Official statistics show that land transfer fees in Beijing reached 105.5 billion yuan ($16.7 billion) in 2011. This was a decrease of 35.7 percent compared with that in 2010, which hit an historical high. Ma Guangyuan, an economist from Peking University, believes that local governments must realize it is unsustainable to derive revenue mainly from selling land. They need to adjust their industrial structures by supporting real economy in order to guarantee the sustainability of tax revenue. Excerpts of his views are as follows:

According to a report on land transactions in 130 Chinese major cities in 2011 released by China Index Academy, China's largest property research organization, the land transfer revenues collected in the 130 Chinese cities in 2011 totaled 1.86 trillion yuan ($294.4 billion), down 13 percent year on year. Although local governments haven't released official data on land-related revenues in 2011, it is certain that the total number is much lower than that of 2010, which was 2.9 trillion yuan ($458.2 billion). Apart from overheating of the real estate market during the past two years, the central and local governments' suppression of the property price bubble in 2011 strained real estate developers' cash flow and clouded their desire to buy land as they saw little profit in the process.

During the golden period of the real estate market, many developers rushed to purchase land regardless of the cost, forcing the land price to skyrocket, most notably in 2009 and 2010. In 2011, due to the stricter policy regulations, the volume of land transactions declined. According to the figures provided by Hong Kong-based Centaline Property, failed bids of land purchasing amounted to 117 in November 2011 with an area of 15.8 million square meters, 432 percent more than that of October. 

Despite the long-time criticism on land finance, local governments are reluctant to give up this method of collecting revenues. Actually, the land finance itself has no benefits for the Chinese economy or society.

First, selling land is a predatory way of economic development. On the one hand, local governments get land from farmers at low prices, a mere way of plundering the farmers' wealth; on the other hand, they keep the housing prices high, getting more wealth from the public. In this way property becomes a tool to manipulate people financially. Many families have to spend their life savings from generations buying houses. The high housing price is also a fundamental reason for China's sluggish domestic demand and it widens the wealth gap as well.

Second, land finance damages China's industrial structure. With private, state-owned and foreign capital flowing into the real estate market, the manufacturing sectors, which the Chinese economy had long depended on for growth, is drastically shrinking and losing its competitiveness. This will fundamentally destroy the foundation of the economy.

Therefore, land finance is a game that cannot be continued. When there was no more land to be sold, numerous bad loans would engulf the entire financial system, the industrial structure would be more abnormal and the gap between rich and poor would be further widened. This year will be a good opportunity for local governments, with the advent of change in the real estate market. They should gradually drop the excessive dependence on gaining revenues from land sales. 

While persisting in the current regulatory housing policy to make prices more reasonable, the Central Government is working on effective regulations on the real estate market. Evidence of this is the expansion of property tax in more cities this year, which will mean an end to the dependence on revenue from land sales as seen in the past.

Some local governments are making progress in this area. Taking Beijing as an example, its regulatory policy on housing market was the strictest in the nation in 2011, which led to a drastic decline in housing transactions and in turn in the government's revenue from land sales. Statistics show that the transaction volume of newly built houses in 2011 was 90,605 apartments, a decrease of 18.4 percent year on year. The floor space of newly built houses sold was for the first time less than 10 million square meters during the past six years. The transaction volume of second-hand houses in 2011 was also the lowest in the past three years. 

However, despite the decline in land-related revenue, the revenue of Beijing reached 300.63 billion yuan ($47.57 billion) in 2011, an increase of 27.7 percent year on year. The stimulation of the home appliance subsidy program in rural areas, the development of Zhongguancun Science Park, industrial restructuring and the transformation of the economic development mode ensured the increase of Beijing government's revenue.

What Beijing has achieved proves that reducing its dependence on land finance is feasible. Others should follow suit and although it may be difficult in the short term, it is a necessary option for the future.