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This paper investigates the economic incentives for urban spatial expansion in China by estimating the value of urban land using an econometric model applied to data from the 220 largest Chinese cities for the period 1996-2003. The results are consistent with the proposition that the rapid rate of urban spatial expansion resulted from a combination of fiscal pressure on local governments and governance reforms that gave local governments greater control over land and investment policies. The estimated parameters of the model indicate that urban land generates far more than income per unit area than agriculture in eastern and central China, suggesting that local governments can profit substantially from conversion of farmland to urban use. The value of urban land in those regions increased in the period after 1999, an outcome that could be attributable to increased demand for land to accommodate economic growth, delayed development of land set aside speculatively into economic/industrial development zones, and/or implementation of stricter administrative controls on farmland conversion that restricted the supply of land for urban uses. Urban land appeared to have a low economic value in western China, a region that, taken as a whole, has lagged in terms of economic growth. The estimated parameters of the model are consistent with findings of previous studies regarding returns on foreign direct investment, domestic Chinese investment, and labor productivity.
