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Land finance is a key component of China's economy in various aspects of the country's urban development.[1] Most scholars summarize it as a fiscal operation model in which local governments obtain land transfer fees[2][3][4][5][6][excessive citations] by selling land use rights and rely on them as a primary source of fiscal revenue, or referring to Chinese local governments' high reliance on various types of land-related financing.[7] Local governments gain substantial financial resources by controlling key stages such as the acquisition, reservation, and transfer of urban construction land. These funds are then invested in urban infrastructure development and the provision of public services, thereby promoting urbanization and economic growth.[8][9][10]

The motivation of land finance

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The objectives of local governments in land transfer are to pursue developmental interests and to maintain social stability. The motivations for land transfer can be summarized as follows:

First, land transfer serves as a means to alleviate fiscal pressure ( Among all feasible approaches, land transfer fees have become the primary source of extra-budgetary income to cover the fiscal deficit resulting from decreases in funding from the central government[11][12][13][14][excessive citations]). Following fiscal decentralization,[15][16] the mismatch between administrative responsibilities and financial resources has become increasingly pronounced. In response, local governments have adopted the strategy of selling commercial land at high prices to ease budgetary constraints and compensate for insufficient revenue allocations (In 2002, the China central government changed the allocation scheme for income tax, and the income tax (which used to be obtained exclusively by local governments) has been shared between the central and local governments (40% for central government and 60% for local governments) since then. After that reform, local governments have found it even more difficult to make both ends meet, and they tend to increase the pace of land expropriation to obtain more extra-budgetary revenue. Local governments' behavior has changed from being "assisting-oriented" to "grabbing oriented".[17]).

The urban construction model of Shanghai, China

Secondly, land transfer revenue provides a supplementary source of capital for public expenditure[18] (Note: not only in China, land assets have become an important source of financing capital investments by subnational governments in developing countries[19]). For example, in 2019, 38% of local government revenue in China came from land sales and land-backed financing[20] thereby mitigating the constraints of local government budgets. By monetizing land resources, governments are able to expand the supply of public goods, which contributes to improving overall social welfare.

Thirdly, the incentive structure imposed by performance evaluations plays a critical role. Due to the pressure of officials' promotion competition and the performance evaluation by superior governments, local governments are often in a state of rivalry and interaction with each other, especially in regions that are geographically adjacent or have similar economic development levels. These local governments not only have to ensure the economic growth rate, but also have to seek higher rankings over their "peers". Consequently, they have a strong incentive to pursue land finance. This results in a strategic orientation toward land development and management aimed at maximizing fiscal returns.[21][22][23][24][25][excessive citations]

Consequently, local governments adopt the dual-track approach: selling commercial land at high prices while offering industrial land at lower prices. This strategy facilitates both revenue generation through land sales and capital attraction through preferential land policies, enabling governments to leverage land resources for fiscal and developmental gains.

The origin of land finance

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China started its reform in 1978, converting the planned economy to a market economy. The marketization of essential production factors, including urban land, played a vital role in this process. Operating on the premise of retaining the State's ultimate ownership of urban land, the land use right market was gradually established beginning in the 1980s.[26] The Land Administration Law in 1986 provided the first official protection of land use rights owned by private enterprises or individuals, and it also explicitly allowed entities/individuals to pay for land use rights. An important milestone was the 1988 amending of the constitution to officially allow for market transactions of land use rights. In the subsequent Property Law in 2007 and the Civil Code in 2020, land use rights are formally recognized as one of the core property rights that are legally protected in China. This series of reforms formally established the separation of urban land ownership and land use rights. The State still holds ultimate ownership of urban land, which is prohibited from trading. However, the land use rights can be transferred, mortgaged, and sold for profit as a bundle of property rights.[27]

Sales revenue from commercialized real estate sold in China

Challenges of land finance

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Land finance is an essential tool for China's urbanization and economic growth. However, some problems and changes also occur:

The limitation of land resources

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Land resources are not renewable. With the continuous expansion of cities, some areas have already seen problems such as the shortage of land supply, and the growth rate of land transfer fees has slowed down or even negative growth.

Volatility of the real estate market

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Land finance is highly correlated with the real estate market. On the one hand, local governments obtain income by transferring land to promote real estate development; on the other hand, the appreciation of land value benifits from the real estate development. However, the real estate market is affected by multiple factors such as macroeconomics environment, population mobility, and credit policies, showing greater volatility and cyclicality. At present, affected by factors such as slowing economic growth and weak population growth, China's real estate market slows down, and even shrunk. Many cities have seen frequent auction failures and transactions at reserve prices, and land transfer fees fall sharply.

Government debt risk

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Land finance is an important collateral for local government debt. Many local governments use the expected future land transfer income as the credit basis for repaying urban investment bonds and other debts, and use this to borrow to expand investment and promote urban construction. However, local government debt cannot be unlimited and must be matched with debt repayment capacity. As land finance becomes increasely dependent on debt, the scale of local government debt continues to expand. In 2020, the local government debt in China amounted to 90 trillion yuan (12.49 trillion U.S. dollars), 50% higher than the World Bank and IMF estimated.[28] The huge debt repayment pressure squeezes out other uses of fiscal revenue; once the land market fluctuates and leads to the decline on land transfer fees, the debt repayment fund chain may break, triggering systemic risks.

Social equity

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Land finance exacerbates the income distribution gap, high land prices pushs up housing prices, increased the burden on residents' lives, and caused social inequality. At the same time, the government is keen on selling land to make profit, and may lead to insufficient investment in the supply of basic public services such as education and medical care, which has weakened the inclusiveness of development results.

See also

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References

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  1. ^ Gyourko, Joseph; Shen, Yang; Wu, Jing; Zhang, Rongjie (December 2022). "Land finance in China: Analysis and review". China Economic Review. 76 101868. doi:10.1016/j.chieco.2022.101868. Retrieved 2025-07-10.
  2. ^ Fan, Xin; Qiu, Sainan; Sun, Yukun (December 2020). "Land finance dependence and urban land marketization in China: The perspective of strategic choice of local governments on land transfer". Land Use Policy. 99 105023. Bibcode:2020LUPol..9905023F. doi:10.1016/j.landusepol.2020.105023. Retrieved 2025-07-10.
  3. ^ Qun, Wu; Yongle, Li; Siqi, Yan (January 2015). "The incentives of China's urban land finance". Land Use Policy. 42: 432–442. Bibcode:2015LUPol..42..432Q. doi:10.1016/j.landusepol.2014.08.015. Retrieved 2025-07-10.
  4. ^ Huang, Dingxi; Chan, Roger C.K. (May 2018). "On 'Land Finance' in urban China: Theory and practice". Habitat International. 75: 96–104. doi:10.1016/j.habitatint.2018.03.002. Retrieved 2025-07-10.
  5. ^ Gyourko, Joseph; Shen, Yang; Wu, Jing; Zhang, Rongjie (December 2022). "Land finance in China: Analysis and review". China Economic Review. 76 101868. doi:10.1016/j.chieco.2022.101868. Retrieved 2025-07-10.
  6. ^ Cao, Guangzhong; Feng, Changchun; Tao, Ran (Mar 2008). "Local "Land Finance" in China's Urban Expansion: Challenges and Solutions". China & World Economy. 16 (2): 19–30. doi:10.1111/j.1749-124X.2008.00104.x. ISSN 1671-2234. Retrieved 2025-07-10.
  7. ^ Gyourko, Joseph; Shen, Yang; Wu, Jing; Zhang, Rongjie (December 2022). "Land finance in China: Analysis and review". China Economic Review. 76 101868. doi:10.1016/j.chieco.2022.101868. Retrieved 2025-07-11.
  8. ^ Huang, Dingxi; Chan, Roger C.K. (May 2018). "On 'Land Finance' in urban China: Theory and practice". Habitat International. 75: 96–104. doi:10.1016/j.habitatint.2018.03.002. Retrieved 2025-07-10.
  9. ^ Gyourko, Joseph; Shen, Yang; Wu, Jing; Zhang, Rongjie (December 2022). "Land finance in China: Analysis and review". China Economic Review. 76 101868. doi:10.1016/j.chieco.2022.101868. Retrieved 2025-07-10.
  10. ^ Wang, Wen; Ye, Fangzhi (June 2016). "The Political Economy of Land Finance in China". Public Budgeting & Finance. 36 (2): 91–110. doi:10.1111/pbaf.12086. ISSN 0275-1100. Retrieved 2025-07-10.
  11. ^ Lichtenberg, Erik; Ding, Chengri (2009-07-01). "Local officials as land developers: Urban spatial expansion in China". Journal of Urban Economics. 66 (1): 57–64. doi:10.1016/j.jue.2009.03.002. ISSN 0094-1190.
  12. ^ Lin, George C. S. (2007-08-01). "Reproducing Spaces of Chinese Urbanisation: New City-based and Land-centred Urban Transformation". Urban Studies. 44 (9): 1827–1855. Bibcode:2007UrbSt..44.1827L. doi:10.1080/00420980701426673. ISSN 0042-0980.
  13. ^ Lin, George C. S.; Yi, Fangxin (2011-01-01). "Urbanization of Capital or Capitalization on Urban Land? Land Development and Local Public Finance in Urbanizing China". Urban Geography. 32 (1): 50–79. doi:10.2747/0272-3638.32.1.50. ISSN 0272-3638.
  14. ^ Fu, Qiang (2015-08-01). "When fiscal recentralisation meets urban reforms: Prefectural land finance and its association with access to housing in urban China". Urban Studies. 52 (10): 1791–1809. Bibcode:2015UrbSt..52.1791F. doi:10.1177/0042098014552760. ISSN 0042-0980.
  15. ^ Lin, Justin; Liu, Zhiqiang (October 2000). "Fiscal Decentralization and Economic Growth in China". Economic Development and Cultural Change. 49 (1): 1–21. doi:10.1086/452488. ISSN 0013-0079. Retrieved 2025-07-10.
  16. ^ Jia, Junxue; Guo, Qingwang; Zhang, Jing (March 2014). "Fiscal decentralization and local expenditure policy in China". China Economic Review. 28: 107–122. doi:10.1016/j.chieco.2014.01.002. Retrieved 2025-07-10.
  17. ^ Qun, Wu; Yongle, Li; Siqi, Yan (January 2015). "The incentives of China's urban land finance". Land Use Policy. 42: 432–442. Bibcode:2015LUPol..42..432Q. doi:10.1016/j.landusepol.2014.08.015. Retrieved 2025-07-11.
  18. ^ Qun, Wu; Yongle, Li; Siqi, Yan (January 2015). "The incentives of China's urban land finance". Land Use Policy. 42: 432–442. Bibcode:2015LUPol..42..432Q. doi:10.1016/j.landusepol.2014.08.015. Retrieved 2025-07-11.
  19. ^ Peterson, George E.; Kaganova, Olga (August 2010). "Integrating land financing into subnational fiscal management". Policy Research Working Paper. doi:10.1596/1813-9450-5409. Retrieved 2025-07-11.
  20. ^ University, © Stanford; Stanford; California 94305. "Propping Up Prices? Assessing the Role of Local Governments in China's Real". sccei.fsi.stanford.edu. Retrieved 2025-07-11.{{cite web}}: CS1 maint: numeric names: authors list (link)
  21. ^ Fan, Xin; Qiu, Sainan; Sun, Yukun (December 2020). "Land finance dependence and urban land marketization in China: The perspective of strategic choice of local governments on land transfer". Land Use Policy. 99 105023. Bibcode:2020LUPol..9905023F. doi:10.1016/j.landusepol.2020.105023.
  22. ^ Oi, Jean C. (December 1995). "The Role of the Local State in China's Transitional Economy". The China Quarterly. 144: 1132–1149. doi:10.1017/S0305741000004768. ISSN 0305-7410.
  23. ^ Chen, Kang (November 2004). "Fiscal centralization and the form of corruption in China". European Journal of Political Economy. 20 (4): 1001–1009. doi:10.1016/j.ejpoleco.2003.12.003.
  24. ^ Chen, Ye; Li, Hongbin; Zhou, Li-An (September 2005). "Relative performance evaluation and the turnover of provincial leaders in China". Economics Letters. 88 (3): 421–425. doi:10.1016/j.econlet.2005.05.003.
  25. ^ Maskin, Eric; Qian, Yingyi; Xu, Chenggang (April 2000). "Incentives, Information, and Organizational Form". Review of Economic Studies. 67 (2): 359–378. doi:10.1111/1467-937X.00135. hdl:10722/138702. ISSN 0034-6527.
  26. ^ Du, Jinfeng; Thill, Jean-Claude; Peiser, Richard B.; Feng, Changchun (April 2014). "Urban land market and land-use changes in post-reform China: A case study of Beijing". Landscape and Urban Planning. 124: 118–128. Bibcode:2014LUrbP.124..118D. doi:10.1016/j.landurbplan.2014.01.012.
  27. ^ Rithmire, Meg Elizabeth (Mar 2017). "Land Institutions and Chinese Political Economy: Institutional Complementarities and Macroeconomic Management". Politics & Society. 45 (1). doi:10.1177/0032329216683167. ISSN 0032-3292. Retrieved 2025-07-11.
  28. ^ JIA, Yuxuan. "China's local govt debt in 2020 was 50% higher than WB, IMF estimates: David Daokui Li". www.eastisread.com. Retrieved 2025-07-11.

Further reading

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