State Capitalism: A New Perspective on Land Sale in China

Abstract

This paper presents a new perspective for understanding the land sale behaviour of local governments in China, focusing on the ‘institutional trinity’ of the land market; namely, state ownership, economic performance‐based political promotion and the unbalanced fiscal structure. The paper argues that the main motivations of local government to sell land are to promote industrial growth and to enhance government fiscal capacity. These two hypotheses are tested using prefecture‐level data covering approximately 330 municipalities during the period of 1999–2007. The paper finds that industrial output and fiscal expenditure increase by approximately 1.8% and 1.0%, respectively, if the area of land sale doubles. Evidence also shows that land sale promotes industrial growth by boosting fixed asset investment and foreign direct investment. Interestingly, the paper also finds that the land‐sale strategy of local governments is more effective in the eastern provinces than in other regions.