When the real estate sector catches a cold, the taxation department sneezes.

This is especially true for Shanghai, where real estate has developed into a key industry in the last few years, becoming a major source of the city's revenue.

But the momentum of high revenue has been abating fast since the central government took steps to cool down the property market in the last two years.

The growth rate of Shanghai's income declined by more than 9 percent last year, largely caused by the negative impact on the real estate sector and the steel industry.

Revenue has been hit particularly hard in some local districts where the property sector once contributed as much as 40 percent of the gross domestic product and 20 percent of the income.

"Land-dependent revenue is expected to suffer prolonged pain as real estate and related industries make up a quarter of the city's income," the 21st Century Business Herald said, quoting a report from the Shanghai Academy of Social Sciences (SASS).

Before 2006, land-driven taxes, such as land leasing tax, value-added tax, income tax, property transaction tax and stamp tax, propelled Shanghai's revenue growth by more than 20 percent a year. But that growth dropped to 11.6 percent last year.

At the just-concluded National People's Congress, local governments' over-reliance on land income received sharp criticism.

The habit of making a pile from land leasing has been blamed for pumping up property prices. Many believe higher property prices make local governments happy as they mean more income for their coffers.

With a sluggish property market, Shanghai has been reportedly looking for new ways to make up for the revenue shortfall. The city government is now banking on the advanced manufacturing and modern service industries, both now listed as priorities in Shanghai's 11th Five-Year Plan (2006-10).

But that switch won't be easy, considering the huge role of the real estate sector in the local economy at the moment. Besides, other major cities in the Yangtze Delta are also targeting advanced manufacturing and modern service industries, touting their much cheaper labor and land costs.

(China Daily March 28, 2007)