A Model for China's Economic Growth: Analysis Based on Land Finance
WEN Zhu, JIN Tao
PBC School of Finance, Tsinghua University; Policy Research Department, China Banking and Insurance Regulatory Commission; Hang Lung Center for Real Estate, Tsinghua University
Summary:
Research on economic growth since China's reform and opening-up generally focuses on two aspects: market-oriented reform, which has greatly improved the efficiency of resource allocation; and competition between local governments, which strongly promotes resource aggregation and local economic growth. However, over the last two decades, China's economic growth has developed new features: GDP growth has continued to slow, total factor productivity (TFP) growth has shown a downward trend, the output efficiency of investment has decreased significantly, net exports as a share of GDP have fallen rapidly since peaking in 2007, and the proportion of the private sector has begun to stabilize after continuous improvement. This paper argues that the above problems are closely related to changes in China's growth model and that land finance has been underestimated before. We develop a dynamic overlapping generations (OLG) model in which land finance and market-oriented reform play key roles to explain China's economic growth over the last two decades. Land finance links economic sectors as follows: households incorporate land value into their utility function; the local government obtains funds through land finance and mainly supports state-owned enterprises to carry out infrastructure construction; state-owned enterprises and private enterprises, which carry out heterogeneous production and operating activities, provide final products and distribute income to households; households deposit money in the bank and obtain down payments for housing through bank loans; and banks provide loans to enterprises to support their production and operations. Subsequently, we extend the two-period model to a multi-period OLG model and perform parameter calibration and model solution. We use MATLAB to simulate China's economic growth in an iterative way. Our results show that land finance works as a pivot in the model, allowing the local government to collect capital from the household sector and invest in the infrastructure sector mostly owned by the state. This progress has accelerated along with urbanization in China, interacting with the development of private companies and forming China's unique growth pattern. Our model explains the features of China's economic growth over the last two decades well, including the slowdown of TFP growth, the growth of the private sector, and improved investment efficiency. The multi-period model is consistent with the trend of China's economic structural changes from 1998 to 2017, as well as macro indicators such as savings rate, investment rate, foreign investment and reserves. The emergence of land finance and market-oriented reform to jointly drive economic growth has a certain historical inevitability as a result of the processes of urbanization and economic transition. Although land finance provides a large amount of funds and a powerful driving force for China's rapid economic growth, it also hinders improving the efficiency of resource allocation. With the further weakening of the role of land finance, continuously promoting technological progress, deepening the reform of state-owned enterprises, and deepening financial reform, among others, are key measures for China's long-term sustainable economic growth. The marginal contribution of this paper is as follows. Following Song et al. (2011), the paper embeds the land finance mechanism in the process of economic growth, which explains the mechanism through which the proportions of the state-owned sector and the private sector tend to balance each other, thus establishing a new model of China's economic growth over the past two decades and providing a new perspective for the study of economic growth.
文竹, 金涛. 关于中国经济增长模式的一个解释框架——基于“土地财政”的演进分析[J]. 金融研究, 2022, 502(4): 1-17.
WEN Zhu, JIN Tao. A Model for China's Economic Growth: Analysis Based on Land Finance. Journal of Financial Research, 2022, 502(4): 1-17.
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