Although Deutsche Bank only reviewed data for four provinces, concerns about the health of property markets in third-tier cities across China are mounting.
Local government budgets, especially in smaller cities, rely heavily on land sales, which in turn are dependent on strong property demand and prices. A glut of new building combined with tougher credit markets has cooled interest in all but the largest cities, forcing local governments to step in and prop up their own land prices.
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Land sales account for about a quarter of local government revenues on average across China but there is a "huge range", said Debra Roane of Moody's rating agency. "The issue is that land as a source of revenue is highly volatile."
LGFVs appeared about six years ago. Created to fund Beijing-mandated stimulus projects in the wake of the global financial crisis, they quickly exacerbated concerns over rising levels of local government debt. Use of the vehicles to prop up land prices would further stoke those concerns.
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"Land sales are among the most polluted statistics in China," said Anne Stevenson-Yang of J Capital Research, who spends most of the year travelling to small cities to investigate the dynamics of local economies. Land sales to LGFVs can be a means to repay debt, move collateral or maintain the value of land locally, she says.
The Chinese population's continued preference for more dynamic provincial capitals and large metropolitan areas flies in the face of Beijing's urbanization policies, which try to force investment, construction and home purchases to smaller cities and county seats, many of which are already overbuilt.
Mr Zhang's analysis of land sales in four provinces shows that the problem is most pronounced in the smallest cities. In Changzhou, a city along the Yangtze river that has built an empty "new district", the share of land sales to LGFVs rose to 70 per cent in 2014, from 28 per cent in 2009, he said.
Also troubling was the level of cross-guarantees of loans among LGFVs, he added.
Several cities, including prosperous Hangzhou, have already had to intervene to support rings of local companies propping each other up through mutual loan guarantees.
Those guarantees become particularly precarious in places where the largest local participant has gone bust, such as the coal-and-steel city of Yuncheng in Shanxi province, home to failed steelmaker Haixin Steel.