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What gave rise to China’s land finance?

Updated: Sep 25, 2023

After the 1994 tax system reform, there has been increasing debate about whether the shared tax system has led to an increase in local reliance on land finance. We share the paper by Yudan Cheng here for purely informational purposes, which may shed some light on this discussion.
Abstract

Land finance, or tudi caizheng, is a phenomenon unique and critical to China’s urban development. Its genesis, however, has not been seriously addressed. This research questions the widely accepted conventional theory that the 1994 tax-sharing reform resulted in land finance. This theory assumes that the reform created a deficiency in local fiscal income; As an expediency, land finance was formulated when local governments sold land usufructs to increase revenue. This research demonstrates that local governments after the reform neither experienced a plunge in revenue nor owned the capacity to create the institutional framework that enables them to increase land revenue. Instead, the combination of rigorous fiscal management, monopoly of land supply, strict land use control, and market mechanism of conveyance, this paper argues, is the primary cause of land finance, and only national institution building can actualise these conditions. The efforts regarding institution building were driven by the party state’s idea of ‘land as resources and asset.’ Otherwise, localities would have to compete to loosen their regulation to attract investments and, therefore, capture much less land value increase, and land finance would be impossible.

10.1016_j.landusepol.2019.05.034
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