Monopolized Land Supply and Excessive Leverage of Local Governments in China

In China, a distinctive feature is that all land is publicly owned, encompassing two forms: state-owned and collectively owned. However, only state-owned land is permitted to sell in the land market, establishing a monopoly on its supply by local governments. Alongside selling land to enterprises, local governments also utilize it to establish financing vehicles, using them as paid-in capital for borrowing in the financial market. This study emphasizes the relationship between land supply and the leverage of local government financing vehicles in contemporary China. The study finds that an increase in land not only raises the amount of debt but also leads to an increase in the leverage ratio, results a much larger amount of debt than under given leverage ratio, which is referred to as excessive leverage. This occurs through both revenue and risk channels, increasing the probability of project termination, and causing greater economic losses in the state of termination.