Urbanization, Land Development, and Land Financing: Evidence from Chinese Cities

By Lin Ye and Alfred M. Wu

China’s urbanization is significant worldwide. The country’s urban population proportion increased from 18 percent in 1978 to 51 percent in 2011. It is estimated that the urban population in China will exceed 60 percent in 2020 and 70 percent in 2050. This unprecedented urbanization process is characterized by under-urbanization of population and fast urban land expansion. After the fiscal relation between the central and local government dramatically altered after an important tax reform in 1994, local governments in China had to look for additional revenue sources that are not controlled by the central government and to capitalize on the land over which they have powers of expropriation, allocation and conveyance to finance urban services and development projects. Under local governments’ strong drive to expand urban land, built-up areas in Chinese cities almost doubled from 1996 to 2000.

Existing literature has tried to build the conceptual framework of such a land-centered urbanization process but limited empirical studies have been able to assess the impact of land financing (leasing) on China’s urbanization with a nationwide sample. This study fills this gap by analyzing the panel data from 1999-2009 for all 286 prefecture-level cities in China. Fixed-effects, random-effects and two-stage least squares estimations are run to test the driving forces of urbanization in China. The findings reveal that land financing, measured by different indicators, significantly contributed to land urbanization in China. Economically stronger cities with higher real estate investment more aggressively pushed for land urbanization. Extracting economic benefits from land development has become a dominant character of China’s urbanization.

It is important to realize that urbanization is a multi-dimensional phenomenon. China’s urbanization is even more unique in terms of its speed, scale and government-driven nature. The true purpose of urbanization should be improving the living standard but not revenue generating. It is suggested that urbanization can truly serve its justified goals only if fiscal and political relations between central and local governments can be adjusted. China’s urbanization will continue to be the most significant event affecting the world development. But only when its drives and goals are justified can urbanization be more desirable and sustainable in the long run.

The full article is accessible without a JUA subscription for a limited time as part of our Virtual Issue on Global Urban Change.

Lin Ye is a Professor in the School of Government at Sun Yat-sen University. Alfred M. Wu is an Assistant Professor in the Department of Asian and Policy Studies at the Hong Kong Institute of Education.