1/14
Very important paper by @AdamYLiu1, Jean Oi and Yi Zhang. The authors explain the the switch in the locus of borrowing to local governments and their proxies (the LGFVs) as part of a “Grand Bargain” imposed by Zhu Rongji.
Very important paper by @AdamYLiu1, Jean Oi and Yi Zhang. The authors explain the the switch in the locus of borrowing to local governments and their proxies (the LGFVs) as part of a “Grand Bargain” imposed by Zhu Rongji.
https://twitter.com/nujoaixil/status/1478494638717620224
2/14
They show that in the 1990s, “While increasing the center’s share of the tax revenues, Beijing needed to find ways to keep the provincial and local governments viable and motivated by allowing them to enjoy fiscal fruits of their own efforts.”
They show that in the 1990s, “While increasing the center’s share of the tax revenues, Beijing needed to find ways to keep the provincial and local governments viable and motivated by allowing them to enjoy fiscal fruits of their own efforts.”
3/14
The solution? “The central government was ready to ‘tie its hands’ and grant full fiscal autonomy to the localities as long as they gave the center the newly increased amount of tax revenues stipulated in the 1994 reform.”
The solution? “The central government was ready to ‘tie its hands’ and grant full fiscal autonomy to the localities as long as they gave the center the newly increased amount of tax revenues stipulated in the 1994 reform.”
4/14
The authors continue: “The implication of our argument is that local officials push to increase GDP, not just because they are ambitious and want to impress superiors and advance careers, but because...
The authors continue: “The implication of our argument is that local officials push to increase GDP, not just because they are ambitious and want to impress superiors and advance careers, but because...
5/14
there is a revenue imperative to fill in the perpetual fiscal gap that all local governments have faced since the 1994 fiscal reform. Debt and development became conjoined twins in China.”
there is a revenue imperative to fill in the perpetual fiscal gap that all local governments have faced since the 1994 fiscal reform. Debt and development became conjoined twins in China.”
6/14
I agree. Because of fiscal pressures the relationship between debt and growth has been central to China's development model. This wasn’t a problem however as long as China was seriously underinvested and debt was used to fund investments that on average were productive.
I agree. Because of fiscal pressures the relationship between debt and growth has been central to China's development model. This wasn’t a problem however as long as China was seriously underinvested and debt was used to fund investments that on average were productive.
7/14
By the mid 2000s, however, it became increasingly difficult to invest productively, and so it was only in that period that debt began rising faster than GDP (BTW I think the paper puts too much emphasis on the GFC as the beginning of the debt problem).
By the mid 2000s, however, it became increasingly difficult to invest productively, and so it was only in that period that debt began rising faster than GDP (BTW I think the paper puts too much emphasis on the GFC as the beginning of the debt problem).
8/14
The key to understanding both the development of Chinese imbalances and the difficulty Beijing faces in resolving them, as this paper shows, is the complex relationship between Beijing and the various local governments. In that light I found this graph especially useful.
The key to understanding both the development of Chinese imbalances and the difficulty Beijing faces in resolving them, as this paper shows, is the complex relationship between Beijing and the various local governments. In that light I found this graph especially useful.
9/14
In my PKU seminar I use both the number of banks and the declining asset share of the Big four banks as proxies for the decentralization of the credit allocation process, which in turn I use as a proxy for the decentralization of political power. That’s because...
In my PKU seminar I use both the number of banks and the declining asset share of the Big four banks as proxies for the decentralization of the credit allocation process, which in turn I use as a proxy for the decentralization of political power. That’s because...
10/14
the ability to control credit allocation is at the heart of economic control in an economy like China’s. As the graph makes clear, this decentralization process took off in the mid-1990s, in large part as a consequence of the “Grand Bargain” that this paper discusses.
the ability to control credit allocation is at the heart of economic control in an economy like China’s. As the graph makes clear, this decentralization process took off in the mid-1990s, in large part as a consequence of the “Grand Bargain” that this paper discusses.
11/14
There are lots of implications. One, which the authors briefly discuss, is the possibility that local-government debt can only be resolved by forcing local governments to sell off their assets. For years I’ve argued that this must eventually happen.
There are lots of implications. One, which the authors briefly discuss, is the possibility that local-government debt can only be resolved by forcing local governments to sell off their assets. For years I’ve argued that this must eventually happen.
12/14
However they do it, I think it will be extremely difficult to rebalance Chinese demand in the ways that both Hu Jintao’s and Xi Jinping’s administrations have promised until we have seen some resolution of the imbalance between Beijing and local governments.
However they do it, I think it will be extremely difficult to rebalance Chinese demand in the ways that both Hu Jintao’s and Xi Jinping’s administrations have promised until we have seen some resolution of the imbalance between Beijing and local governments.
13/14
But this won't be easy. There has already been some consolidation in the banking sector, as the graph shows, some of which has consisted of Beijing takeovers of local banks, but it has barely started.
But this won't be easy. There has already been some consolidation in the banking sector, as the graph shows, some of which has consisted of Beijing takeovers of local banks, but it has barely started.
14/14
By the way for those interested, Jean Oi discusses the paper in this lecture:
By the way for those interested, Jean Oi discusses the paper in this lecture:
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