Chinese cities, which for years pursued a ‘build it and they will come’ strategy, have shifted their focus from projects to people
- In China’s state-led political economy system, local authorities jostled for favourable treatment from Beijing to gain greater autonomy in local policies
- As investors are now harder to find and borrowing becomes dangerous, the competition among local governments will take on a new look
China’s economic success over the past few decades can be attributed in part to internal competition for growth among the country’s hundreds of municipalities. As Deng Xiaoping unleashed the Chinese people’s desire to get rich, reform and opening up also turned local cadres into wild beasts pursuing growth in industrial output and tax revenues.
For years, the message has been clear to Chinese officials. First and foremost, they have to deliver economic growth, and local governments have scrambled to secure funding and other resources to boost their local economy. A big job for local officials is to persuade investors to put money into the local economy. In China’s state-led political economy system, local authorities also jostled for favourable treatment from higher authorities to gain greater autonomy in deciding local policies, which eventually helped local authorities win investment projects.
But the game of vying for investors has become difficult to sustain. Good investment opportunities are harder to find amid the economic downturn, and investors are becoming more cautious in their long-term capital spending. For local governments, the days when investors would line up to join an “industrial park” after it was open for business are over.
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To convince investors to put money down, local governments often have to chip in as well. This model, however, carried huge risks for local authorities. If an investment project failed, the local government or its financing vehicle would be thrown under the bus.
The “if you build it, they will come” formula does not work any more. While many local governments attempted to repeat the success of Shenzhen in the 1980s and Shanghai Pudong in the 1990s, most ambitious and highly-leveraged development plans failed to materialise, resulting in a debt hangover. The central government was aware of the problem and has tried various ways to control these debt levels, but there’s a gap between identifying a problem and solving it.
Beijing has started to hold officials personally accountable for poor investment decisions. In a recent state television confession, Li Zaiyong, a veteran official in Guizhou, was publicly shamed for incurring 150 billion yuan (US$21 billion) in debt on the city’s balance sheet. Li was accused of leading Liupanshui, a poor area, into blindly borrowing money for vanity projects, including a ski resort, without concern for “fiscal affordability”.
The case was extraordinary. Li, 61, had been promoted again and again for his boldness in going the extra mile in boosting local development through tourism. China’s governing system provides opportunities for ambitious officials like Li to get big-ticket deals done. If “borrowing blindly” or disregarding fiscal sustainability is a crime, then few mayors or municipal party bosses would be innocent.
The act of making an example out of Li is all about “killing a chicken to frighten the monkey”, so that officials across the country will take heed and be less aggressive in pursuing development plans. But it may also exacerbate the so-called “laying flat” trend among cadres. In other words, local officials will be reluctant to take on initiatives and will be risk-averse when approving new projects. The priority, therefore, will shift from “let’s make something happen” to “let’s make sure nothing happens”.
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Meanwhile, as investors are now harder to find and borrowing becomes dangerous, the competition among local governments will take on a new look. For instance, Chinese cities are increasingly competing for consumer attention through marketing tricks. Harbin, the capital of northern Heilongjiang province – with one of the smallest land revenues and deepest population declines among China’s provincial capitals – is positioning itself as a must-go winter resort for consumers, particularly those from the affluent coastal areas south of the Yangtze River.
It should be noted that success for some cities has little meaning for the national economy, as it is a “zero sum” game if China’s overall consumer spending remains unchanged. However, the paradigm shift in China’s intercity competition is still a good thing as it means the focus has changed from money and projects to people.
