The Indian Prime Minister urged States to compete to attract investors.
Extreme subnational economic competition in China is now seen as counter-productive, though it was once celebrated as part of its economic success.
51% of government spending in China occurs at sub-provincial levels, unlike India, where city-level governments account for less than 3%.
In China, local governments handle unemployment insurance and pensions, responsibilities typically associated with national governments in other countries.
China’s Party-state system is not federal; the central government can revoke the powers of local governments, as seen in the 1994 Tax-Sharing Reform.
Overcapacity and Investment Model:
Local governments prioritized industrial construction over public services to drive economic growth, offering land at deep discounts to attract firms.
This investment-led model resulted in overcapacity, with rapid production for exports leading to wasteful investments.
Despite inefficiencies, the model created tremendous wealth during Hu Jintao’s leadership, as local governments experimented and competed for growth.
Central government allowed local innovations, like special economic zones and housing sector reforms, without micromanagement.
Foreign markets absorbed China’s increasing capacity, with the steel sector as a key example of how Chinese firms generated value by expanding exports.
Half of all investments between 2009-2013 were deemed ineffective, wasting nearly $6.9 trillion, prompting Xi Jinping to tighten central control.
Central directives became narrower, focusing on specific industries, such as the drive for self-sufficiency in semiconductors.
Despite heavy investment in local chip-making firms, China has not mastered advanced chip production.
By June 2024, 30% of all Chinese industrial firms were making losses, surpassing the worst performance since the Asian financial crisis.
Geopolitical Challenges:
Other governments view China’s overcapacity as a national security threat, especially in sectors like electric vehicles and telecom equipment.
China’s international behavior has worsened perceptions of its products and investments.
Xi Jinping's efforts to boost domestic demand and find new international markets through the Belt and Road Initiative have not succeeded.
Countries involved in the BRI are not economically strong enough to generate significant demand.
Overcapacity and export orientation are intrinsic to China’s decentralization model, but it has reached its limits due to self-reliance and poor international relations.
Without transforming its political and economic relations with major countries, China risks economic decline.
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