Your strongest point may be that the problem is not a shortage of rules but an excess of reasons not to obey them. For a local official, closing a zombie firm means layoffs, lost tax revenue, lower land values, and political risk; keeping it alive disperses the cost across banks and the future. Under those incentives, every new prohibition simply invites a new form of support. Productivity reform therefore depends less on telling officials what not to do than on changing who bears the visible cost of letting a firm die.
The article offers a genuinely insightful account of the incentives and constraints facing China’s local governments. Yet it does not establish that technological innovation has failed to generate productivity gains. That question matters far more to China’s economic transformation than the continued survival of some inefficient state-owned enterprises.
Aggregate total factor productivity is shaped by many forces: the property adjustment, changes in industrial structure, capital and energy prices, labour reallocation, and fluctuations in capacity utilisation. Productivity can rise rapidly in electric vehicles, solar power, batteries and telecommunications equipment even while economy-wide TFP growth continues to weaken.
More importantly, there is usually a long lag between R&D investment and measurable gains in aggregate productivity. Building capabilities in semiconductors, aircraft engines, industrial software and advanced materials initially involves duplication, experimentation and relatively low capital efficiency. The economic returns may take many years to appear. A prolonged slowdown in TFP growth is hardly unique to China; it has occurred across most large economies. China’s current productivity position is broadly comparable to South Korea’s roughly two decades ago. South Korea subsequently sustained annual TFP growth of around 1–2 per cent. That is a more relevant development path for China than the assumption that its productivity model has already failed.
Western observers also tend to underestimate the sophistication of Chinese local governments. Compared with most local authorities in the West, they often behave more like entrepreneurs. Government support can certainly keep zombie firms alive, but it can also finance long-term risks that private markets are temporarily unwilling to bear. Early investments in semiconductors, solar power, batteries, commercial aircraft and advanced manufacturing typically require enormous fixed costs, long payback periods and generate substantial technological spillovers.
Failed projects are easily labelled as waste after the fact. Yet if financing were restricted to companies that had already demonstrated profitability, many new industries would never emerge. The relevant question is therefore not whether industrial policy produces failures. It is whether the successful firms, technologies and supply chains ultimately created by that process justify the cost of experimentation.
Finally, the article’s proposal that local governments should set their own debt-reduction targets is strikingly naïve. On a consolidated balance-sheet basis, China’s public-sector net debt position is exceptionally strong. State-owned assets under government control amount to roughly RMB400 trillion, far exceeding approximately RMB170 trillion in public liabilities, even when the hidden debts of local-government financing vehicles are included. The central challenge is the allocation, liquidity and quality of these assets and liabilities—not simply the gross level of local debt.
Funny that R&D spending quadrupled and productivity growth still went nowhere. AI looks set to repeat it: model labs and chip projects subsidized in every province, each one a future zombie some local government can't afford to shut down.
Your strongest point may be that the problem is not a shortage of rules but an excess of reasons not to obey them. For a local official, closing a zombie firm means layoffs, lost tax revenue, lower land values, and political risk; keeping it alive disperses the cost across banks and the future. Under those incentives, every new prohibition simply invites a new form of support. Productivity reform therefore depends less on telling officials what not to do than on changing who bears the visible cost of letting a firm die.
Interesting piece
Another one of those "China is doomed" propaganda I see. 2/10 nice try though
The article offers a genuinely insightful account of the incentives and constraints facing China’s local governments. Yet it does not establish that technological innovation has failed to generate productivity gains. That question matters far more to China’s economic transformation than the continued survival of some inefficient state-owned enterprises.
Aggregate total factor productivity is shaped by many forces: the property adjustment, changes in industrial structure, capital and energy prices, labour reallocation, and fluctuations in capacity utilisation. Productivity can rise rapidly in electric vehicles, solar power, batteries and telecommunications equipment even while economy-wide TFP growth continues to weaken.
More importantly, there is usually a long lag between R&D investment and measurable gains in aggregate productivity. Building capabilities in semiconductors, aircraft engines, industrial software and advanced materials initially involves duplication, experimentation and relatively low capital efficiency. The economic returns may take many years to appear. A prolonged slowdown in TFP growth is hardly unique to China; it has occurred across most large economies. China’s current productivity position is broadly comparable to South Korea’s roughly two decades ago. South Korea subsequently sustained annual TFP growth of around 1–2 per cent. That is a more relevant development path for China than the assumption that its productivity model has already failed.
Western observers also tend to underestimate the sophistication of Chinese local governments. Compared with most local authorities in the West, they often behave more like entrepreneurs. Government support can certainly keep zombie firms alive, but it can also finance long-term risks that private markets are temporarily unwilling to bear. Early investments in semiconductors, solar power, batteries, commercial aircraft and advanced manufacturing typically require enormous fixed costs, long payback periods and generate substantial technological spillovers.
Failed projects are easily labelled as waste after the fact. Yet if financing were restricted to companies that had already demonstrated profitability, many new industries would never emerge. The relevant question is therefore not whether industrial policy produces failures. It is whether the successful firms, technologies and supply chains ultimately created by that process justify the cost of experimentation.
Finally, the article’s proposal that local governments should set their own debt-reduction targets is strikingly naïve. On a consolidated balance-sheet basis, China’s public-sector net debt position is exceptionally strong. State-owned assets under government control amount to roughly RMB400 trillion, far exceeding approximately RMB170 trillion in public liabilities, even when the hidden debts of local-government financing vehicles are included. The central challenge is the allocation, liquidity and quality of these assets and liabilities—not simply the gross level of local debt.
Funny that R&D spending quadrupled and productivity growth still went nowhere. AI looks set to repeat it: model labs and chip projects subsidized in every province, each one a future zombie some local government can't afford to shut down.