When the Iron Hand Shakes the Visible Hand : Financing Infrastructure Projects through Local Government Debts in China

This study is a response to the call for further research on infrastructure financing from China in the 2019 special issue of Urban Studies on “Funding, Financing and Governing Urban Infrastructures”. We develop a theoretical model to investigate the complex relationship between local government debt issuing for infrastructure financing, land finance, and demand from the private sector in China. Using local government financing vehicles’ accounting data, we find that not only the visible hand of local governments is working creatively to meet infrastructure development targets handed down by the ‘iron hand’ of the central government, but also the visible hand is getting more effective by considering activities from the private sector in their debt issuing decisions. By studying the two financing methods in one unified framework, our work provides reliable and practical evidence on how infrastructure financing works in China. The policy implications of our findings are also discussed in light of the newly announced Dual Circulation economic development strategy in May 2020