Land Finance, Real Estate Market, and Local Government Debt Risk: Evidence from China

Abstract

The financing function of land in China has been extensively documented, but little research has explored the role of land finance in the real estate market affecting local government debt. In light of the recent simultaneous increase in China’s real estate market risk and local government debt risk over the past two years, a pressing need to reevaluate the significance of land finance has arisen. Thus, this study explores the role of land finance in the relationship between the real estate market and local debt risk. The data were collected from 224 Chinese cities from 2010 to 2019. The study found that real estate market prosperity significantly promotes the expansion of local government debt. Land finance acts as a mediator and a moderator in this relationship. The study also found that during periods of real estate market booms, local governments tend to sell more land, which reinforces their debt-raising behavior and exacerbates the impact of the real estate market on local government debt; during periods of real estate market downturns, local governments tend to decrease debt, but the government debt repayment risk increases significantly. Furthermore, the amplifying effect of land finance is more pronounced in economically developed regions and cities with higher public budget revenues.