Opinion | The era of the entrepreneurial Chinese local government is over

Decentralisation of decision-making from the central government to local authorities is widely regarded as one of China’s most effective policy reforms of the past four decades. As the Communist Party’s priorities shifted from class struggle to economic development, decentralisation turned out to be a tremendous catalyst for growth.

Compared to the centrally planned system, local governments were better positioned to tailor economic decisions to local conditions. Local governments were also better placed to facilitate economic activity in an underdeveloped market, including by protecting ownership rights and coordinating business transactions.

Mayors acted as CEOs of municipal economies, and all levels of local government implemented investment promotion programmes, offering a wide range of subsidies to potential investors. As a result, local governments were crucial to China’s economic take-off.

But decentralisation is not the same as market liberalisation, even though it did initially lead to efficiency gains. The power to allocate resources remains in the hands of government, albeit local rather than national.

07:00

China airs 4-part anti-corruption series on prime-time TV amid renewed crackdown on graft

China airs 4-part anti-corruption series on prime-time TV amid renewed crackdown on graft

Local governments also promote the development of industries targeted by the central government. In the case of green energy, for example, they try to attract companies by offering tax reductions, access to subsidised credit and the free use of land. But instead of overcoming technological bottlenecks, this localised industrial policy mainly serves to expand production capacity.

03:14

China’s Communist Party wraps up policy meeting amid growing uncertainties

China’s Communist Party wraps up policy meeting amid growing uncertainties

To that end, the plenum detailed several reforms, such as the standardisation of investment promotion programmes to prohibit improper industrial subsidies, and increased oversight of local governments’ debt management. But implementing these changes will not be easy. The Chinese government will need extraordinary determination and deft policymaking to lower local government debt, redistribute spending responsibilities and manage financial risks.

Three principles should guide this process. First, local governments should refrain from intervening in resource allocation and price formation, which should be steered by markets and enterprises.

Second, the central government should manage all industrial and fiscal policies, without imposing additional spending responsibilities on subnational governments.

These changes, if implemented, would go a long way towards supporting robust economic growth in China and meeting the Chinese government’s goal of building an advanced socialist market economy.