Urbanization, Land Revenue and Market Equilibrium in China

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Urban Planning and Design Research (UPDR) Volume 2, 2014

Urbanization, Land Revenue and Market Equilibrium in China Tao Li1, Michael Lahr2 School of Economics and Trade, Nanjing Audit University, China School of Planning and Public Policy, Rutgers University, USA drlitao18@hotmail.com; 2lahr@rutgers.edu

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Abstract Starting from trend of public land revenue and urban land scale, this thesis analyzes land revenue, supply-demand of urban land, and sets up a regression model on urban land expansion by using provincial panel data (2000-2010) in China. This model tests data of whole country, east, middle and west of China. The results indicate that: (1) land taxes exhibit their obvious positive incentive on urban land expansion, but, land market revenues show the diversity because of different revenue types. (2) land demand appears stronger initiative than supply as a motive force of urban land expansion. (3) Effects of each factor on urban expansion have large differences in the east, middle and west.

Keywords Land Revenue; Market Supply-demand; Urban Land Expansion

The paid land use system has become an important financial resource for urban governments in China.

But it also has advanced urban sprawl. This is because governments have opted to promote the use of land to enhance the scale, structure, and development of their land-based finances. It is reported that in 2012, 2,851.7 billion RMB were collected from long-term land lease revenues. This is 46.7% of the local fiscal revenue. A cacophony of problems has germinated from this fiscally decentralized regime. Urban land expansion is the concentrated expression of these problems. Thus, it is critical to analyze the relationship between land finances and urban expansion before it is too late. For this reason we start with an analysis of the composition of land revenue, supply and demand of urban land, and set up a panel regression model of urban land expansion (2000-2010) to probe into the effect of land public revenues on urban expansion.

URBAN LAND EXPANSION AND LAND REVENUE Trend of Urban Land Expansion No matter what induces urbanization, urban land use changes in two ways in theory: by expanding the extent of urban land area and by increasing land use

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intensity. Despite the lack of cultivated land resources and vacant urban land, the actual supply suggests the augmentatation of land quantity. We usually describe developed land as the “urbanized area.” China’s change in total urbanized area between 1989-2011 suggests that: (1) the extent of urban land was constantly rising, increasing a total of 31,141km2 during 1989-2011 at average annuallized growth rate of 11.4% ; (2) its grew rapidly during two particular points during this period–from 1991 to 1994, when key policies and management measures were established and both “development zone fever” and “real estate fever” went pandemic in China and from 2000 to 2004 when strong economic growth encouraged by some positive fiscal policy renewed momentum in real estate development; (3) and the interim period during which land expansion slowed due to restrictive land policies developed in response to prior overheating in the real estate market. Indeed agricultural land transfer was frozen twice. It is worth noting that urban land expansion has accelerated since 2010, although some rarther restrictive policies remain in place.1 Composition and Variation Trend of Lan Revenue Since the paid use system for state-owned land was implemented, land rents, taxes and fees have constituted state land revenue. They have mostly been enacted as sources of local revenue since the tax division was reformed in 1994. This paper mainly discusses two kinds of land finance revenue: land rent and land taxes. Land rent has diversified forms in China. It refers to all kinds of income in the first level land market. Land rent includes market-oriented long-term lease revenues, quasi-market long-term lease revenues, and other revenues from state-owned property. Land taxes mainly include Urban Land Use Tax, Land Appreciation Tax, Cultivated Land

Data: “China Land and Resources Yearbook” , “China Statistical Yearbook of Land Resources”, 1988-2012. Following are the same.

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Occupation Tax, Real Estate Tax, and Deed Transfer Tax. The compositions of land revenue are relatively abundant both in land market revenue (refer to revenue from the first level land market) and land taxes, and every income has a continuous rising trend.

Their change has some features: First, the rise in land finance revenue is alarming. It increased from 4.8 billion Yuan in 1989 to 3,936.8 billion Yuan in 2011, which amounts to a remarkable average annual increase of increase more than 35 percent! The steep rise is mainly due to the rapid advancement of the land paid use system reform. Second, total land revenue significantly accelerated. Such revenues fluctuated around 50 billion Yuan before 1999, but began to accelerate after breaking through 100 billion Yuan in 2000, quadrupling by 2002, exceeding 1000 billion Yuan in 2006, and even closing toward 4000 billion Yuan in 2011. Third, total land revenues fluctuated widely. They actually suffered negative growth in certain years, including 1995-1997, 2004, and 2008. the cause of the fluctuations was the same as for the slowing of urban land expansion—land market regulation. But sudden spikes in land revenue were experienced after each nadir.

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land use in 1999, the total short-term land area had been 2.4 billion m2 till 2010, and the total revenues were 11.5 billion Yuan.

In China, there are three taxes directly related to land: (1) an Urban Land Use Tax, which implements different fixed tax rate each year by region; (2) a Land Appreciation Tax, which implements four progressive rates from 30-60%,; and a Cultivated Land Occupation Tax, which implements a different tax rate by region.

Since these three taxes have been imposed, their revenues have totalled 1.5 trillion Yuan, which is 11.4% of long-term lease land revenues for that period.

There are two taxes associated with land revenue: (1) a Real Estate Tax, which is imposed on property owners and only to income-generating housing and has been reforming in Chongqing and Shanghai since 2011 and (2) a Deed Transfer Tax, which is imposed on the owner of property rights. The total goverm,ent income from two indirect taxes from 1987 to 2011 has been about 2.0 trillion Yuan.

Market Supply and Demand of Urban Land Expansion

Comparison of Various Urban Land Finance Revenue

The urban land market here refers to the relationship between land suppliers and demanders in the changes of urban land scale. In this market, suppliers are generally organizations in the rural economy who are owners of rural land. The set of demanders include urban governments, land developers, and final urban land users. Urban governments play a very subtle and vital role in land markets. First, governments monopolize the initial transaction as a buyer in market.

Second, governments are the only legal land suppliers in the primary land market. Other demanders can only obtain land through this intermediate market monopolist, or through the secondary market after having passed through the primary market.

Governments shoulder the dual responsibility as urban land owners and land managers, and acquire land property revenue and taxes.

Land market revenue can be further divided into two categories. First, long-term lease land revenues, which are the most significant revenuesource in the first level market. .They include long-term leases through no-bid contracts and bids, auctions, and listings. The total long-term land area was 23.0 billion m2 in 1987 to 2011, and the total revenues were about 13.2 trillion Yuan.

Second, quasi-market land revenue with no long-term lease are largely revenues from land value sharing or authorized operations of state-owned properties. They can also be short-term lease revenues. Since short-term land lease was first stipulated as a form of the paid

On the side of land supply, urban governments mainly acquire land directly by requisitioning rural land. The supply quantity is anticipated through urban land expansion and commonly uses prior requisitioned land area as a leading indicator. Land demand can be divided into two types: land needed in the pivotal and monopolistic primary market, and land required for urban construction. These land demands overlap and influence each other somewhat. We have calculated the change in land supply and demand for the 19982010. Land areas requisitioned fluctuate from year to year, and was lowest during the first few years after

Land Finance Factors and Model Building The variability of urban land scale can be expressed in two forms: land supply changes constantly under the influence of changing socio-economic conditions; land demanders could choose the trading quantities at the same price level. We focus on the first form in this section. and test the intrinsic link between land revenue and urban land scale. Land finance policies refer not only to land market revenue and land tax policies, which can gain land revenue directly, but also to the market policies that also enable land revenues.

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the agricultural land permits were frozen in 1997. It peaked in value in 2002, declining least after the second permit freeze in 2004. It then slowly ascended after 2007. Concerning the contrast of supply and demand, except for a balance in 2001-2002, the quantity of demand has generally been greater than that of supply. That not only reflects rules of rural land transfer, but also illustrates strong demand for urban land by governments, which seek a path of land arrangement under strict land control policies.

Empirical Model and Variable Index The effects of land on urban land scale have two aspects: land resource for urbanization, capital resource that enables urban construction. These effects are inseparable from finance and other related policies.

Based on the above analysis, we focus on the influnce of land finance revenue, and the urban land market supply-demand relationship on urban land expansion.

UrAi,t= β0 + β1SLi,t + β2DLi,t + β3Taxi,t + β4LeRi,t + β5OthRi,t + β6Othi,t + θ1DumEi,t + θ2DumMi,t + θ3DumWi,t + μi + ξi,t (1) In the above equation, i and t denote province and year. The dataset included 31 provinces in China during the 2000-2010 period. The dependent variable UrA represents urbanized land. We use the urbanized area analyzed in previous section for this indicator.

SL and DL represent land supply of and demand for urban expansion. Urban land supply-demand policies take into account land policies, including agricultrue land requsition policies and land supply policies.

From the perspective of urban land expansion, land supply is nonurban, so the area of transformed agricultural land (TrA) is regarded as land supply. In the urbanization process, urban governments are actually the primary land demanders. Such a demand is related with the land supply of different ways in the primary land market. We also divide land revenue into two types: long-term lease land area (LeA) and other land area with no long-term lease (OthA).

Model of land finance revenue yields multiple policy forms. So we divide them into three types for testing: long-term lease land, other land to no long-term lease, and taxes, which we denote asLeR OthR, and Tax. Oth is a group of control variable that identifies the other types of urban land demanded. For emphasis and to avoid repetition, we use greenfield areas (GrA) to account for a large proportion of urban land area, and built-up areas (BuA) of real estate development. It

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can be contrasted with the above land demand that is controlled by land policies.

The variables DumE, DumM, DumW respectively identify the east, middle, and west as 1 and all other regions are denoted as 0 in each case. We add the vector quantity X (composed of the dummy variables and all explanatory variables) into the regrssion model.

They measure the effects of the independent variables on dependent variables in the different regions. μi+ξi,t denotes a composite random disturbance term.

Empirical test and analysis of result Regresion Result of Empirical Test TABLE 1 ESTIMATED RESULT OF MODEL2

Variable

country East Middle West 0.090* 0.079* 0.149* 0.149* LeR (1.74) (1.54) (1.69) (1.58) Land -0.651** -1.294** 1.126** 0.661** finance OthR (-2.08) (-2.03) (2.12) (2.76) revenue 1.982** 1.931** 1.944** 1.927** Tax (2.47) (2.29) (2.37) (2.35) 0.433** 0.817*** 0.597*** 0.212*** TrA (3.76) (2.92) (2.97) (3.42) Market 1.176*** 1.180* 0.483** 0.929** supply- LeA (2.99) (1.43) (2.67) (2.73) Demand 0.107 -0.120 0.135 -0.120 OthA (0.80) (-0.26) (0.86) (-0.66) 0.444** 0.436** 0.450** 0.441** GrA Others (2.69) (2.69) (2.72) (2.70) 1.565*** 1.571*** 1.560*** 1.553*** BuA (6.00) (6.18) (5.86) (6.22) R2 0.837 0.838 0.837 0.838 Hausman 37.47 74.32 66.33 42.31 Notes: Standard deviations are all robust. The symbols “***,” “**,” and “*” denote a significance level of one, five, and ten percent, respectively.

There are a great variety of urban construction and land market development among the east, middle, and west of China. So we examine model for the country as a whole and then also the east, middle and west separately. The latter three are examined by adding interactive terms of land revenue and supply-demand.

According to equation (1), we use the provincial panel data for regressions. This enables the use of provincial fixed effects or random effects, as needed according to Hausman tests. Thus, we obtain the final regression results subject to fixed effects. Table 1 shows final results for 2000-2010, with the regression results after adding regional interactive variables.

Results Analysis of the Whole Country The east include Jing, Jin, Ji, Liao, Hu, Su, Zhe, Min, Lu, Yue and Qiong; the middle include Jin, Ji, Hei, Hui, Gan, Yu, Er and Xiang.

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(1) Different types of land finance revenue stimulate the urban land expansion in different orientations. The positive stimulation of long-term lease land revenue on urban land expansion suggests that the higher the long-term lease land revenue is, the more easily a local government generates the impulse of breakthrough policies that control expansion of urbanised area. The negative stimulation of other no long-term lease land revenue verifies that there is an obvious land revenue stimulation in urban land expansion for urban governments. Because of the excessive low revenues, governments prefer not to add land resources this way.

The significant positive correlation between land taxes and urbanized area shows that land taxes only generat the incentives as a part of local fiscal revenue. That is, the tax restraint mechanisms are clearly insufficient for the phenomenon of cultiveated land reduction and urban land waste.

land through granting, value sharing or authorizing operation, due to the more-backward economic development of the middle and westin particular their industrialization level and economic structure, etc..

(2) Both land supply and demand play a positive role in the expansion of urban land area. Compared with land finance revenue, the more significant correlation of the test results suggests that increasing land supply or demand causes an increase of the number of land market transactions. From the view of estimated parameters, land demand being generally higher than that of land supply (especially the long-term lease land area and completed building area) points to land market demand as the driving force behind urban land market change. This is because, on the one hand, urban governments require large amounts of land for long-term leases tthat enable high returns. On the other hand, urban land demand for real estate development contributes to the expansion of the urban land availability.

Result Analysis of the East, Middle and West (1) In terms of relationships between dependent and independent variables, the results are identical with those for the whole country, except for inconsistent performance of land revenue and area through other no long-term leases for the different regions. In other no long-term lease land, the estimate for area is not statistically significant as it is for the whole country.

In the case of revenue on urban land expansion, the sign is opposite to their realtion for the nation in the middle and west. The principal reason is that compared with the east, the middle and west have less-developed land markets., Thus the income gap between long-term lease land and other no long-term lease land is less pronounced. It is undoubtedly also due to a larger demand for other no long-term lease

(2) In term of the contrast of estimated parameters, there are quite a few differences among the east, middle, and west. Concerning the land finance revenue, incentives for land revenues on urban land expansion in the east is significantly less than that in the middle and west since: urban governments in the east have largely turned away from simply expanding urban area toward efficiently readjusting and intensifying land use. Concerning the urban land supply and demand, the decreasing influence on land supply from east to west indicates the decrement from the east to the west in the scarcity of rural land policy enforcement in cultiviated land protection.

Governments’ demands for land are slightly different.

The results for long-term lease land area are not significant in the east; and the coefficient is somewhat higher for the west than for the middle. As is the case for land supply, long-term lease land does not only depend on urban land expansion in the east. While land prices provide no obvious advantages as a result of relatively stable urban development in the middle, the west appears to be experiencing rapid expansion of urban lands due to specialized policies focused on western development.

Conclusions Land Tax Policies Have Target Deviation, and Land Revenue Structure has Some Unreasonabeness.

For urban governments, land taxes should function both to raise fiscal revenues and to regulate land use expansion and intensity. However, from the analysis in precedingsections, we find that land taxes do not appear to be attaining both of these objectives simultaneously. It seems that the current tax design only considers the tax revenue enhancement while ignoring other possible roles for land taxation. This is the cardinal reason that perverse reactions are becoming evident as a result of the current taxation system. That is, the current tax system is revealing indeterminate relationships among land rent, taxes and fees, due to duplication or absence of certain tax categories, the unclear function of certain taxes, large variabilities in definitins of the tax base, and the high costs of imposing taxes. Comparing with land taxes, land market revenues comprise a larger share of land finance revenue, which leads to a significantly rising

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dependence of governments on this revenue source.

Main Active Force are Land Demnad And Tendentious Policies of Government’s Land Supply.

In term of land supply, the small relevative influence of transferred land area reflects the strong enforcement and stable effect of the policies on rural land transfer approval, requisition and cultivated land protection. However they need dynamic management.

Compared with land supply, urban land demand is the prime motive for urban land expansion. To promote improved quality of life of residents, economic development, social stability and other multiple factors, local governments have developed a healthy demand for urban land. On the other hand, as suppliers in the first level market, governments need a large land reserves that can only be guaranteed by the current dual monopoly policy in agricultural land acquisition and the primary land market.

There is Obvious Different Impact of Relevant Policies on Urban Land Expansion Among Regions.

On either land finance revenue policy or maket demand-supply policy, regional differences appear to be mainly related to the difference in the economic development among the east, middle and west in terms of urbanization, industrial structure, maturity of the land market, natural resource availability, and so on. Generally speaking, the east has less influence on the land market revenue from urban expansion than the middle and west. But it has more urgent demand for various types of land reserves in the primary market. Compared with the west, the impact of land market revenues and market supply on urban expansion is somewhat stronger in the middle, while the government's demand for land has a weaker effect.

All of the above illustrate that the land utilization in the three regions depends on their different stages of urbanization: the east is dedicated to improving the efficiency of urban land use and revitalizing the land stocks; the middle is close to equilibrium with regard to the relationship between urban land expansion and

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internal land sorting; the west appears to have launched into an exciting future with its abundant land and other natural resources, while enjoying benefits of spatially targeted national development policies.

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Tao Li, Jiangsu, China, (1972/12- ). Ph.D. 2004. Economics, Nanjing Agricultrue University. Associate Professor, Nanjing Audit University,China.

Michael Lahr, New Jersey, USA, (1954/12- ). Ph.D. 1992.

Regional Science, University of Pennsylvania. Associate Research Professor, Rutgers University,USA. This paper has been awarded the sponsorship of Jiangsu Overseas Research and Training Program for University Prominent Young and Middle-aged Teachers and Presidents.