A Policy Reversal as Structural Break: A Lesson from China’s Land Lease Financing for Infrastructure

Yilin Hou, Lin Li and Lei Shao

No 12356, CESifo Working Paper Series from CESifo

Abstract: Land-based revenues as a fiscal instrument to finance infrastructure tie public investment to real estate markets, where demand fluctuations cause fiscal consequences. This paper takes policy reversals as structural breaks and examines their impacts on infrastructure investment. We dissect China’s 2016 policy reversal that disallowed developers to finance land purchase with debt, causing sharp declines in local government land revenues, slashing their fiscal base for infrastructure investment. Using prefecture-level panel data and continuous difference-in-differences identification, we estimate the reversal reduced land-lease revenues by 55%. Two-stage least squares estimates suggest a 10% land-revenue decline translates into 6.6% investment reduction. Decomposing the funding sources show that 70% of the decline stems from contractions in local self-financing and borrowings by local financing vehicles, and resource reallocations within these financing vehicles amplify the impacts of the structural break. The lesson is: policy regime stability is vital to fiscal systems that rely on land-based revenues.

Keywords: land finance; infrastructure investment; credit crunch; local government financing vehicles; implicit debt (search for similar items in EconPapers)
JEL-codes: H74 R14 R28 R31 R53 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12356

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