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University of Sydney Business School
IBUS6020 Enterprise
Management in China
Week 3 Lecture 2
The Local Party-State
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Local Party, State and enterprises
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The local government business context
o Decentralisation and local autonomy
o What are the powers of local governments as opposed to the
central government?
o What is Dual Leadership (tiao-tiao kuai-kuai)?
o What is special about Chinese local state-enterprise
relationship?
o Why do private enterprises depend on the local state?
o How does the local state help/harm businesses?
o Co-evolution of local state and local enterprise sector
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5 Levels of governments in China
Central government
Provincial
governments (34)
Prefecture/City
governments (300)
County governments
(3,000)
Township
governments (40,000)
Local Agency
Central Agency
http://www.china.org.cn
/english/Political/2884
2.htm
https://www.tandfonlin
e.com/toc/rgov20/curr
ent
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Local autonomy and decentralisation
https://www.chinausfocus.com/videos/economic-decentralization-chinas-recipe-for-success
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Strong Political Institutions, Weak Economic Institutions
› Central
› Provincial
› Prefectural
› County
› Township
Political
Institutions
Economic
Institutions
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Nested Hierarchies
Local
government
levels
› Provincial
› Prefectural
› County
› Township
• Political
Institutions
• Economic
Institutions
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Central legislation, local regulation
– Legislation: China has begun drafting a law on the promotion of the
private economy, state media reported, as the country accelerates efforts to
ensure equal treatment of state-owned enterprises and private companies.
It’s difficult for private enterprises to operate in the financial, oil and power
sectors
– Local regulation: The legislative work should cover core concerns of private
companies, including protection of property rights, equal access to factors of
production, and equal protection under the law, the report said.
– Local embeddedness: The southern manufacturing hub of Guangzhou is
proposing to grant equal market access to private businesses and forbid
local governments from setting illegal restrictions that prevent them from
bidding for contracts to use public resources.
https://www.caixinglobal.com/2023-03-29/chinas-private-sector-set-for-
bo st-as-local-governments-step-up-support-102013511.html
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China Vows to Create a ‘Bigger, Better, and Stronger’
Private Sector https://www.caixinglobal.com/2023-07-20/china-vows-to-create-
a-bigger-better-and-stronger-private-sector-102077454.html
– creating a first-class, market-oriented business environment and cultivating a
“close and clean” relationship between businesses and the government.
– protection of property rights of private firms and entrepreneurs; ensuring
fair market competition by breaking down market-entry barriers;
– Distressed private businesses are encouraged to recover capital by
disposing of their assets through bankruptcy and restructuring.
– Private companies are encouraged to invest in China’s central, western, and
northeastern regions to develop a labor-intensive manufacturing sector, as
well the renewable energy and storage sector, and participate in
infrastructure construction projects, such as urbanization, transportation and
water conservancy.
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The five levels of government in China
Central government
Provincial
governments (34)
City governments
(300)
County governments
(3,000)
Township
governments (40,000)
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Central government
Provincial
governments (34)
City governments
(300)
County governments
(3,000)
Township
governments (40,000)
Dual leadership (vertical tiaotiao and horizontal kuaikuai)
Ministry of Environmental
Protection
Provincial Environmental
Protection Bureau (34)
City Environmental
Protection Bureau (300)
County Environmental
Protection Bureau (3,000)
Tiaotiao 条条
Kuaikuai
块块
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Formal: central government – local government links
Informal: Party – local government link
Prov Gov’t
County Gov’t
Central Ministry
(e.g. Nat Tax Office)
Provincial Office
Prefecture/City
Bureau
County Office
Township Office
Prefecture
Gov’t
T’ship Gov’t
Prov Party
City Party
County Party
T’ship Party
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Informal: the Party – Society link
Prov Party
Prefect/City
Party
T’ship Party
Enterprises
society
Enterprises
society
Enterprises/
society
Enterprises/
society
Prov Gov’t
County Gov’t
Prefecture/City
Gov’t
T’ship Gov’t
County Party
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The local party state
1. The party secretary
operates like a chairman in charge of
policy formation and strategic planning.
coordinates the vertical and horizontal
lines of authority (tiaotiao kuaikuai）
2. The mayor
operates like a CEO in charge of local
bureaucracies and is bound by policies
and rules for implementation of policies.
Party
secretary
Mayor
Chairman
CEO
Title Function
Head of Dept. Manager
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The economic functions of the local state
– Setting policies: linking central directives to local circumstances
– Allocating land, access to infrastructure
– Taxation and raising local fees
– Imposing of employment targets
– Incentivizing innovation
– Property right protection
– Supporting local enterprise activity through networking with financial
and other institutions
– Dealing with corruption
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Local finance
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The resources of the local state
– Taxation
– Financial revenue
– Formal revenue
– Informal revenue
– Project revenue
– Real estate
– Policy implementation
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Wong, C. (2016). Budget reform in China: Progress and prospects
in the Xi Jinping era. OECD Journal on Budgeting, 15(3),
– To finance infrastructure needed to support urban growth (schools, public
transport and urban facilities), Chinese cities borrowed off-budget, through
quasi-public financial entities set up as enterprises under government
departments. These local investment corporations (LICs) – variously named
City X Development Corporation, etc., undertook to co-ordinate and finance
the construction of facilities such as water supply, sewerage, roads, and
utility hook-ups. Typically, they raised and bundled together bank loans and
other financing, using a variety of municipal assets including budgetary and
off-budget revenues as equity and collateral, with land playing a principal
role in providing the financing as well as collateral (Wong, 2013a). This
extra-budgetary financing from land sales and off-budget borrowing
developed largely outside the purview of government financial oversight.
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Local government finance
– local governments are responsible for around 85 per cent of total
government expenditure and undertake the bulk of public infrastructure
investment.
– Before 2015, local governments raised funds by forming off-balance sheet
entities known as local government financing vehicles (LGFVs). These LGFVs
sourced credit, in large part, from outside the regular banking system.
– In 2014, the central government adopted a strategy of ‘opening the front
door and closing the back door’ for local government borrowing.
– In 2015, the central government introduced a three year ‘debt swap’
program to convert the debt of LGFVs (including bank debt, debt owed to
non-bank entities, and LGFV bonds) into local government bonds with
extended maturity and reduced interest costs.
– https://www.rba.gov.au/publications/bulletin/2019/jun/chinas-local-government-bond-market.html
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Composition of revenues for an average prefectural city (2013)
Source: Wong (2013)
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The funding burden at local level is high
OECD Economic Surveys: China 2019 DOI:https://doi.org/10.1787/eco_surveys-chn-2019-en, p.40
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The economic functions of the local state
Regulator:
Setting
policies
Negotiator:
Promotion
and subsidies
Participants:
Firms and
local
investors
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Local Government Enterprise Incentives
Exogenous incentives
–Cascading down of central
government financial incentives
–Cascading of administrative
incentives
–Adaption of policies to local
circumstances
–Setting up special economic
zones
–Incentives for Foreign direct
investment
Endogenous incentives
–Local industrial policies, cluster
building
–Local infrastructure incentives
–Local tax and other incentives
–Local administrative support
–Access to resources
–Financial support for specific
industries
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Hierarchical subordination: How can China be a unitary state
and radically decentralised at the same time?
– The division of functions and powers between the central and local state
organs is guided by the principle of giving full scope to the initiative and
enthusiasm of the local authorities under the unified leadership of the central
authorities.
– Local people’s governments at various levels are responsible and report on
their work to the State administrative organs at the next higher level. Local
people’s governments at various levels throughout the country are State
administrative organs under the unified leadership of the State Council and
are subordinate to it.
– Interjurisdictional competition between local governments
– Merit-based promotion of local cadres
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Interjurisdictional competition between local governments
Inter-jurisdictional competition over attracting investment,
incentivizing local enterprises and local employment creation.
Local Governments use their resources to attract investors
–land, infrastructure, limited control over taxation, local fees
investment funds, economic opportunities
Incentives for domestic and foreign investors
–Financial, regulatory, access to infrastructure, administrative
support
–Government and Party Networks
How to avoid a race to the bottom?
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State Institutions – core reading
– Xu, Chenggang. “The Fundamental Institutions of China’s Reforms and
Development.” Journal of Economic Literature 49.4 (2011): 1076–1151.
Web.
– https://sydney.primo.exlibrisgroup.com/permalink/61USYD_INST/14lgoon/
jstor_archive_123071664
– Chenggang Xu https://english.ckgsb.edu.cn/faculty/xu-chenggang/
– Xu Chenggang is Professor of Economics at Cheung Kong Graduate School
of Business. He is one of the first recipients (joint with Yingyi Qian) of China
Economics Prize for contributions in understanding government and
enterprise incentive mechanisms for the transition economy of China.
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– P. 1082: I introduce the fundamental institution of China, which I call the
regionally decentralized authoritarian (RDA) system. The RDA system is
characterized by
– highly centralized political and personnel controls at the national level, and
– a regionally decentralized administrative and economic system.
– Both decision making and policy implementations in the RDA regime, from
national strategic issues to concrete local matters, are deeply influenced by
this combination of political centralization and economic decentralization.
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Sub-national marketisation diversity
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Summary points
– China has four levels of local governments in nested hierarchies
– Dual leadership enables local autonomy
– Interjurisdictional competition encourages economic initiative
– Underfunding of local budgets incentivises local economic policies
– Sub-national markets are diverse
– Local governments can influence enterprises in their jurisdiction
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Thank you!