State intervention, local indebtedness, investment overheating and their systemic background during the global crisis in China

Abstract

This paper focuses on the immediate economic and systemic reasons of steadily increasing local government indebtedness and investment overheating in China despite central efforts to contain them. These two phenomena emerged between 2008 and 2011 as a direct consequence of an external shock caused by the global crisis and the subsequent internal reaction in the form of intensified stimulating state intervention.

China’s crisis management between 2008 and 2011 proved to be successful. The national and local level responses to the global crisis met the original goals of compensating economic decline and decreasing export reliance. Different level governments and banks became promptly active, investments accelerated, economic indicators quickly improved, and unemployment rate soon dropped to the pre-crisis level. Infrastructural investments in the Central and Western regions skyrocketed, attracting similar growth pace in the manufacturing sector. Moreover, demands of preferred state owned enterprises activated the market field as well.

However, new chances for resource distribution and investments through state intervention mobilized distribution priorities and politically rational economic behavior of actors, characteristic to party-state systems. Locations of mobilization were defined by the decentralized Chinese system specifics along the intertwined institutional party-state structure. This process was further amplified by the characteristics of transforming economy in China, as actors in the private sphere were mobilized by the increased input demand of those privileged by the systemic priorities of state intervention. Thus stimulating state intervention turned into overheating. Budgetary expenditures increased in enormous pace; legal and illegal land-requisitions and land-use sales grew unlimited; expansion of local bank lending became hardly controllable; bad loans widely re-emerged; growth of local governments’ indebtedness through fiscal vehicles increased steadily; bubbles developed in production and infrastructure building requiring new state intervention. Systemic characteristics and its Chinese specifics together resulted in investment overheating, and steadily growing local indebtedness through large and state-owned enterprises and local governments.