Pacific Money

5 Factors Holding Back China’s Economic Reform

Local level factors are weighing on China’s reform momentum.

5 Factors Holding Back China’s Economic Reform
Credit: Pixabay

Reform is essential to China’s long-term growth prospects but execution depends on local governments. A recent cross-province survey report by the Economic System and Management Institute, overseen by the National Development and Reform Commission, China’s top policy authority, uncovered five local-level factors undermining progress, which break down as follows:

Local-level countermeasures: Local governments have a tendency to tweak or ignore entirely any regulations they aren’t inclined to follow. In one example banks met the China Banking Regulatory Commission’s 2011 order to cancel standard RMB34 ($5) charges on personal accounts by inventing new fees or ignoring the directive. Another example includes officials in Lioaning province renovating the interior of a farmhouse into an extravagant dining room, complete with a hired gourmet chef, to get around new government rules outlawing lavish, ostentatious banqueting.

Selective interpretation: Other times, local officials implement centrally-announced reforms but interpret them to their own advantage. After a new rule cutting taxes on farmers from RMB76 to RMB45, Hexun found that officials in Luzhou in Sichuan province set the new tax rate above the guided level and pocketed the difference, thus diluting the intended impact on farmer’s costs.

“Short-termism”: Reforms often get piloted at the local level before nationwide roll-out; however, this doesn’t always spark wider application. Local officials often want to run an initial pilot project to attract funding and approval from their Beijing-based superiors, but may fail to follow through with wider application after initial success. In other words, their focus is short-term gains, not long-term success.

One-sided reform: When Guangdong officials launched water and electricity pricing reforms to cut costs for low earners and increase costs for businesses and high-income groups, surveys showed that poorer customers actually felt they were paying much more compared to businesses or higher-income groups. This is largely because the new reforms were either not sensitive enough to control prices for low-income groups, or were not implemented fully enough to target those with ability to pay the higher fees.

Intentional overreach: Local officials also have a history of expanding the scope of a given reform far beyond the original intention. For example, the central government released new guidelines governing internet financing platforms in the wake of online lender Ezubao’s fraud case, but the report said that some local officials, possibly in cahoots with the local banking sector, took to refusing to approve business registrations by all new internet financing companies, regardless of whether they met new official guidelines.    

While local officials often bear the brunt of criticism for policy failure, the report also highlights the many challenges they face, including a lack of expertise, high expectations from the central government, poorly designed top-level policy, challenges from local interest groups, and also the financing of reform, which is a major barrier considering the parlous state of local government finances.

These challenges, together with the five identified obstacles, mean that the process of economic reform, though essential to China’s future growth prospects, remains a highly complex one that makes rapid success unlikely.