Journalists and bloggists (sounds balanced that way) have been punting around the topic of China’s real estate ‘bubble’ for many weeks now. The question that has garnered the most attention is whether or not the market is actually experiencing a bubble or whether this is sustainable growth.

Fun stuff, and I have participated myself. However, I get the feeling that the analysis focuses too heavily on banks, developers, and speculators/home owners and fails to address secondary effects of a possible market adjustment.

Sure, if the bubble pops dramatically, the banks could have some serious exposure. Developers and speculators might be left hanging as well. This would all lead to a big drag on the economy, which otherwise seems to be recovering fairly well at the moment.

For journalists, these topics are the low-hanging fruit. Easy to understand, easy to source, no problem reaching out to folks at banks and development companies for reax quotes.

I think that’s the reason why secondary effects never get much press. It’s not obvious at first glance that one sector that would be hit the hardest by a possible bubble pop would be local governments, which would then hit people living in many suburban and rural communities.

What’s the connection? Trace the land ownership on all those new homes, shopping malls and factories and you eventually will find a small number of local government officials that granted land use rights to a development company.

Sometimes those deals are dirty, many of them are transparent and legal. In most cases, though, the grant or lease involves significant revenues flowing to that local government.

When prices go up, local officials realize that they’re sitting on a goldmine, and it makes perfect sense to sign grants and leases as quickly as possible to benefit from the hot market. In some cases, the officials even retain a piece of the action (i.e. the development company) and either the local government and/or the officials themselves benefit even more as the property is developed.

No surprise at these numbers, therefore:

While the global financial crisis raged, land lease revenues for China’s local governments soared to a new high in 2009. The Ministry of Land and Resources said February 2 combined annual revenues rose to 1.59 trillion yuan, up 63.4 percent year-on-year and far surpassing the previous record set in 2007.

At the same time, budget performance reports from regions nationwide show last year’s increases in land lease income and land-related tax revenues were noticeably higher than local government revenues from other sources. (Caixin)

Another no-brainer: it’s easy for local governments to get used to this revenue and then start relying on it. Example? Just take a look at oil-producing nations and their often tragic boom-and-bust histories, with a careful examination of their government budgets.

So here’s the worry. Sure, I’m concerned what happens to the banks if the real estate market tanks. (I don’t expect it to do so, by the way, although a prolonged period of slow growth wouldn’t surprise me.) I don’t care as much about the developers and speculators, except of course how their demise would hurt bank balance sheets.

But what happens to local governments and their budgets if a lot of that land-based revenue dries up or at the very least slows down considerably? What happens to all those new programs designed to help the rural poor? Would Beijing step in with assistance to these localities?

Once the market stops growing at mega-fast rates and some of these superfluous developments fail, the land and tax revenue to the local governments will be hit. What other sources of revenue are going to fill the gap?