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A Policy Reversal as Structural Break: A Lesson from China’s Land Lease Financing for Infrastructure

Author

Listed:
  • Yilin Hou
  • Lin Li
  • Lei Shao

Abstract

Land-based revenues as a fiscal instrument to finance infrastructure tie public investment to real estate markets, where demand fluctuations cause fiscal consequences. This paper takes policy reversals as structural breaks and examines their impacts on infrastructure investment. We dissect China’s 2016 policy reversal that disallowed developers to finance land purchase with debt, causing sharp declines in local government land revenues, slashing their fiscal base for infrastructure investment. Using prefecture-level panel data and continuous difference-in-differences identification, we estimate the reversal reduced land-lease revenues by 55%. Two-stage least squares estimates suggest a 10% land-revenue decline translates into 6.6% investment reduction. Decomposing the funding sources show that 70% of the decline stems from contractions in local self-financing and borrowings by local financing vehicles, and resource reallocations within these financing vehicles amplify the impacts of the structural break. The lesson is: policy regime stability is vital to fiscal systems that rely on land-based revenues.

Suggested Citation

  • Yilin Hou & Lin Li & Lei Shao, 2025. "A Policy Reversal as Structural Break: A Lesson from China’s Land Lease Financing for Infrastructure," CESifo Working Paper Series 12356, CESifo.
    • Handle: RePEc:ces:ceswps:_12356
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    Cited by:

    1. Yilin Hou & Michael Kumhof & Lei Shao, 2026. "The Potential and Utility of Land Value Taxation: A Theoretical Framework and Simulation for China," CESifo Working Paper Series 12476, CESifo.

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    Keywords

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    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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