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Fiscal policy choices of local governments in China: Land finance or local government debt?

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  • Cheng, Yudan
  • Jia, Shanghui
  • Meng, Huan

Abstract

This study examines how fiscal incentives affect policy choices of local governments in China. We construct a difference-in-differences model using the 2014 Chinese central government policy of controlling the increase in construction land in metropolitan cities as an exogenous shock. The results reveal a substitution relationship between land sales revenue and local government debt, wherein local governments tended to expand debt when land revenue was reduced. Moreover, this decline affected local government debt’s maturity structure, as local governments faced higher short-term debt pressure and more quickly adjusted the interest rate maturity structure, which could trigger new debt risks.

Suggested Citation

  • Cheng, Yudan & Jia, Shanghui & Meng, Huan, 2022. "Fiscal policy choices of local governments in China: Land finance or local government debt?," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 294-308.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:294-308
    DOI: 10.1016/j.iref.2022.02.070
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other

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