In recent decades, China’s financial architecture has undergone transformative change driven largely by what is termed “land finance”—the fiscal leverage local governments obtain through land sales and land-related revenues. This phenomenon, essential yet often underestimated, lies at the heart of China’s regional economic integration (REI). Emerging research reveals the intricate, multi-dimensional roles land finance plays, not only as a critical fiscal instrument but also as a force reshaping regional growth patterns across China’s vast and diverse landscape.
Since the early 2000s, the increasing prominence of land finance has been nothing short of remarkable. Empirical data illustrates that the ratio of land finance to local public budgets soared from just over a quarter in 2002 to more than four-fifths by 2020. This rapid escalation underscores land finance’s evolution into a cornerstone of fiscal revenue for local governments, driving unprecedented infrastructure development and urban expansion. Simultaneously, REI accelerated, with urban agglomerations—clusters of densely interconnected cities—becoming the primary engines of China’s regional growth, particularly in economically dynamic zones.
Geographically, this rise of land finance and regional integration exhibits a distinct east-to-west diffusion. The eastern region, endowed with robust geographic advantages and vibrant economic activity, has consistently harnessed land finance to fuel growth, reinforcing a positive feedback loop between economic dynamism and fiscal capacity. This spatial concentration has gradually expanded to central and western provinces, although at varying scales and intensities. Cities such as Wuhan, Chengdu, and Changsha serve as prime examples, utilizing industrial zones and land finance to boost regional economic synergies and integration, despite resource constraints.
The trajectory, however, is complex and nonlinear. Following an initial boom, the pace of regional integration moderated post-2010. This deceleration correlates with emergent challenges—over-reliance on land-driven wealth creation has induced resource depletion, infrastructure saturation, and environmental degradation. Moreover, the congested urban landscapes and competitive pressures among municipalities have triggered spatial tensions that undercut the once-surge momentum of REI, spotlighting the dual-edged nature of land finance as both a catalyst and a constraint.
Beyond broad trends, the distinct phases of land finance’s influence on REI reveal a nuanced dynamic. At the initial stage, before the land market reforms of 2003, land finance’s impact was limited, constrained by slower growth and conservative fiscal policies. Despite this, local governments viewed land finance as essential for bridging fiscal deficits, enabling basic infrastructure investments, and promoting regional synergy. Yet, land transfer practices at this time—especially those favoring low-price agreements—tended to disadvantage high-value service industries, inadvertently stalling high-quality regional development.
As fiscal dependence on land revenues surged in the boom era, a paradox emerged. While land finance’s relative importance increased and local governments eagerly pursued this revenue stream, the outcome was mixed. Excessive reliance resulted in growing government debt, crowding out private investment, and elevating systemic fiscal risks. Furthermore, aggressive competition manifested as a “race to the bottom,” where municipalities vied to offer land at lower prices to attract industrial investments, fragmenting economic markets and undermining collaborative regional strategies.
Spatial econometric analyses illuminate the intricate interdependencies between land finance policies across neighboring cities. The spatial spillover effects suggest that a city’s land finance mode and scale don’t just impact its own development but reverberate throughout the region’s economic fabric. Inter-city competition can induce imitation or substitution effects, heightening the risk of inefficient resource allocation and weakened regional cohesion. Recognizing these spillovers is crucial for policymakers striving to balance local autonomy with the collective benefits of integrated regional growth.
These empirical insights compel a reevaluation of land finance policy as a multi-stage, multi-scale phenomenon. Policymakers must tread carefully, transitioning from a short-term revenue-centric mindset to a more sustainable and diversified fiscal framework. Overdependence on land finance has revealed fiscal vulnerabilities, highlighting the need to balance land-derived income with alternative revenue sources, improved land use efficiency, and environmental stewardship. Gradual shifts, such as the property tax pilot programs in mega cities like Shanghai, represent vital steps towards fiscal diversification.
A crucial policy dimension involves addressing the spatial and threshold effects of land finance on REI. Research identifies tipping points beyond which the scale of land finance becomes counterproductive—either when too low to stimulate growth or excessively high, inducing deleterious competitive dynamics. Such nonlinearities necessitate tailored land finance strategies that reflect the economic scale, development stage, and regional integration goals of diverse urban agglomerations, ranging from small cities to supercities.
The spatial heterogeneity of China’s urban landscape further underscores a pressing need for differential strategies. While smaller cities and interior provinces have often relied on industrial parks and development zones—financed heavily by land revenues—to integrate regionally, mega-cities have innovated by transforming their land finance modalities. These reforms aim to curb urban sprawl and upgrade infrastructure sustainably, setting examples for spatially nuanced urban policy that reconciles growth ambitions with ecological and social imperatives.
Enhancing land finance’s role in promoting REI also requires institutional reforms. Deepening the land management system, refining market-based mechanisms for land allocation, and establishing inter-provincial land quota trading are among the pioneering approaches recommended to harness land value more efficiently and equitably. Such reforms not only help rationalize land use but also facilitate the redistribution of land development rights to cities demonstrating higher productivity and innovation, thereby aligning incentives with regional economic integration imperatives.
Moreover, fostering cooperation across city boundaries remains central to overcoming detrimental competition. Policies aimed at mitigating “race to the bottom” dynamics—where cities undercut each other with preferential land deals—can realign regional development towards collaborative growth. Regional planning frameworks must encourage sharing of land-related revenues, infrastructure investments, and coordinated industrial strategies to optimize economic complementarities and maximize collective benefits.
The environmental externalities associated with land finance-centered growth are equally significant. Overheating urban land markets, infrastructure saturation, and pollution threaten the long-term viability of regions. Integrating ecological considerations into land finance policy designs is vital for sustainable REI, necessitating innovative fiscal tools such as environmental taxes and urban maintenance fees. These measures not only help internalize environmental costs but also generate alternative revenue streams to alleviate pressure on land sales.
Considering rural-urban dynamics is another facet emerging from recent analyses. Rural land stock development complements urban fiscal strategies, particularly under China’s rural revitalization agenda. By enhancing the efficiency and value of rural land assets, local governments can diversify their financing mechanisms while supporting balanced regional integration that bridges urban-rural divides, contributing to more inclusive economic landscapes.
Looking ahead, the dynamic interplay of land finance and REI will remain central to China’s urban and regional development policies. The challenge resides in balancing rapid urban expansion with sustainable resource use, fiscal prudence, and harmonious regional cooperation. Local governments, supported by central policymaking, must strategically calibrate land finance intensity, embrace spatial spillovers, and innovate institutional frameworks to unlock the full potential of land finance as an engine for cohesive, high-quality regional economic integration.
This evolving research underscores how land finance—though often regarded narrowly as a local fiscal tool—extends far beyond simple revenue generation to shape the spatial and economic contours of modern China. It challenges prevailing orthodoxies, urging a sophisticated appreciation of the spatial-temporal dynamics and phased effects of land finance. As China continues to urbanize and the global economy recalibrates, insights from this multi-dimensional analysis have broad applicability, offering lessons for emerging economies balancing rapid growth with sustainable urban and regional integration.
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Subject of Research: The multi-dimensional and phased roles of land finance in driving regional economic integration in China.
Article Title: Underestimated impacts: the multi-dimensional roles of land finance in driving regional economic integration.
Article References:
Zhang, C., Chen, D., Zhang, X. et al. Underestimated impacts: the multi-dimensional roles of land finance in driving regional economic integration. Humanit Soc Sci Commun 12, 1729 (2025). https://doi.org/10.1057/s41599-025-06026-w
Image Credits: AI Generated
DOI: https://doi.org/10.1057/s41599-025-06026-w
