Determinants of Land Finance in China: A Study Based on Provincial-level Panel Data

Abstract

Tapping land values to raise extra-budgetary funds for local coffers has been a prominent fiscal phenomenon in many developing countries. This article, based on a provincial-level panel dataset for the period 1999-2009, examines the factors behind Chinese local governments’ reliance on land finance. Our analysis shows that intergovernmental fiscal arrangements, such as the central-provincial fiscal imbalance, and the lack of adequate revenue capacity of sub-provincial governments, have encouraged local governments to exploit land leasing. There is also evidence suggesting that political factors might have a significant impact on land finance arrangements, but these tentative results need further investigation. This research contributes to the body of literature on intergovernmental fiscal relations, and improves our understanding of the dynamics and complexity of land finance arrangements in China. Policy implications are drawn from this analysis for further reforms of land management and intergovernmental financing in China and other developing countries facing similar challenges.