Zoning for Profits: How Public Finance Shapes Land Supply in China

73 Pages Posted: 26 Sep 2022 Last revised: 6 May 2024

See all articles by Zhiguo He

Zhiguo He

Stanford University - Knight Management Center

Scott Nelson

University of Chicago - Booth School of Business

Yang Su

CUHK Business School

Anthony Lee Zhang

University of Chicago - Booth School of Business

Fudong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 2022

Abstract

Public finance and real estate are uniquely intertwined in China, where local governments also serve as monopolist sellers of land. We shed new light on how land sale decisions and land prices depend on local governments’ financing objectives. First, we document the large (ten-fold) price premium paid for residential-zoned relative to industrial-zoned land and show this price premium can be explained by the greater future tax revenues generated by industrial land; the choice to sell land as industrial rather than residential generates an IRR of 7.70%, which is comparable to local governments’ cost of capital in bond markets. Second, local governments are sensitive to financing constraints: industrial land supply decreases with governments’ bond yields. Third, local governments’ land sales are sensitive to the intergovernmental tax sharing, such that industrial land sales increase with the share of taxes captured by local governments. Thus, shocks to local public finances can be expected to affect the Chinese real estate market and vice versa.

Suggested Citation

He, Zhiguo and Nelson, Scott and Su, Yang and Zhang, Anthony Lee and Zhang, Fudong, Zoning for Profits: How Public Finance Shapes Land Supply in China (September 2022). NBER Working Paper No. w30504, Available at SSRN: https://ssrn.com/abstract=4229127

Zhiguo He (Contact Author)

Stanford University - Knight Management Center ( email )

655 Knight Way
Stanford, CA 94305-7298
United States

Scott Nelson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Yang Su

CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Anthony Lee Zhang

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Fudong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
24
Abstract Views
545
PlumX Metrics