A Research on the Debt Sustainability of China’s Major City Governments in Post-Land Finance Era

Lihe Tu and Emanuele Padovani
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Lihe Tu: Department of Accounting, School of Business Administration, Northeastern University, Shenyang 110167, China
Emanuele Padovani: Department of Management, School of Economics and Management, University of Bologna, 47121 Forlì Campus, Italy

Sustainability, 2018, vol. 10, issue 5, 1-21

Abstract: Land finance, i.e., a city government’s revenue, depends deeply on the revenue from transferring multiannual land use rights and is a phenomenon unique to China. However, due to increasingly tense land supply, increasingly prominent social conflicts, and the slowdown of urbanization in China, the country is entering what we may label the “post-land finance” era. Therefore, revenue from land finance is decreasing, which threatens the sustainability of Chinese city governments’ debt, especially in major cities. This paper tests the long-term sustainability of major Chinese city governments’ debt. Different from intuition, the empirical results show that the debt of these major city governments is still sustainable at the macro level. This paper also constructs a quadratic function model to predict the critical value of the local government debt. Our results suggest that despite the fact that debt is still sustainable, critical value may be reached quickly, as debt is growing rapidly. There is thus a need for local fiscal reform that divides financial power and authority between the local governments and the central government more reasonable and clearly, improves the current assessment mechanism of local governments’ officials, and speeds up the legislative work on property taxes.

Keywords: debt sustainability; city governments; China; land finance (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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