The Politics of Economic Growth and Fiscal Deficit in China, 1994-2015

This paper examines the political and economic forces which have shaped economic growth policy and debt accumulation in China since 1994. It argues that China’s single party political system and the decentralised nature of the country’s political and economic governance have conjoined to foster a debt-fuelled growth policy which has significant repercussions for Chinese society. In particular, the paper analyses the role which central government and local government relations have played in shaping both the GDP targets of local governments and the willingness of local officials to accept increasing deficits. A distinction is made between those local officials who govern provinces and municipalities. Whilst officials who are insiders are home-grown having risen through the party ranks within the same jurisdiction in which they serve, officials who are outsiders have been externally placed by Beijing in a locality. It is argued that this insider-outsider dynamic helps to explain the approach to economic growth and fiscal deficit adopted by particular provinces and municipalities.     

Total Social Financing stock has been escalating at a rapid pace to the point that that the country’s total debt in 2014 exceeded 280% of national GDP. These levels have raised concerns about the possibility of a looming economic crisis which could result in the event of default contagion amongst local governments and businesses.

Three salient developments are examined which created the institutional conditions which have both constrained and incentivised the actions pursued by local government officials. Local government debt has been fuelled by a growth model which has been underpinned by specific political incentives within the institutional framework of China’s single party system. Growth policy depends upon local economic performance to propel national GDP. The delivery of stellar growth rates by local officials can come with the prospect of career advancement within the Communist Party. Nevertheless, local leaders do not have the fiscal resources to achieve central government development goals. The fiscal reform measures of 1994 increased the central government’s share of tax revenue but capped its contribution to public expenditure. This fiscal imbalance meant that local governments had to raise revenue via alternative means. However, the banking reforms of 1998 prevented local authorities from orchestrating loans for their own public projects through local branches of state-owned banks. Local governments responded through the establishment of municipal banks through which local influence over borrowing decisions continued and turned to shadow banking.

The analytical approach adopted by the paper is two-pronged. Firstly, an in-depth process-tracing of growth policy and fiscal/financial reforms is undertaken. Public statements made by central government, provincial government and local government leaders as well as local employers are used in order to shed light into the policy preferences of those actors. Secondly, logit models are run in order to analyse the relationship between political insiders and outsiders and indicators of economic growth and fiscal deficit. The insider/outsider indicator is derived from a self-composed database of public official CVs which have been obtained from a thorough search of Chinese governmental websites.