Every time India’s growth rate gets compared with China’s, the gap is explained by a familiar set of factors. Some say India’s democracy holds it back. Others point to culture, and to differences in work ethic. Still others attribute it to Beijing’s centralised, top-down directing of the economy to pick national winners. This essay looks at China’s rise through a very different lens and says that the last explanation actually works backwards i.e. China’s growth is down to decentralised policymaking.
Ben Southwood & Robin Rivaton open with a thought experiment. “Imagine if Y Combinator owned and ran San Francisco.” Highways double-decked, subway lines multiplied, skyscrapers everywhere, taxes cut to pull in more founders. That, they say, is “only a slight caricature of how city government works in China.” Provincial cities like Hefei and Hangzhou have become world leaders in electric vehicles, solar and batteries, steered by mayors “whose career incentives are similar to those of partners in a venture capital firm, getting promoted if their portfolio grows and fired if it fails.”
The Western story, that a far-sighted Beijing directs the economy from above, misreads where the intervention happens. Subnational governments do around 85 percent of public spending, so “Beijing’s role is more akin to being a rulemaker in a great tournament,” while thousands of local governments compete beneath it. Take the champions. Huawei, BYD and DJI all grew out of Shenzhen’s special economic zone. Geely began making refrigerator parts and now owns Volvo and Lotus. And “what all have in common is that Beijing played no role in their creation.” Even in sectors it favoured, batteries or electric cars, Beijing stayed “agnostic as to which specific firms and regions rose to dominance.” In the authors’ phrase, “Beijing set a prize, and local bureaucrats competed to win it.”
Hefei shows the machine at work. In 2008 the city staked $500 million, nearly a tenth of its revenue that year, on a struggling display maker called BOE. It landed. BOE is “now the world’s largest display panel manufacturer and makes about a quarter of smartphone screens worldwide.” The city recycled the gains into more bets. Its stake in the carmaker NIO returned “an internal rate of return exceeding 30 percent,” and it now part-owns a memory-chip firm running “just behind Samsung, SK Hynix, and Micron.” Across the decade to 2023 it “had invested roughly $25 billion of public funds, generating reported earnings of nearly $9 billion.” That’s a city balance sheet that reads like a VC fund.
Why do mayors behave this way? Because the incentives are ferocious. Each official is scored by superiors in a secret career file, and promotion turns on the growth of the place they run. Across the 2000s, officials who beat their predecessors by 3.3 points of growth were “40 to 50 percent more likely to be promoted.” Miss an age window and you’re stuck for life. And the cities keep what they earn. After 1980, “provinces retained roughly 75 of every 100 marginal yuan they raised,” later holding on to the upside from state firms and the money from selling land. This, the authors argue, is the hinge. China’s “competitive municipal socialism works because of local governments’ role as, effectively, landowners.” The career of Li Qiang, now China’s second most powerful man, traces it. He turned Wenzhou and Zhejiang into laboratories for private enterprise, scrapping 8,000 legal powers to swap the “restless hand” of government for the “invisible hand” of competition, and rode the growth to the Politburo. China’s officials, they write, “are more like company directors than administrators.”
Competition is the engine, and it runs on land. A Western city has the same tools but splintered governance (the San Francisco Bay Area answers to 101 separate municipal governments) or capped property taxes. A Chinese city owns the upside, so it builds the roads, power and cheap land that pull in an anchor firm and the cluster around it. When Shanghai wanted Tesla, Li Qiang’s government handed over grants, cheap loans, a tax cut and half-price land, so lavishly that one minister reportedly grumbled that “Shanghai leaders were unbelievable, giving away the entire investment without Tesla having to spend a penny.” And it threw in speed: Musk expected two years, and got cars in under one. Across China such cash inducements run to “2 percent of Chinese GDP,” against “0.3 percent in the United States and 0.5 percent in the European Union.” Multiply that reflex and you get the clusters. “By the late 2000s, Kunshan made half of all laptops in the world.” A single town in Jiangsu grinds half the world’s spectacle lenses. By the end of 2023 China held “4.1 million different manufacturing enterprises, almost twenty times as many as the United States,” and “96 percent were private.”
Then the authors strip China of its mystique. All of this growth needs fuel, and Beijing supplies it by trapping the nation’s savings at home. Capital controls and capped deposit rates left households holding “165 trillion yuan ($24 trillion) in bank deposits” by September 2025, “equal to 122 percent of the country’s GDP,” in accounts paying almost nothing. The authors don’t dress up what that is. It’s “an immense forced transfer of wealth from hundreds of millions of savers to Chinese companies.” Cheap money builds marvels. It also builds follies. One carmaker, spun out of a developer, was “briefly worth more than Ford despite never producing a car.” The car industry can build twice the vehicles it sells. Even “mighty BYD’s profit margin has fallen to a meager 4 percent.” The result of this is low capital efficiency: “The United States gets almost twice as much economic output out of every dollar it invests as China does,” the opposite of what a catch-up economy should show. Growth has been bought with a great deal of wasted capital.
However, this isn’t an alien model. Instead, the authors say this growth model is America’s own, mislaid. The United States of the 1950s and 1960s ran on local growth machines too, cities living off property taxes and ploughing the spillovers back in. “America had its own Li Qiangs,” they write, a Daley wiring up Chicago’s O’Hare, a Moses and a LaGuardia driving roads through New York. That country “laid 310,000 miles of new local roads between 1950 and 1970” and built three times as many homes per person in 1972 as in 2025. What’s rare about China isn’t the method. It’s that China still runs dozens of these machines while the West let most of its own seize up.
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
