Core Viewpoint - Local competition in China, a significant driver of economic growth since the reform and opening-up, is undergoing a historic restructuring as new regulations aim to standardize local investment attraction practices and eliminate discriminatory policies [1][2]. Group 1: Economic Structural Changes - The traditional model of local competition, which heavily relied on manufacturing and factor accumulation, is becoming less effective as China's economy transitions towards high-quality development [2][3]. - The service sector is now leading economic growth, with the tertiary industry accounting for 56.7% of GDP in 2024 and employing 48.8% of the workforce [3]. - Local competition has negatively impacted service sector consumption by prioritizing production over welfare spending, leading to a threefold suppression effect on consumer spending [3]. Group 2: Innovation and Competition Dynamics - Local competition has reduced the returns on innovation, creating a "prisoner's dilemma" where regions compete for subsidies, ultimately leading to uncertainty in innovation outcomes [4]. - The economic growth landscape is shifting from uniform growth across regions to a more differentiated growth pattern, driven by factors such as resource endowments and infrastructure [4][5]. Group 3: Policy Recommendations for Local Competition - Short-term measures to address local competition issues include regulating investment attraction practices, while long-term strategies should focus on restructuring the underlying logic of local competition [6]. - A new local competition system should prioritize labor over capital, emphasizing the quality of life and public services to attract talent [6][7]. - Transitioning from homogeneous competition to differentiated competition based on regional functions can optimize resource allocation and promote specialized growth [7]. - The shift from protective to incentive-based competition is essential, leveraging fiscal policies to encourage local governments to participate in regional collaboration and industry development [8][9]. Group 4: Taxation and Regional Cooperation - Current tax revenue distribution favors production locations over consumption areas, which incentivizes local governments to attract businesses rather than expand consumer markets [9][10]. - Adjusting the tax distribution framework to favor consumption locations and embedding regional cooperation into performance evaluations can enhance overall economic growth [10].

Core Viewpoint - The restructuring of local government competition is crucial for maintaining development enthusiasm while avoiding unnecessary losses from "involution" competition, especially in the context of building a unified national market [1] Group 1: Changes in Local Competition - Local competition has historically been a key driver of China's economic growth, but its effectiveness is diminishing as the economy undergoes structural changes [2] - The shift from a manufacturing-led economy to a service-oriented one is evident, with the tertiary sector accounting for 56.7% of GDP in 2024 and employing 48.8% of the workforce [3] - The focus on production-oriented spending by local governments has suppressed consumer spending, leading to a threefold negative effect on residents' consumption [3] Group 2: Innovation and Economic Growth - The traditional factor-driven growth model is becoming less effective, with the marginal productivity of capital declining from nearly 30% in 2000 to below 10% in 2019 [4] - Local competition has reduced the returns on innovation, creating a "prisoner's dilemma" where regions compete for subsidies, ultimately leading to fiscal losses and uncertainty in innovation outcomes [4] Group 3: Regional Economic Dynamics - Economic growth is shifting from uniform progress to steady differentiation among regions, with resource allocation increasingly favoring areas with inherent advantages [5] - The central government has emphasized the importance of promoting the efficient flow and aggregation of various factors since 2019, aiming to create regional growth poles centered around major cities [5] Group 4: Reforming Local Competition - Short-term measures to address local competition's negative effects include regulating local investment attraction practices [6] - Long-term reforms should focus on establishing a new local competition system that prioritizes spatial allocation benefits over mere GDP growth [6] - The new competition framework should shift from capital-centric to labor-centric, encouraging local governments to enhance living quality and public services to attract talent [7] Group 5: Taxation and Incentives - The reform should transition from protective competition to incentive-based competition, leveraging fiscal policies to guide local governments towards regional cooperation and industry development [8] - Adjustments in the distribution of tax revenues based on consumption rather than production are necessary to align local incentives with national economic growth [10] - Encouraging inter-regional collaboration and fair distribution of economic statistics will promote the rational flow of economic factors [10]