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The political connection between the state and firms in the context of China's corporate restructuring has been little explored. Using the clientelist framework and unpacking the incentives of both firms and the state, we analyse political connections as repeated patron–client exchanges where the politically connected firms can help the state fulfil its revenue imperative, serving as a failsafe for local authorities to ensure that upper-level tax quotas are met. Leveraging original surveys of the same Chinese firms over an 11-year period and the variations in their post-restructuring board composition, we find that restructured state-owned enterprises (SOEs) with political connections pay more tax than their assessed amount, independent of profits, in exchange for more preferential access to key inputs and policy opportunities controlled by the state. Examining taxes rather than profits also offers a new interpretation for why China continues to favour its remaining SOEs even when they are less profitable. (China Q/GIGA)

China's rapidly growing local government debt problem has long been recognized by foreign observers as a risk, but inside China, only recently was this problem called out as alarming. Why has local government debt been allowed to grow with little direct intervention from central authorities? We argue that it has much to do with a "grand bargain" between the central government and localities during the 1994 fiscal recentralization reform. While much scholarly attention has been paid to the consequences of the 1994 reform that left localities with a tremendous fiscal gap, our findings show that Beijing in fact gave localities the green light to create new backdoor financing institutions that counteracted the impact of fiscal recentralization. In essence, these institutions were the quid pro quo offered to localities to sustain their incentive for local state-led growth after 1994. The bargain worked, and growth continued. The drawback, however, was that China's economic growth has been accompanied by the accumulation of local government debt with little transparency and central control. When the global financial crisis slowed growth, and local deficits and debts spiked, Beijing began to shut down backdoor financing and opened front-door options that were transparent and under the control of national authorities—but with limited success. In the wake of COVID-19, the question is whether the pendulum will swing back toward more tolerance of local debt for the sake of economic growth. (China J/GIGA)