Our proposed research will examine the spatial incentives inherent in the land-tenure system for both the public sector and the private development sector. The analysis will be based on standard urban models of land development and local public finance in the institutional context of local planning in Chinese urban areas. Within this context, we will use local data on the development process, infrastructure investment, fiscal conditions, and real estate market characteristics to explore the role that the land tenure system plays in shaping urban development. Based on our urban and public finance framework, and by contrasting Chinese outcomes with those in Hong Kong and the US, we will examine the potential spatial impacts of significant changes to the land tenure system such as the introduction of a property tax. This analysis should provide key inputs into the current discussions in China about changes in the structure of local public finance. This research will examine the spatial implications of the current Chinese public land leasehold tenure system and the potential impacts of proposals to restructure the real estate-related levies through the introduction of a property tax system.

There has been a significant amount of research on China’s land tenure system, its implications for local public finance and investment, and the ability to sustain local public services. In addition, the limited property tax pilot programs in Shanghai and Chongqing, as well as issues with local debt, peri-development, incomplete property rights, and market imperfections have brought the land tenure system under scrutiny. Research to date has not, however, focused on the role of the land tenure system in shaping the spatial patterns of urban development, nor have the potential spatial implications of proposed tax changes in the land tenure system been examined. The land tenure system as practiced in Chinese urban areas entails three key features significant up-front leasing fees for development rights; significant funding of local public infrastructure based on these fees, and  limited recurrent revenues generated from the developed parcel once developed. In addition, there has been a strong emphasis on using revenues collected through leasing fees to promote GDP growth.

Finally, while land leases span relatively long time periods, they are not permanent, and the outcome of disposition of the rights at expiration is unclear, especially when property rights are limited in many aspects. 5 When examined in the context of standard urban economic location models, these features are likely to have important spatial implications. Since a significant part of its revenues is contingent upon the continued sale of land development rights, local governments have a strong incentive to develop new parcels. 6Investing in transportation and other infrastructure outside the developed areas reinforces the local government’s ability to enhance the transaction values of development rights. On the other hand, because the development rights are purchased primarily through one-time payments, the local government has less incentive to make investments in the developed area because the continued growth in land value has little impact on future revenues. Thus there are incentives to expand land consumption, potentially beyond efficient levels.