Make or Break

Planetary urbanization in China combined with innovative land public finance mechanisms, addressed from varying perspectives, has finally slowed due to several external shocks. Maintaining fiscal resilience has become one of the most important goals for Chinese cities, which have also started looking for new ways to cover public-service expenditures and to finance urban renewal projects.

This research reviews the evolution of land public finance in China and quantitively measures its relationship with fiscal resilience. An index of city fiscal resilience is developed from three measurements, including response capacity, recovery capacity, and growth capacity. The data show that Chinses cities are less resilient to external pandemic shocks, as reflected in the extremely high growth rate of the fiscal gap in 2022. Divided by land finance dependence, the rise in fiscal deficits in the high-dependence group, after 2021, reveals long-term risks associated with heavy reliance on land finance. The fiscal resilience index for the low-dependence group has continuously declined, while the fiscal resilience of the moderate-dependence group has remained relatively stable. Moreover, the fiscal resilience index for the high-dependence group has experienced volatility since 2019; although it showed some stability during periods of ample land revenue, its reliance on a single revenue source makes it vulnerable to economic changes.

Case studies were prepared using two cities, Hangzhou and Shenzhen, which are typical in China for their reliance on land public finance. The city of Hangzhou, in Zhejiang Province, used to rank first in the country in terms of reliance on land public finance. It has since adopted a diversified approach to land finance transformation through economic transformation, industrial upgrading, tax reform, and innovative policies. Shenzhen, in Guangdong Province, is one of the most economically developed cities, and it has successfully kept its reliance on land public finance low by increasing land use efficiency and diversifying fiscal revenue.

This research also reviewed the international experiences of cities with fiscal resilience. China can borrow some innovative methods, such as Certificates of Additional Construction Potential (CEPAC), to improve its cities’ fiscal residence in the post-land public finance era.

The findings herein offer compelling evidence to help policymakers understand the importance of sustainable revenue for fiscal resilience and to shed light on future policy implications. To reduce reliance on public finance and improve fiscal resilience in Chinese cities, more tax powers need to be devolved to local governments, innovating sustainable land financing tools in the short term, deepening local tax reforms, and promoting industrial and innovation-driven growth in the long term.