Liu Wei

Senior Policy Research Fellow, Peking University–Lincoln Institute Center for Urban Development and Land Policy

Fiscal governance and urban planning are closely interconnected both theoretically and practically. Realizing effective coordination between the two will greatly boost sustainable urban development across China. The relationship between fiscal systems and urban planning can be elaborated from three dimensions:

First, urban planning cannot be decoupled from a city’s fiscal capacity, and municipal finance should serve as a binding fiscal constraint. A city’s fiscal capacity covers current revenue and future revenue streams. Land transfer fees constitute a major component of current municipal revenue, featuring close ties to planning and relatively high spending autonomy, yet they carry prominent sustainability risks. A city’s future revenue mainly comes from debt financing, with land-collateralized debt instruments deeply intertwined with urban planning. During China’s past wave of urban expansion, urban planning rarely took municipal fiscal capacity into full consideration. In some cities, planning was even reduced to a tool for land finance, which distorted planning practices and triggered mounting municipal debt risks. Moving forward, urban planning must be grounded in objective, comprehensive assessments of a city’s present and long-term fiscal capacity.

Second, reforming municipal fiscal systems to better underpin planning implementation. To begin with, authorities should clarify priority areas for fiscal investment in urban construction. As public funds, fiscal resources ought to target public projects with strong positive externalities and weak commercial profitability, rather than compete with market entities. Furthermore, current fiscal funding for urban construction suffers from fragmented funding channels and overlapping administrative oversight; integrating relevant fiscal funds is recommended to improve capital utilization efficiency. In addition, a medium-term fiscal budgeting system should be established to align with the capital expenditure cycles of urban construction. Current fiscal budgeting operates on an annual cycle, while urban construction projects typically span three to five years, creating a temporal mismatch. Medium-term fiscal budgeting will enable fiscal resources to support urban construction more efficiently while helping contain fiscal risks.

Third, establishing a virtuous cycle of urban construction funding via land value capture. Rational, evidence-based urban planning can generate land value appreciation. Fiscal and planning instruments can capture this land value increment to secure sustainable funding and public service provision. Land value capture stands as a critical linkage point integrating planning and fiscal governance. At present, land transfer fees serve as China’s primary mechanism for land value capture, yet this tool performs poorly in capturing value appreciation generated during the land holding stage. Many cities are experimenting with alternative land value capture mechanisms, such as transit-oriented development (transit + property) and developer obligation requirements, but these practices remain scattered and underdeveloped. Going forward, China must actively build an institutional framework and policy system for land value capture tailored to national conditions. This will allow municipal governments to reasonably and fully recoup land value gains stemming from public investment and societal development, and reinvest those proceeds into urban construction and public services to deliver sustainable development. A wealth of international experience exists in land value capture worthy of in-depth study and reference. It is proposed that domestic and international policy tools and real-world cases of land value capture be systematically compiled into a case database to promote the dissemination of land value capture concepts and policies.

Published in City Planning Review, Issue 12, 2023, Academic Dialogue Column of the Annual Conference