The Return of State Control and Its Impact on Land Market Efficiency

Abstract

Urban land reform in China aims to build an efficient land market. However, it has led to a dual land supply system that consists of both market-based leasing and administrative allocation. In recent years, the control by local municipal government over land supply has strengthened substantially. This has caused concerns over whether the land reforms can achieve efficiency goals given the constraints imposed on market instruments. This paper addresses this important question by studying whether market instruments introduced by urban land reforms improved the efficiency of land supply and new housing supply after state control was tightened from 2002. We propose a theoretical framework that incorporates the interactions between land and housing supply and facilitates analysis at both the macro and the micro levels. We find that the return of state control has caused a general decline of the marketization level in China’s first tier cities. The land marketization level in new first tier and second tier cities has improved significantly over the last decade, but the trend has already slowed down. The overall trajectory of land marketization in China is a clear downward trend since 2002. Meanwhile, we have found consistent evidence that higher levels of land marketization lead to more efficient land and housing supply. As a result, the cost of increased state control has offset the benefits of market-oriented supply methods, and the overall effect is a decline in land market efficiency. These findings have important implications in understanding the role of government interventions in supporting market-based activities in China’s land and housing markets.