy experimentation at the margins—and central encouragement without systemic delegation.

There’s an argument—quiet, but persistent among property analysts—that land finance isn’t unsustainable by design. It’s simply been overextended. In its early years, the model worked well. It allowed rapid urban development, enabled infrastructure upgrades, and provided predictable cash flow for local governments. But like any growth engine, it required boundaries. The failure wasn’t the model—it was the refusal to wind it down gradually.

Had Beijing begun reducing land sale dependency in the late 2010s—when urban saturation was already evident—fiscal risks could have been managed more cleanly. Instead, the system was left to bloat. Local financing vehicles mushroomed. Collateral chains lengthened. And developers became de facto fiscal arms of the state, feeding both political GDP targets and local government budgets.

Today, the problem isn’t that land finance exists. It’s that it’s become the default in a system pretending it’s moved on.

Too many Western analysts frame China’s property retreat as a clean pivot to industrial policy. In reality, it’s a substitution without subtraction. The state is adding new strategic sectors—electric vehicles, AI chips, green energy—but not subtracting the old fiscal scaffolding. That’s not transition. That’s layer-caking. Even Chinese tech leaders acknowledge this. In private, entrepreneurs describe new industrial parks built with land revenues, offering free office space to “strategic sectors”—but with few sustainable funding channels beyond the same old mechanisms.

The result is a dual-track system: innovation at the front desk, land collateral in the back office.

This matters. Not just for China’s economy—but for multinationals, investors, and regional peers interpreting the signal. If Beijing is serious about fiscal modernization, the reforms must be institutional, not rhetorical. If not, capital markets will price in the persistence of land finance—alongside its growing fragility.

China is not yet in a post-land finance era. It is in a standoff with its own system design. The strategy has changed on paper, but the fiscal plumbing remains the same. The danger isn’t that land finance still exists. The danger is that everyone is pretending it doesn’t. Until local governments are given new revenue authority—or until national redistribution mechanisms emerge—land finance will remain the quiet engine keeping the lights on. Not because it’s optimal. But because it’s the only tool left in the drawer.