State interests or local interests? An investigation of Chinese prefectural-level cities’ behaviour in response to national policy implementation

Abstract

Through a study of the behaviour of already debt-ridden local governments in response to the Made in China 2025 policy, this paper explores whether local governments prioritized State interests over local interests, when their financial involvement was required. Deploying a panel data analysis for more than 280 prefectural-level cities, this paper finds that, despite having been subject to an “Administrative Subcontract” arrangement under which the Central Government appoints top local officials, local economic/debt interests were prioritized over national policy implementation under fiscal decentralization. Instead of promoting infrastructure development, the Made in China 2025 policy provided an opportunity for local governments to raise capital via Local Government Financing Vehicles (LGFV) primarily for debt refinancing, despite the State's numerous attempts to control the growth of local government/LGFV debt. Some policy implications concerning i) the effectiveness of national policy implementation on local levels under “Administrative Subcontract” and ii) the debt situations of prefectural-level Chinese cities and their effects on China's economy in general are then discussed.