Thirty years of reforms have given local governments in China unprecedented authority, including widespread powers over land sales, infrastructure, commercial and residential property construction, natural resources and foreign direct investment. With limited supervision, it is their foot rather than Beijing’s that has been firmly on the accelerator of the country’s remarkable growth engine.
We argue that the pendulum has swung too far in one direction, especially now that the old growth model is starting to run out of steam.
In the past three years, 10 provinces have registered GDP growth of more than 70 per cent, a remarkable figure. But at the same time local, governments and state-owned enterprises have accumulated huge debts (helped by the lightly regulated and opaque shadow banking system), industrial overcapacity is rife and it now takes more and more government spending to produce less and less growth. On top of this, corporate sales, profits and margins have been in decline since 2010 and while parts of the economy are awash in cheap credit, vibrant small businesses can’t get access to loans.