Changsha – Just last year, the government's land auction center in this sprawling city buzzed with activity, with investors fighting to buy plots in the town center and pushing prices to record highs.
Now, the center is eerily quiet, as moves by the national government to rein in the country's once-roaring property market have taken hold.
"The land market is cooling down so quickly –it's as if all the property developers vanished overnight," said an official at the department that handles government land sales for Changsha, a central Chinese city of 7 million.
"Now we have to go out and find buyers by ourselves. It is really a hard time," added the woman, who declined to give her name.
The city government in Changsha, once known for machine-making and now becoming a hub for China's TV and creative industry, has good reason to be nervous about declining land sales. Without hefty income from such sales, Changsha faces problems paying its bills, which include heavy debt-servicing.
Many other cities are in the same, potentially precarious position.
On Tuesday, two days after Beijing pledged to "unswervingly" maintain property curbs, a major auction for 12 plots in the southern city of Guangzhou was abruptly canceled, without explanation, just three hours before opening.
Changsha could find itself unable to borrow more money and to pay for the kind of investment projects that have kept local economies – and the national economy – humming at near-double digit rates.
Where's the money?
"Without income from land sales, where can we get enough money to build roads, schools, hospitals and other projects that Beijing ordered us to do?" asked a man surnamed Wang who works at Changsha's land auction center.
Lacking other steady sources of revenue, city and provincial governments across the country have come to depend on land sales, often turning farmland – still ultimately owned by the state – over to developers via auctions.
The model worked well enough while China's land values rose, as they have most of the past decade. But across the country, sales are slowing and prices are sagging.
"Most cities in China could see their revenue base drying up with land sales shrinking noticeably," said Qiao Yongyuan, an analyst at CEBM, a private investment advisory firm in Shanghai.
"It would take them a relatively long time to find a new source of sustainable revenue," he added.
As many cities, including Changsha, have funded massive expansion efforts with borrowed money, economists warn that a continued fall in land prices could eventually trigger a wave of debt defaults and produce a new crop of bad loans in the banking system.
That could destabilize the world's second-largest economy, which expanded in the third quarter at its weakest pace since early 2009.
Pillar of the economy
Real estate is a pillar of China's economy, with property investment accounting for 12 percent of GDP and 25 percent of total fixed asset investment in 2010.
Zhang Zhiwei, chief China economist at Nomura Securities in Hong Kong, says the full impact of declining land sales will only become clear gradually – and it could prove big.
"Over time, the cooling land market could affect the Chinese economy in a much broader way, although most of the pressure would be felt by some local governments."
When Beijing moved to curb rising property prices in late 2009, the average home price in 70 major cities was rising 7.8 percent a year. The central government has adopted steps from raising mortgage rates and down-payments to making buyers pay property tax for the first time.
In late 2009, Beijing began moves to curb soaring property prices. The surge peaked in April 2010, when home-prices in 70 major cities rose 12.8 percent on average from a year earlier.
Later, the government introduced more moves, and this year the measures seem finally to have taken hold. All signs point to a downturn – or at least an end to price rises – for land.
In the first nine months this year, 17 of the top 30 cities had lower land-sale revenue than a year earlier, and in three places the fall topped 35 percent, according to industry data. And for most cities, average prices are dropping.
Most Chinese cities are driven to sell land to pay their debts, a partial legacy of an investment binge under Beijing's 4 trillion yuan (US$629 billion) stimulus package to cope with the 2008 global financial crisis.
At the end of 2010, China's local governments had 10.7 trillion yuan worth of debt, according to the National Audit Office.
Cities "will surely face stress trying to meet their repayments," said Hui Jianqiang, the head of research at E-house China, a real estate information provider.
Vicious cycle of strain
Credit Suisse said in a recent report that loan losses at Chinese banks may be equivalent to 60 percent of their equity capital if real-estate companies and local governments fail to repay debts.
The possibility that cities could default may make it more difficult for their local financing vehicles to raise capital through bond issues or bank loans. That could drop local governments into a vicious circle of cash strains.
That would force some localities to halt unfinished projects or scrap new investments.
Suspensions of projects, along with the slowdown in property investment, may eventually weigh on China's fixed-asset investment, the most important driver of Chinese economy.
Hangzhou, the capital of eastern Zhejiang province, is counting on land sales to pay back 82 percent of its debt, which was 83.7 billion yuan at the end of 2010. But it is unlikely to reach its target of 55 billion yuan from land sales this year, which might result in a default on the debt.
In northeast Liaoning province, nearly 85 percent of local government-related financing vehicles missed debt service payments in 2010, according to its audit report published on the local government's website.
Some local governments are starting to backpedal on some property tightening measures Beijing has imposed.
"Actually, we are not following Beijing's order as strictly as required," said the woman at the center who bemoaned the vanishing of buyers. She said it isn't hard for residents to find loopholes and skirt rules barring the purchase of a third home in the city.
Changsha is not alone. The southern city of Foshan last week announced that it would relax restrictions on home purchases, although it later suspended that move to study the possible impact.
In Changsha, officials are trying to find ways to lure developers back. For example, instead of openly auctioning a plot, officials are now privately approaching some developers, promising to sell land at a relatively lower price.
That could be a "more realistic way" to win sales when the dimming market has made bidders cautious, said Shu Tingfei, a property analyst at Shanghai Securities Co.
The Changsha center also allowed more land to be developed for residential use, as developers are shunning commercial projects, which usually cost more to complete.
In the first nine months of 2011, the southwestern city of Kunming put up for sale 21 million square meters, or more than four times as much land as a year earlier, according to the China Real Estate Index System.
In Changsha, officials fret about the financial impact of the market going from hot to cold.
"You can say that our city was somehow kidnapped by the land market and it is not something sustainable," said the woman in Changsha's land auction center. "But for now, we haven't found a way out." (US$1 = 6.359 Yuan)