How Covid has affected China's local government debt
The China Forum lecture on Thursday 10 November 2022 was delivered by Professor Jean C. Oi, William Haas Professor of Chinese Politics, Stanford University; Director of Stanford China Programme, Walter H. Shorenstein Asia-Pacific Research Center at Freeman Spogli Institute for International Studies (FSI), Stanford University; and Lee Shau Kee Director of Stanford Center at Peking University.
In order to understand the impact of COVID upon China’s local government debt, Professor Oi provided an overview of the genesis of local government debt, noting that it is a long-standing issue, rooted in the 1994 tax-assignment reform (fenshuizhi). The reform created a grand bargain in the fiscal system between central and local governments, including the development of local government financing vehicles (LGFVs) to enable local borrowing and generate land revenue. Professor Oi explained that before the onset of COVID in 2019 the central government had begun to tighten risk control and increased fiscal discipline. However, three years later most local governments suffered serious fiscal deficits. In Professor Oi’s view the fiscal crisis had its origins in actions by the central government taken during COVID. She argued that the central government’s success in containing COVID during the first stage of the pandemic (12/2019 -06/2020) led it to be overconfident and in the second stage of the COVID crisis it resumed efforts to crackdown on local government debt (07/2020 - 07/2022). However, in the third stage of the pandemic (08/2022- ) the Omicron variant arrived, while a zero COVID and lockdown policy were adopted. Consequently, local governments suffered a double blow: their spending increased in order to deal with COVID in the context of diminished revenue due to enhanced risk control. Professor Oi concluded that it was the central government’s actions that pushed local government debt into freefall.
The Q&A session addressed the following issues: the capacity of the current fiscal system to manage local government debt; the reasons why Shanghai was the only local government which did not run fiscal deficit in 2022; historical lessons that might assist in devising policies to deal with the current fiscal relationship between central and local governments; causes of the transition from successful control of COVID and local government debt in the first stage of the pandemic to failure during the second stage; comparison of the fiscal relationship between central and local governments in the UK, US and China; the extent to which alternative policies might have avoided the fiscal crisis; the contribution that local governments’ increased involvement in financial activities, including investing in the high-tech sector, might make to resolving local government debt; the composition of local debts; and how to deal with the ‘soft budget constraint’ in China.
Jean C. Oi, a University of Michigan Ph.D. in political science, is the William Haas Professor of Chinese Politics in the Department of Political Science and a Senior Fellow of the Freeman Spogli Institute for International Studies (FSI) at Stanford University. She directs the China Program at the Walter H. Shorenstein Asia-Pacific Research Center at FSI and is the founding Lee Shau Kee Director of the Stanford Center at Peking University. In March 2022, she was elected Vice President and President-Elect of the Association for Asian Studies.
Professor Oi has published extensively on political economy and reform in China. Recent publications include Fateful Decisions: Choices that will Shape China's Future, co-edited with Tom Fingar (2020), “Firms as Revenue Safety Net: Political Connections and Returns to the Chinese State”, co-authored (The China Quarterly 2022), and “China’s Local Government Debt: The Grand Bargain”, co-authored (The China Journal 2022). Her new research focuses on China’s Belt and Road Initiative.
