China is abandoning its real estate-centered economic model

"The era of growth through land sales is over"... China abolishes 'land finance' and implements 'transfer of consumption tax to local governments' - Global Economic. The Chinese government has embarked on a historic fiscal overhaul, officially abandoning the 'land sale-based local finance model'—the core engine that has driven ultra-fast urbanization and economic growth for the past 30 years—and transferring tax revenues linked to consumption and commercial activities to local governments. This is the first major shift for the central government since the 'Tax Sharing System' reform in 1994.
China's local government revenue structure is similar to South Korea's.
Local governments sell land-use rights > use sales revenue for urban development
Construction companies sell apartments pre-construction > use pre-sale revenue to purchase land and build apartments
However, with the Evergrande crisis in 2021, the Chinese real estate bubble burst,
and the surge in unsold apartments became a social issue.
The proposed economic system reforms include:
- Pre-sales only allowed after the apartment structure is at least completed
- Transferring a portion of the consumption tax, which previously went to the central government, to local governments
- Collecting consumption tax at the final sale stage rather than the production stage
The goal of the consumption tax reform is to shift the financial structure of local governments from real estate profits
to revenue generated from actual economic activities.
Local governments will stop indiscriminate development of new cities/residential districts
and focus more on promoting commercial districts, attracting businesses, and increasing citizen purchasing power.
Since this is an issue that South Korea is also grappling with,
domestic scholars are reportedly paying close attention to the results.