China Struggles To Crimp Cozy Local Business Breaks

THIS BYSTANDER HEARS that there has been considerable resistance to an edict from Beijing late last year instructing local governments to stop offering tax and other incentives to businesses. The proscribed incentives include tax rebates, cheap land, and social security concessions. The aim of the measures, contained in a document from the State Council known as Circular 62, is to standardize local tax and fiscal regimes, knock back local protectionism and generate fairer market competition.

Any incentives not in line with national priorities were to be stopped immediately, and those that local officials felt were had to be submitted to finance ministry review by end-March. However, many local officials have been dragging their feet and protesting that the changes will disrupt local business conditions. Finance ministry officials have softened their initial hard line on implementation of the changes to exhorting businesses crying foul to take professional advice on getting their houses in good order. They are also recognising that the tight timeline they first set is unlikely to be met.

Local officials are feeling squeezed between using a tried and trusted policy tool — preferential treatment for local investors and enterprises — to reverse the overall slowdown in economic growth and the fiscal discipline being imposed on them from above. They have already had their financial freedom crimped by restrictions on their access to off-balance sheet financing, notably through captive special investment vehicles.

The primary driver for that was central-government fears about the risks of the local-government debt bomb going off. The anti-local protectionism measures are more about central government removing the local distortions that bedevil the economy while at the same time exerting more central control over fiscal management.

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