China will abolish local investment incentives

Subject

Moves to reduce local protectionism.

Significance

The government has embarked on an ambitious plan to create a more unified national market. At its heart are new measures that restrict the ability of local governments to offer investment incentives to companies operating in their jurisdictions. These reforms will increase costs and reduce profitability for companies, fatally for some, but benefit the national economy in the long term by increasing competition and efficiency. However, the measures have met resistance from local governments. Finance ministry officials admit that they will miss their targets for implementation.

Impacts

• 'Free trade zones' (FTZs) modelled on Shanghai will retain considerable autonomy; other 'development zones' look likely to be curtailed.
• Investment decisions will become easier as local government preferential policies become more transparent.
• A more unified national market will lead to larger Chinese firms better able to compete against multinationals.
• The closure of small, inefficient firms should aid efforts to limit pollution.
• Successful implementation will smooth bilateral investment treaty negotiations with Brussels and Washington.