China’s Local Governments Face New Challenges as Tax Rebates and Subsidies AreCurtailed
BEIJING – A shift in China’seconomic policy is forcing local governments to rethink their approach to attracting investment. The days of offering generous tax rebates and subsidies to lure companies are coming to an end, leaving officials scrambling to find new ways to compete in a rapidly changing landscape.
The change is driven by a growing concern over unfair competition and a desire to createa more level playing field for businesses. The newly implemented Fair Competition Review Regulations explicitly prohibit local governments from offering tax breaks or financial incentives to specific companies without legal justification or national approval. This move, coupled with a series ofdirectives from central authorities, signals a clear intention to curb the internal involution that has characterized China’s investment promotion practices for years.
The impact of this policy shift is already being felt across the country. Local officials,once accustomed to using tax rebates and subsidies as bargaining chips, are now facing a new reality. No county or city dares to include tax refunds in their incentive policies anymore, said Han Dong, a recruitment director at the Investment Promotion Center (Beijing) in a northern Chinese city. He has witnessed firsthand the shift inpolicy and its implications for attracting investment.
The practice of offering tax rebates and subsidies has been a common strategy for local governments seeking to attract investment and boost economic growth. However, this approach has also led to a phenomenon known as bird-like companies, which relocate after receiving subsidies, leaving behind empty factories andunfulfilled promises.
Zhou Gaosheng, a deputy director of the Investment Promotion Bureau in a county in Hunan Province, described this phenomenon. In the past ten years, we’ve seen a lot of companies that come in, take the subsidies, and then move on to the next county, hesaid. They’re like birds, flitting from one place to another.
The practice of offering tax rebates and subsidies has also been criticized for creating a system where companies prioritize short-term gains over long-term sustainability. This has led to a focus on attracting companies with low tax contributions and highsubsidies, often at the expense of developing a robust and diversified economy.
The new regulations aim to address these issues by promoting a more sustainable and competitive investment environment. Instead of relying on tax rebates and subsidies, local governments are now being encouraged to focus on building a strong business environment, providing quality infrastructure, and fosteringinnovation.
This shift is not without its challenges. Local governments are facing pressure to meet their economic development targets, and the loss of tax rebates and subsidies could make it more difficult to attract investment. However, the new regulations are seen as a necessary step towards creating a more equitable and sustainable economic landscape.
The future of investment promotion in China is uncertain, but one thing is clear: local governments must adapt to the changing landscape and find new ways to attract investment. The focus is shifting from short-term incentives to long-term strategies, and the success of these strategies will depend on the ability of local governments to create abusiness environment that is attractive to companies and fosters sustainable growth.
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