Key Takeaways

• China has a vast system of local governance, with no single national model of how provincial authorities interact with subordinate sub-provincial governments.
  
  
• There is a long history of central government attempts to control local governments, with solutions to tackling one perceived driver of local autonomy often generating new ones.
  
  
• Despite the centralisation of authority under Xi Jinping, local governments retain the ability to prioritise local economic interests and objectives over national ones. This creates problems both for Beijing (for example, excess capacity and provincial competition leading to a waste of resources) and also for Europe (overcapacity leading to price wars in external markets).
  
  
• Xi Jinping has targeted eliminating local protectionism and building a unified national market as a key task for the next Five Year Plan.
  
  
• Raising revenue to meet local spending commitments and the way in which officials are evaluated combine to provide incentives for local governments to prioritise local economic objectives over national ones. Dealing with local debt is also a key driver in many cases. What might seem irrational from a national viewpoint can look very rational and effective from the local level.
  
  
• As there is no single driver of local protectionism, there is no easy solution. Reforming the fiscal system, though, and the financial relationship between central and local governments must form part of any solution.