Spring Festival was kind to Fu Ruide, vice general manager of Hangzhou Goldfish Home Appliances. Over seven days, his company sold more than 50 washing machines, a 300% increase from the same period the year before.
Goldfish was included on a procurement list released by the Hangzhou municipal government, which issued vouchers to encourage local people to shop, offering 18% discounts on locally produced appliances. Over the weeklong holiday, Hangzhou’s consumers spent nearly US$189,000 on local appliances.
Although successful, this voucher program, and others like it across China, have attracted strong criticism.
“This is local protectionism, because it uses government finances to subsidize local enterprises,” said Lang Xianping, an economics professor at the Chinese University of Hong Kong, and former host of a controversial finance-themed TV talk show in Shanghai. “It has put other products in a disadvantageous position.”
In recent months, dozens of cities and provinces have introduced programs similar to Hangzhou’s vouchers initiative that are intended to boost consumption of local products. While some observers question the long-term sustainability of such policies, the more pressing concern is whether they are guilty of Lang’s charges of local protectionism. Most programs stop at encouraging the purchase of locally made goods, rather than requiring it, but nevertheless create artificial barriers to domestic trade.
In Changchun, Jilin province, the city government issued orders in January to encourage consumers to buy cars produced by Changchun-based First Automobile Works (FAW) Group, China’s largest automobile producer, through policies such as the elimination of certain administrative fees. The city also requires vehicles purchased by local government organizations and development zones to be made by FAW.
Some areas have gone even further. In February, authorities in Anhui issued an order obliging local businesses to use locally produced industrial equipment in infrastructure and other projects. In addition, local automakers must buy Anhui-produced steel, and power companies must purchase locally mined coal.
These programs are not motivated by the commercial altruism of local governments. Across China, a number of specific sectors – automobiles, steel, construction materials, cigarettes, alcohol, agricultural machines, fertilizers, fuels and medicines – have been disproportionately favored.
“[This is] mainly because the tax rates for these products are high,” said Li Shantong, a senior analyst with the Development Research Center under the State Council. “For example, the auto industry is central to many cities’ economies. The governments hope that by protecting these industries they can generate more taxes, boosting their local economies.”
Some governments are even turning their attention toward the labor market. In Guangdong, home to most of China’s migrant workers, some members of the provincial People’s Political Consultative Conference suggested imposing charges on non-local workers. They would also introduce limitations on the hire of out-of-province labor to create more job opportunities for millions of unemployed local workers. The discussion raised the ire of domestic media as some warned that local protectionism could make a difficult economic situation even worse.
“Local protectionism is not a new phenomenon in China … However, with the economy cooling, local governments are trying to use it again as a tool to protect local enterprises and economic growth,” said Zhang Xiaojing, a researcher with China’s Academy of Social Sciences. He warns that barriers set up by the policies could hurt more than they will help.
Still, local governments are not yet abandoning their preferential policies. Hangzhou Communist Party chief Wang Guoping has said that his city’s measures were a way of “showing [local] firms that we are fighting the difficulties with them.” Hangzhou lawmakers have rejected charges of protectionism.
Beijing is watching the trend carefully. Media reports suggest that several ministries – including the National Development and Reform Commission and the State Administration of Industry and Commerce – are collecting information on provincial protectionist policies for a report to the State Council. As the central government tries to right the domestic economy, protectionist regional policies may face the regulatory ax.