The local governments in China have borrowed a lot of debts in the past ten years. In recent years, local governments have been under increasing pressure to repay debts. By matching panel data for city-level urban construction and investment bonds (UCIBs) with hand-collected new-town construction panel data, this study found that new-town construction has partly accounted for UCIB issuance, especially since 2009. Firstly, the new-town construction presented a trend that the distance away from the city center increases and planned population density decreases over time, which may end up with lowering efficiency of new towns. Secondly, the number and planned area of new towns in inland regions far exceeds that in coastal regions, while the scales of UCIBs are also larger in inland cities than in coastal cities, along with relatively higher interest rates. We argue that the inland-favoring land supply policies and local government political competition are the main driving forces behind this phenomenon. Thirdly, while local governments built new towns increasingly by borrowing, the return to investment is declining over time both in coastal and inland regions. We argue that without fully understanding the importance of population density and distance to downtown in urban economic development, new-town construction using land financing can lead to inefficient urbanization in China, which is not financially sustainable, especially for small and inland cities.
