The Thinking Of Solving The Problem Of Local Government Dependence On Land Finance

Local governments in China depend a lot on land finance, which is closely related with the finance system of the central government. In order to solve the central fiscal difficulties brought by over decentralization since the Reform and Opening up, tax system reform was adopted in1994, which symbolized a major adjustment in China’s financial system. Through this re-shuffle, property rights have been centralized, while obligations have been passed to the local government. For a long time, central finance can hardly make ends meet. The tax system reform reversed this situation, while it also brought local finance a lot of embarrassment at the same time. To compensate for the fiscal shortage, the local government had to embark on the road of land sales. Local government acquires low-cost land from farmers, and then sells it in the land market at a high price.In a certain extent, land finance makes up for the lack of local financial revenue, and raises funds for local municipal construction, thus promoting local economic development as well as ensuring the achievements of government officials. However, a series of negative effects brought by it cannot be neglected. For instance, due to their monopoly on the property rights of land, some local governments acquire lands or farming areas through forced confiscation to gain financial support for their vanity projects and achievements competition, which results in the escalation of conflicts between the cadres and masses as well as rising mass disturbances. Since land resource is limited, it is unsustainable for governments to sell a large amount of land in order to maximize the land revenue. Once the land is all sold out, government may face bankruptcy crisis. To ensure the stability of the macro-economy and the society, in all likelihood, the central government will support the local government, and local financial burdens will be transferred to the central government in this way. Meanwhile, local governments may bear huge debts in the form of loaning from banks via financing platforms with lands as the mortgage, which may cause financial crisis. When land is not sustainable and the financial chain breaks, credit crisis happened in Western countries may also be staged in our country. Apart from that, land speculation and unhealthy rising housing price in land revenue have been hot issues aggravating social conflicts in recent years. In addition, land revenue has been managed as extra-budgetary revenue by local government, which is also a source of corruption. All these have demonstrated that it is an important and realistic problem to deal with land finance dependence issue in China.In this thesis,current land finance problems are introduced from the following aspects:First, the thesis analyzes the impact of current land finance system and land revenue on local debt, the financial markets and the real estate market; and then it analyzes the influences of land ownership and tax system reform on local finance; and finally, learning from the experience of developed countries, this thesis puts forward some suggestions for the reform of land financial system in China. To cope with land finance issues, the main focuses should be the following:firstly, establish a reasonable financial level and improve fiscal system and as well achievements evaluation system; secondly, reform land property right system and make land confiscation standardized; and lastly, find new sources of local revenue in order to solve the difficulties in local finance.