Chinese fiscal revenue growth is set to hit its lowest level in more than three decades this year, Deutsche Bank warned, which is likely to add more downward pressure on a slowing economy.
"We forecast the growth of total government revenue will slow to 1 percent in 2015 from 4 percent in 2014 and 19 percent on average from 2009 to 2013," the bank said in a recent report, stating that 2015's pace of growth will be the slowest since 1981. It also predicts growth of local government revenue will drop to -2 percent this year from 2 percent in 2014.
"We believe this is the most important risk to the economy and one that is not well recognized in the market," the bank added.
The slump in land sales, which make up 23 percent of national government revenue, is to blame for the fiscal crisis, according to the report. Land auctions plunged 55 percent in the third-quarter and averaged a decline of 40 percent across 300 cities all of last year, according to Deutsche Bank
"The reality is that the land market started to cool down sharply in March 2014, but from a fiscal revenue perspective in annual terms, land sales remained positive until Q3 2014. We believe the fiscal shock to local government revenue only started in Q4," Deutsche Bank said.
Buyers usually make payments to local governments within two quarters of the completed auction, so the fiscal impact of lower land sales will only be felt in the first half of 2015, the report said.
China's property slowdown is seen as the primary reason behind dwindling land auctions.
Land sales value in 300 cities dived 27 percent on year in the 2015 financial year, according to a report from Citigroup this month. "We believe slowing land sales reflect sluggish physical market and reluctance of local governments to launch land sales during a low period," analysts Oscar Choi and Marco Sze said.