How Does Low-Density Urbanization Reduce the Financial Sustainability of Chinese Cities? A Debt Perspective

Abstract

Low-density urbanization threatens urban social and ecological sustainability not only directly by excessively encroaching on suburban farmland and ecological space, but may also indirectly do so by undermining the financial basis of sustainable urban development. To address this relationship, this study empirically examines the effect of low-density urbanization on local government debt by using panel data of prefecture-level cities in China from 2006 to 2015. Results show that the scale of local government debt increases significantly with a rise in urban expansion. Furthermore, this study found that low-density urbanization affects local government debt in two ways. First, low-density urban expansion reduces the land output efficiency, which decreases potential fiscal revenue and thus increases local government debt. Second, low-density urban expansion raises the construction and maintenance expenditure of urban infrastructure, which increases the demand for urban construction financing and thus pushes up the scale of debt. The results of the heterogeneous study indicate that low-density urbanization significantly affects local government debt mainly in Central/Western regions, small and medium-sized cities, cities with high fiscal stress and development pressure, and residentially expanding cities. On the contrary, low-density urbanization has no significant effect on the Eastern regions, large cities, cities with low fiscal stress and development pressure, and spatially expanding cities. This study theoretically explored and empirically verified a critical indirect effect of low-density urbanization on urban sustainability by increasing fiscal risks, which is, and will continue to be, a common and vital challenge faced by cities in China and other rapidly urbanizing developing countries.

Local Government Debt, Real Estate Investment and Corporate Investment: Evidence from China

“…Table 7 analyzes the impact of LGD and real estate investment on firms' risk and liquidity. The results in columns (1) to (11) show that LGD crowds out investment mainly by increasing the risk of insolvency and reducing the liquidity of the firm; however, real estate investment plays the opposite role. Overall, the increase in the value of collateral assets will enhance the liquidity of the firm.…”

“…Specifically, LGD is mostly used for constructing urban infrastructure and utility services to provide a sound investment environment and attract human capital inflow [1, 11,12], which in turn leads to a boom in the real estate market and fast growth of real estate investment. As observed in Figure 1, there has been a lagged positive correlation between LGD and the growth rate difference between investment in infrastructure and real estate since 2014.…”