Does the “Braking” of China's land finance facilitate economic “Shift Gears”? Evidence from investment decisions of real firms

Abstract

In 2015, China introduced the New Budget Law and Document No.43, which were designed to regulate land finance. Utilizing a difference-in-differences (DID) model, this study examines how these land finance regulations influence the investment decisions of real firms in China. The findings reveal that land finance regulations stimulate increased investments by real firms. Moreover, these regulations enhance firms' investments in production upgrading by easing financing constraints, and heighten risk awareness, ultimately driving investments in R&D. Cross-sectional analyses also reveal that these effects are particularly pronounced in regions with low levels of financial development and fiscal transparency. Additionally, they are more pronounced in industries that are capital-intensive and technology-intensive, as well as among non-state-owned, small firms, firms with high financing constraints and government subsidies. Therefore, China's targeted governance of land finance effectively fosters the advancement of real firms, aligning with the objective of achieving "high-quality development".