(Yicai) March 25 -- China's land market exhibited signs of picking up in the first two months of this year, as property developers prioritize land purchases in key cities while staying cautious about smaller markets.

Local government revenue from selling the rights to use state-owned land in 300 cities rose more than 19 percent in the two months ended Feb. 28 from a year ago, with that for first-tier cities surging nearly 58 percent, and average floor prices climbed 25 percent, according to data from China Index Holdings, a provider of real estate market information.

The rebound is driven by builders adjusting their strategies to mitigate risks and maximize profits, focusing on quickly replenishing land reserves in key cities while maintaining a cautious approach toward third- and fourth-tier cities, said Luo Zhiheng, chief economist at Yuekai Securities. He noted that the stabilization of house sales has also boosted market sentiment.

Local governments have traditionally relied heavily on land sales for income -- a system often referred to as ‘land finance’ -- but have faced difficulties in recent years due to fluctuating sales and the need for a more sustainable fiscal structure.

Revenues from land sales continued to fall in January and February, down 15.7 percent from a year earlier, through the pace of the decline slowed from 16 percent last year, according to finance ministry data.

Local governments have optimized their land supply structure and made more high-quality plots available, Luo said, adding that cities such as Guangzhou and Wuhan are reclaiming idle land, changing its usage designation, and returning it to the market, thereby increasing its appeal to developers.

The central government should consider issuing special treasury bonds and establishing a real estate stabilization fund of around CNY2 trillion (USD275.4 billion) to support the delivery of housing projects, acquire existing housing stock, and buy idle plots from developers so as to ease their liquidity pressures and support market stabilization, Luo said.

China should also adjust its tax policies to bolster local government finances, offsetting the impact of declining land sale revenue while improving expenditure efficiency. This, he added, could drive fiscal and tax reforms to address the long-standing challenge of balancing local revenue and expenditure.

Editor: Futura Costaglione