Land financialization and debt expansion: Evidence from city–county mergers in China

Abstract

This paper discusses the “land-debt” financing pattern in China in the context of local governments under fiscal pressure and analyzes the development and economic effects of land financialization. Using a difference-in-differences approach based on the exogenous shock of city–county mergers, we find that city–county mergers significantly boost local governments' debt issuance, causing land financialization. City–county mergers relax land resource constraints on local governments, increasing land held by local government financing vehicles (land mortgages) and land transfer revenue (land guarantees). Accordingly, it is as such an impact mechanism rather than a fiscal pressure that mainly leads to debt expansion. We also document that this effect is more pronounced in China's central and western regions, where land is more correlated with local economies; in periods when the central government does not regulate local land financing; and in areas where officials have strong promotion incentives. Further analysis reveals that most of the debt funds raised by city–county mergers are used for infrastructure construction and loan repayment, and the increasing debt risk of local governments should also be a matter of concern.