Central-local relations, land development, and local public finance in China : a case study of Guangdong province

Abstract

Since the late 1990s, local governments in China have been relying heavily on land, which is a state-owned asset in urban area, to generate a significant amount of extra-budgetary revenue. Whilst this striking phenomenon has attracted numerous academic attentions, not many literatures shed the light on the process of central-local interactions. Adopting the procedural approach, this study examines the central-local fiscal and policy relations in the context of land finance. Taking the evidence from Guangdong province, this study understands the central-local relations as a process of policy interactions. After the central’s attempt to recentralize the fiscal resources of local governments in the mid-1990s, localities have been facing fiscal stress, which led them to rely heavily on land conveyance income, an extra-budgetary revenue in order to complement the fiscal shortage in budgetary account. However, a series of socioeconomic consequences of local fervent land development have attracted frequent central interventions. The most noticeable example is the housing macro-regulations introduced in light of the soaring housing prices. The example of the housing macro-regulations rejected the classic centrist model of the central-local relations in China, which implies a zero-sum game. On the contrary, in face of an issue influencing the conflicting core interests of both actors, both the powers of central and local governments were intensified to the extent that no one single actor will totally win over another. The powers of the central and local governments were also mutually transformed in the course of the game. It is argued that local governments display a sense of resistance against the central interventions as they have strong interests in land and real estate industry after tax sharing reform. On the other hand, it is unlikely for the central government to give concession to local governments as the failure to alleviate the consequences of land finance may cause public discontent and even political crises. The possible outcome is either a “win-win” situation or loss for both actors. To avoid a negative-sum outcome, collaboration and compromise are recommended. The centre is urged to address the root problem of misalignment of revenue and expenditure and to institutionalize the relationship between the centre and subnational governments.