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Urbanisation and Fiscal Risks in China



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Wu, Liangqi 


China has witnessed rapid urbanisation over the past three decades. It has been generally successful in mobilising resources and providing the infrastructure that cities need to grow their economies. The central government has played a major role in China’s urbanisation through setting the overall development direction, land granting, and policy formulation. However, the responsibilities of infrastructure financing have been gradually shifted to local governments, and consequently, local budgetary systems face substantial funding challenges. While the decentralised structure of Chinese politics provides strong incentives for local officials to take the lead in urbanising China, fiscal institutions place heavy financial burdens on local governments. This thesis studies two major problems that arose from China’s urbanisation process. In terms of theoretical contribution, the thesis both advances the theories of Chinese style fiscal federalism and provides new evidence to enhance its explaining power. The first study is on China’s infrastructure financing and local government debt. It finds that local government debt for infrastructure is positively affected by the land demand from the private sector. Furthermore, land finance is positively related to the level of local government debt. The results reveal that the visible hand of local governments works creatively to meet infrastructure development targets handed down by the ‘iron hand’ of the central government. The second study is on local government financing vehicles’ (LGFVs) borrowing costs and land finance. It finds that local governments with higher land leasing revenue could bring down the borrowing costs of local LGFVs, while a higher ratio of land revenue to fiscal revenue would raise LGFVs’ borrowing costs. A booming local land market would push up the value of land assets held by LGFVs and therefore strengthen its ‘collateral channel’, enabling LGFVs to borrow at a lower cost. The thesis’ findings can help investors better identify the risks associated with LGFV bonds and enable local government borrowing at a lower cost.







China, Fiscal Risks, Local Government, LGFVs Bond, Land Finance, Urbanisation


Doctor of Philosophy (PhD)

Awarding Institution

University of Cambridge