Export slowdown and increasing land supply: Local government’s responses to export shocks in China

Abstract

Using the shift-share (Bartik) instrumental variable to solve the endogeneity problem, this study shows a robust negative effect of export shocks on residential land supply in China during 2008–2022. We attribute this effect to a novel revenue-based fiscal-consolidation measure: Chinese city governments intentionally increase urban-land-supply revenues to hedge against declining tax revenues caused by the export slowdown. The additional land-supply profits can offset approximately 94 % of the tax-revenue losses. This effect is achieved as city governments expand land supply while maintaining stable land prices to generate additional land revenue. However, we find this land-based fiscal-consolidation measure bears unintended costs: it has led to excessive urban expansion, amplified the risk of the housing market, and increased commuting costs. A one-percentage-point drop in export growth correlates with a yearly increase of 124 million USD in commuting costs caused by the land oversupply in China. Further, this measure is becoming less sustainable as its preconditions (abundant developable land and robust demand) become increasingly difficult to meet.