1.1 Introduction
Over the past ten years, China has witnessed a rapid growth in local governments’ state-owned land use right transfer along with the expansion of urban area, land expropriation and development of land for non-agricultural constructions. Notably, the land conveyance fee accounts for 9% of local fiscal revenues in 1999 and increases to more than 60% in 2011 (Ye and Wang 2013). Local governments’ land transaction revenues increased more than $193 billion to roughly $629 billion in 2013 according to the Ministry of Finance.
“Land finance”, narrowly defined as the local government’s dependence on the income from leasing or selling land to fund its fiscal expenditure, has become a prominent phenomenon. In a broad sense, land finance includes land conveyance fee, land-related taxes and mortgages through which local governments acquire via the rights to use lands. Although the land conveyance fee increases fiscal income, stimulates urban growth and facilitates industrialization through exploitation of surplus land (Ye and Wang 2013), it has induced a wide range of severe problems. First, corruption related to land and real estate transaction is one of the major concerns. Prior audits have indicated rent-seeking behavior in land sales in 95% of provinces surveyed (CKGSB knowledge 2014). Second, the excessive land acquisitions from peasants with inappropriate compensation reduce peasants’ welfare and may result in social conflicts. Moreover, conversion of agricultural land for non-agricultural purposes undermines food security. Land finance pushes up the housing price through increasing land price, which catalyzes bubbles in real estate industry. Furthermore, it results in waste and severely inefficient use of land resource (Li et al. 2013a). As mentioned by Li and Zhang (2014), although land finance boosts the economy to some extent, it leads to an increasingly unsustainable economic structure, reducing the overall efficiency of economic development. Therefore, the identification of the underlying reasons behind land finance is imperative.
A misunderstanding of the underlying reasons is very likely to lead to invalid approaches to address the problems caused by land finance (Ye and Wang 2013). Our research probes into the causes of Chinese local governments’ land-leasing behaviors, a major component of “land finance”. We propose two questions. The first is related to whether fiscal decentralization has been a significant contributor to land-leasing behavior since 2003. The second concerns whether yardstick competition contributes to local governments’ land-leasing behavior.
The existing studies of Chinese local governments’ land-leasing behaviors point out one widely recognized institutional cause—the fiscal decentralization system established since the 1994 tax distribution reform. The fiscal pressure amplified by the fiscal decentralization system leads to local governments’ aggressive pursuit of extra-budgetary revenues. However, a new trend observed in data after 2003 questions fiscal decentralization’s role as a main contributor to land finance (Li et al. 2013a). Another view claims that inter-jurisdictional gross domestic product (GDP)-oriented competition resulting from the cadre evaluation system intensifies the land-leasing behavior. Before 2003, local governments conducted land sales mostly by negotiation featuring low prices to attract foreign direct investment (FDI). However, after the enactment of the 2002 regulations on the conveyance of land use rights by tender, auction and listing and the 2003 regulations which prohibit land sales by negotiation, land-leasing behaviors may not be FDI-oriented. This chapter examines the varied roles fiscal decentralization and yardstick competition play in explaining Chinese local governments’ land-leasing behaviors.
In the following section, we provide a comprehensive literature review. In the third section, we construct a theoretical framework based on the principal-agent model to evaluate if fiscal decentralization system and yardstick competition are two important contributors to Chinese local governments’ land-leasing behaviors. In Sect. 1.4, we present the empirical strategy followed by the results and findings shown in Sect. 1.5. The last section concludes.
1.2 Literature Review
According to existing studies of governments’ land-leasing behaviors, the vertical strategic interaction between central and local gov...