State Capitalism: A New Perspective on Land Sale in China

• Author: Liugang Sheng,Hongyan Zhao,Wei Tian
• DOI: http://doi.org/10.1111/1468-0106.12153
• Date: 01 February 2016
• Published date: 01 February 2016

STATE CAPITALISM: A NEW PERSPECTIVE ON LAND

SALE IN CHINA

WEI TIAN University of International Business and Economics

LIUGANG SHENG*Chinese University of Hong Kong

HONGYAN ZHAO Research Department of International Monetary Fund

Abstract. This paper presents a new perspective for understanding the land sale behaviour of local gov-

ernments in China, focusing on the ‘institutional trinity’of the land market; namely, state ownership,

economic performance-based political promotion and the unbalanced fiscal structure. The paper argues

that the main motivations of local government to sell land are to promoteindustrial growth and to enhance

government fiscal capacity. These two hypotheses are tested using prefecture-level data covering approxi-

mately 330 municipalities during the period of 1999–2007. The paper finds that industrial output and fiscal

expenditure increase by approximately 1.8% and 1.0%, respectively, if the area of land sale doubles.

Evidence also shows that land sale promotes industrial growth by boosting fixed asset investment and

foreign direct investment. Interestingly, the paper also finds that the land-sale strategy of local governments

is more effective in the eastern provinces than in other regions.

1. INTRODUCTION

Land is of central importance to industrialization and economic structural

change. The history of industrialization starting in the UK in the 18th century

is closely connected to the structural change in land usage. Land has been the

most important production factor in agriculture for thousands of years, and this

is still the case in modern society. Factories and infrastructure need to be built

on land to promote industrial development, and skyscrapers and modern cities

rise in historical rural areas. Land also provides capital and collateral, which

is particularly important for developing countries such as China because of the

scarcity of physical capital (Caselli and Feyrer, 2007).

The land policy on how the government should allocate land efficiently

between agricultural needs and industrial development is an ongoing topic of de-

bate. With its astonishing economic growth since 1979 and the dramatic increase

in industrialization and urbanization, the area of land sale (for conversion) in

China has risen significantly. This development has triggered a wave of public

anxiety about the causes and consequence of land sale by local governments;

thus, this issue is a hot topic of discussion among academic researchers and

policy-makers.1However, the existing studies either only examine the effect

of land conversion on agricultural output (Zhang et al., 2004) or consider the

effect of land sale on the fiscal revenue of local governments. There are few

*Address for Correspondence: Chinese University of Hong Kong, Shatin, N.T., Hong Kong. E-mail:

lsheng@cuhk.edu.hk. We are grateful to the Editor and to an anonymous referee for their helpful

suggestions.

1For example, a recent report of the World Bank on urbanization in China expresses concern that

the dramatic rise in land conversion might lead to unsound urban growth, waste of land resources,

unsustainable local government finance and fiscal risk.

Pacific Economic Review, 21: 1 (2015) pp. 84–101

doi: 10.1111/1468-0106.12153

© 2016 John Wiley & Sons Australia, Ltd

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systematic reviews of the motivations and strategies of the government in

selling land, nor empirical assessments of the effect of land sales on the local

economy.

The present paper offers a new perspective on land sale in China since the

1990s, arguing that the state-capitalism perspective provides an integrated frame-

work to understand the institutional features of the land market, the political mo-

tivation of local governments, and the effect of their practices on the local

economy.2The dual-track rural–urban land tenure system entitles local govern-

ment to monopoly power in urban land supply, and also allows local government

to discriminate against buyers with various purposes of land usage. Meanwhile,

the economic performance-based political promotion scheme motivates local

government officials to boost economic growth using various resources, with

land being an important instrument to stimulate investment and industrial devel-

opment (Li and Zhou, 2005). The fiscal reform implemented in 1994 deprived

local government of a large share of the revenue that they previously received,

while their responsibilities in regards to economic development and public service

provision remained largely unchanged. This fiscal imbalance imposed great pres-

sure on local government, and land sales have become an important additional

source to finance the fiscal deficit (Cao et al., 2007; Liang, 2009). Therefore, the

‘institutional trinity’of state ownership, the political promotion mechanism

and an unbalanced fiscal structure strongly motivates local governments to sell

land to promote industrial growth and boost government fiscal capacity.

In this paper we first discuss the relevant institutional environment of the land

market in China, and then derive twomain hypotheses on land sale. Our main ob-

jective is to carefully quantify the effect of governmentland sale by estimating the

elasticity of industrial output and fiscal capacitywith respect to land sale. We also

explore the possible channels or regions through which the effectswork. The ques-

tion of whether land sales have meaningful effects on local industrialization and

on government fiscal capacity has great policy relevance in China, but previous

research on land sales consistsmainly of case studies and non-systematic empirical

analysis. For the present analysis, we use Chinese prefecture-level municipality

data from 1999 to 2007; these data cover approximately 330 cities. We exclude

the four largest metropolitan areas (Beijing, Tianjin, Shanghai and Chongqing)

because their data might be significantly differentfrom other cities due to the spe-

cial administration arrangements in place. We also construct a unique data set

that includes information in land sales, industrial output, fixed asset investment,

foreign direct investment (FDI), and fiscal revenueand expenditure, which allows

us to estimate the effect of land sales on industrial output and fiscal capacity.

We find that land sale has a positive effect on industrial output and fiscal

expenditure. Industrial output and fiscal expenditure increase by approximately

1.8% and 1.0%, respectively, if the area of land saledoubles. Evidence also shows

that land sale promotes industrial growth by boosting fixed asset investment and

2The term “state capitalism”has various meanings, but it is usually refers to the dominance of state-

owned entities or business enterprises in certain industries or markets. The revival of state capitalism

as a result of the economic success of BRIC countries (especially China) contrasted with the recent

deep recession in developed countries (Li et al., 2014).

STATE CAPITALISM AND LAND SALE 85

© 2016 John Wiley & Sons Australia, Ltd