The Land–Debt Feedback Loop: Land Finance Contraction, Endogenous Collateral, and Macroeconomic Amplification in China

Whether falling asset prices and public debt risk can form a self-reinforcing feedback loop is a central question in macro-finance. China’s land finance model, under which local governments fund public expenditure through land conveyances and land-collateralized borrowing, has contracted sharply since 2021, offering a relatively clear institutional setting for examining this mechanism. Standard models let collateral values move with asset prices but fix the loan-to-value (LTV) ratio, precluding endogenous feedback between borrowing capacity and asset prices. We develop a DSGE model in which a local government’s effective LTV responds endogenously to land-price deviations through a confidence multiplier, so that a land-price decline simultaneously erodes collateral value and tightens financing capacity, compressing fiscal expenditure and real activity and further weakening land demand. Calibrated to Chinese institutional data for 2010–2024, the model yields three findings. First, the endogenous collateral constraint substantially amplifies the cumulative macroeconomic effects of adverse shocks, supporting the existence of the feedback loop. Second, feedback strength is convex: beyond a threshold, risk accelerates disproportionately. Third, policies that directly weaken the feedback chain, namely land-price stabilization and reaffirming implicit guarantees, dampen macroeconomic volatility more effectively than fiscal expansion alone, which can set a floor under output but leaves the feedback chain intact.