Working Paper: NBER ID: w30504
Authors: Zhiguo He; Scott T. Nelson; Yang Su; Anthony Lee Zhang; Fudong Zhang
Abstract: Public finance and real estate are uniquely intertwined in China, where local governments also serve as monopolist sellers of land. We shed new light on how land sale decisions and land prices depend on local governments’ financing objectives. First, we document the large (ten-fold) price premium paid for residential-zoned relative to industrial-zoned land and show this price premium can be explained by the greater future tax revenues generated by industrial land; the choice to sell land as industrial rather than residential generates an IRR of 7.70%, which is comparable to local governments’ cost of capital in bond markets. Second, local governments are sensitive to financing constraints: industrial land supply decreases with governments’ bond yields. Third, local governments’ land sales are sensitive to the intergovernmental tax sharing, such that industrial land sales increase with the share of taxes captured by local governments. Thus, shocks to local public finances can be expected to affect the Chinese real estate market and vice versa.
Keywords: Public Finance; Land Supply; China; Zoning; Local Governments
JEL Codes: G31; H70; R14; R38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to local government finances (H79) | land markets (R33) |
| municipal bond rates (H74) | industrial land supply (R52) |
| municipal bond rates (H74) | residential land supply (R31) |
| local government financing constraints (H74) | land zoning decisions (R52) |
| local governments' share of tax revenues (H71) | volume of industrial land sold (R33) |