For decades, China's spectacular economic growth was powered by land finance, a fiscal model whereby local governments relied on selling land-use rights and land-backed borrowing as a major source of revenue. To fund development, localities created special-purpose entities, called local government financing vehicles (LGFVs), to borrow off-the-books from banks and bond markets for infrastructure financing and construction – a practice Beijing quietly backed to stimulate growth. By summer 2020, however, the COVID-19 pandemic’s skyrocketing containment costs, combined with the central government’s move to severely limit real estate firm borrowing, ultimately pushed local governments to the brink. With their land finance revenue stream all but gone, they were mired in hidden debt of at least $8 trillion by 2022.

Yet despite China’s economic slump and their massive fiscal shortfalls, localities remain responsible for development and continue to drive growth. What strategies are they using to compensate for the loss of land finance revenue?

Fieldwork conducted in Shandong and Jiangsu provinces in 2024 by Jean Oi, the William Haas Professor in Chinese Politics at the Department of Political Science and a senior fellow at the Freeman Spogli Institute, indicates that localities are pioneering new industries by developing integrated industrial parks and transforming their heavily indebted borrowing arms into venture capital instruments that invest in private startups.

Oi, the director of the China Program at Shorenstein APARC, outlines her observations in a study published in the August 2026 issue of the Journal of Asian Studies. The interviews she conducted in the two developed provinces come after a period of almost four years when few, if any, foreigners were allowed to conduct fieldwork in China, and “provide firsthand details of what is happening at the local levels, in cities and counties,” she writes.

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The Rise of Integrated Production Parks

In Shandong, Oi finds that authorities are directing resources toward new industries that address growing needs: not merely high tech but also elder care and health care, as well as advanced production to meet these ends. Some firms that were previously engaged in traditional manufacturing forms are the ones pursuing the new sectors.

And in both Shandong and Jiangsu, a major new development is the proliferation of integrated production parks built to accelerate the growth of these new industries. Unlike older forms of industrial parks that served as designated areas for individual factories, and unlike industrial clusters, these parks are complete ecosystems. Organized around a core product with guaranteed proximity to the raw materials needed in production, they ensure localized supply chains and dramatically cut transportation and storage costs.

“Integrated production parks are typically organized around one key input that links the activity of all firms within a park,” explains Oi. “The ideal scenario is to attract a major producer (a dragon head firm) that relies on this key input. That big-name firm, in turn, would draw in upstream and downstream suppliers, ultimately growing a whole production ecosystem.”

For example, an aluminum production park in Shandong took shape after a county-level firm secured a stable supply of bauxite, the raw material for aluminum, from a mine in Guinea. The local county government then built a self-contained ecosystem around high-value aluminum products on a site left by a bankrupt enterprise, attracting firms along the production process. The development of this park had a ripple effect, spurring the growth of integrated industrial parks in other parts of the province.

Crucially, such parks attest to “Beijing’s desire to reduce reliance on imports in China’s supply chains: a need that no doubt stems from security concerns after the disruptions during COVID and that have only been intensified post-COVID, with the rise in geopolitical tensions,” Oi emphasizes.

Increasingly, privately owned firms are the ones to populate the production parks, and many of them are recruited from outside of the locality. This dynamic, however, is shaped by the complex relationship between the state and private firms and poses risks for local officials, she notes.

From Land Finance to Venture Capital

The term “local state corporatism” (LSC) has been used to describe local governments acting as entrepreneurs to spearhead local state development. Oi’s fieldwork reveals that localities have adapted this model: instead of helping firms secure loans by acting as guarantors – which has been a defining feature of LSC during the market reforms of the 1980s and 1990s, or what Oi labels LSC 1.0 – local governments now directly buy equity in promising startups within their industrial parks, at times acting alone and sometimes cooperating with private venture capitalists (VCs).

“Local governments have become VCs who provide ‘patient capital’ (naixin ziben 耐心资本)” – officially described as ‘investment that generates healthy returns over the long run rather than taking quick profits,’” she says. She coins this new development model LSC 2.0.

Perhaps her most surprising finding is that those doing the investing for local governments are none other than LGFVs. “In Shandong and especially in Jiangsu, local governments are repurposing their LGFVs, transforming them from instruments of land finance into VCs,” Oi explains. “This finding is particularly noteworthy given the heavy debt and problems that many LGFVs faced in the wake of the COVID pandemic.”

To make this transition possible, local governments are executing a clever financial maneuver: injecting profitable state-owned enterprises (SOEs) directly into failing LGFVs, which, in turn, are acting as holding companies, each with SOEs as subsidiaries. This asset injection boosts the LGFVs’ balance sheets, raises their credit ratings, and allows them to issue new bonds and secure bank loans to fund local startups. Notably, this reorganization is done with the blessing of the central government.

Adapting Foreign Policy for Domestic Growth

To finance expensive industrial parks under tight borrowing limits, revenue-starved, entrepreneurial localities have found a creative loophole: the Belt and Road Initiative (BRI). BRI is widely viewed as a grand foreign policy aimed at building infrastructure overseas. Yet Oi’s analysis shows that between 2013 and 2022, China accounted for the largest number of BRI projects, with 263 out of 2,254.

In 2015, Beijing assigned BRI-related roles to certain designated provinces and municipalities, with the rest being considered non-designated provinces or cities. Oi's analysis of publicly available data, however, reveals that domestic Chinese localities are strategically using the BRI label to secure funds and loan approvals to build new industrial parks, address continuing development needs, and bypass infrastructure spending bans.

Oi also finds that most BRI-designated provinces incorporated projects that fell outside the mandate envisioned by Beijing; that non-designated provinces, too, took advantage of opportunities within China under the BRI label; and that Shandong and Jiangsu are among some of the non-designated provinces that have been particularly active in pursuing BRI projects.

“The popularity of industrial parks might seem contrary to common perceptions of the BRI centered on infrastructure and international connectivity,” Oi writes. “While one might wonder how industrial parks would serve that goal, for some more ambitious localities, integrated production parks may represent a way to foster cross-border trade and business cooperation. This also reflects the growing importance of the international market in local state development plans.”

Challenges for Local State Corporatism 2.0

Can the new integrated production parks fully replace land finance? And what is the future of the evolving local state-led development model? Oi enumerates several steep obstacles ahead of this emerging local state corporatism 2.0.

First is a critical structural hurdle: under China’s fiscal system, local governments cannot keep the tax revenues generated by the industrial parks. Localities can only retain nontax revenues, such as factory leasing fees and rents, which are unlikely to bridge the massive fiscal gaps left by the collapse of land finance. Ultimately, it remains unclear to what extent and how quickly the new industries developed in integrated production parks can become substantial revenue generators for struggling localities.

Another hurdle for the new development model is manufacturing overcapacity stemming from deep investment in industrial expansion paired with weak domestic consumer demand, which triggers intense domestic competition and a race to the bottom in product prices. 

Furthermore, in the era of geopolitical competition, trade and manufacturing have become security concerns, and geopolitical tensions are closing off export markets that the new industries desperately need. Finally, it is neither yet clear if cadre incentives will be effective in catalyzing the new development model, nor whether LGFVs will succeed as venture capital investors.

China’s strong political leadership often drives the perception that its governance is monolithic and highly centralised. In this episode of East Asia Pulse, a podcast produced by the East Asian Institute (EAI) at the National University of Singapore, Jean Oi, the William Haas Professor in Chinese Politics, a senior fellow at the Freeman Spogli Institute for International Studies, and director of the China Program at APARC, speaks to EAI Director Alfred Schipke about the complexities of China’s local governments and the role they play in China’s economic landscape. Over the past year, while on academic leave from Stanford, Oi has served as EAI’s Goh Keng Swee Professor in China Studies.

While they have played an outsized role in China’s economic development by spurring innovation and experimentation, local governments have also in recent years been associated with debt and the misallocation of resources. Among other issues, Oi weighs in on the need for fiscal reform to address the inconsistencies in local governments’ responsibilities and revenue sources and examines the role of local government financing vehicles (LGFVs) in generating revenue.

Key Highlights: 

00:00 Defining the central-local government relationship and key challenges faced in this dynamic 

08:10 Challenges in balancing growth with the management of local government debt   

15:10 How incentive structures for local governments lead to overcapacity and misallocation of resources 

23:40 Local government financing vehicles (LGFVs) and their role in generating revenue through land sales and equity investments. 

27:10 The need for fiscal reform to address inconsistencies in local governments' responsibilities and revenue sources

This essay first appeared in The Diplomat.

For decades, South Korean strategy rested on a stable hierarchy within the international order. The alliance with the United States provided security; Seoul then managed relations with Japan, Europe, China, and regional institutions around that anchor. The alliance remains indispensable, but Seoul can no longer assume that this foundation will stay stable.

The evidence is visible in the way Washington now deals with allies. In 2025, the United States initially announced sharply differentiated “reciprocal” tariffs on South Korea, Japan, and the European Union. Negotiations later produced a 15 percent baseline framework for all three, but the process mattered as much as the final rate. Trade access, industrial investment, defense procurement, and alliance politics were increasingly handled as one bargaining package. Allies were not exempt from economic pressure because they were allies.

At the same time, Europe and Asia have been building connections that would have seemed highly ambitious a decade ago. The European Union signed security and defense partnerships with Japan and South Korea in November 2024. This year, the EU and Japan launched a defense-industry dialogue, while the EU and South Korea signed a digital trade agreement and began implementing cooperation on maritime security, cyber and hybrid threats, information manipulation, space, and the defense industry. The strategic map is becoming more networked. 

The network, however, remains uneven. Japan already has a mature economic partnership with the EU and rapidly expanding defense-industry ties. EU-South Korea relations are deepening, but they still lack the density and regular strategic consultation found in EU-Japan ties. A trilateral format would therefore do more than add another meeting: it would reduce asymmetry among three partners whose capabilities are increasingly complementary.

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South Korea, Japan, and the EU now face four converging challenges and pressures.

The first is demographic. South Korea is aging faster than any other OECD society; Japan’s working-age population has been shrinking for decades; and the EU’s fertility rate reached a new low in 2024. Demography is not a social-policy sidebar. It affects defense recruitment, industrial capacity, fiscal room, technological adoption, and the ability to sustain long-term commitments. Each actor is experimenting with immigration, automation, workforce policy, and welfare reform, but the security implications remain largely compartmentalized.

The second is concentrated economic dependence. None of the three can or should decouple from China. Yet South Korea’s experience after the THAAD deployment, Europe’s debates over economic coercion, and China’s export controls on gallium, germanium, and other strategic inputs have shown that interdependence can be converted into leverage. De-risking therefore requires more than national stockpiles. It requires shared risk maps, compatible certification, co-investment in alternative suppliers, and advance consultation before export controls or industrial subsidies create collateral damage among partners.

The third challenge is U.S. volatility. The United States is still the only actor capable of providing extended nuclear deterrence to South Korea and Japan, and NATO remains central to European defense. But dependence on U.S. power now coexists with uncertainty about U.S. policy. The classic alliance dilemmas of abandonment and entrapment are no longer opposite ends of a spectrum. Today, U.S. allies fear both being left out and being drawn into bargains or contingencies they did not shape.

The fourth pressure is the collapse of the old geographic separation between European and Asian security. North Korean munitions, missiles, and troops have supported Russia’s war against Ukraine. Moscow, in turn, has provided Pyongyang with political cover, economic support, and the prospect of military know-how. What happens on a European battlefield is changing the military balance on the Korean Peninsula. A regional response to a cross-regional threat is structurally inadequate.

This is the case for an EU-Japan-South Korea strategic dialogue. This framework should not be described as strategic autonomy, equidistance, or a hedge against the United States. A better term would be institutionalized hedging: risk diversification through standing, rule-based consultation among allies and partners that remain anchored in the broader U.S.-led system.

The proposal is more feasible than ever before. Japan-South Korea relations have improved significantly in recent years. The January 2026 summit in Nara and the reciprocal summit in South Korea in May demonstrated continuity across leadership changes in both countries since June 2025. The EU already has free-trade, digital, green, and security frameworks with both countries. The task is not to invent three new bilateral relationships; it is to connect existing ones.

The dialogue should begin modestly, through a Track 1.5 process involving officials, experts, and industry. Its early agenda must be concrete and specific: a joint critical minerals and supply chain risk assessment; consultation on export controls and investment screening; cooperation on AI, cyber resilience, and digital standards; exchanges on demographic and defense workforce adaptation; and shared monitoring of North Korea-Russia military cooperation. Successful projects could then be elevated to ministerial working groups.

Two design choices are essential. First, the initiative must remain function-driven. It is not NATO, not the Quad, and not an anti-China coalition. Its purpose is to reduce vulnerability without demanding economic separation. Second, it should be complementary to relations with Washington and transparent about that purpose. Horizontal networks strengthen alliances when they help allies absorb shocks, coordinate positions, and arrive at consultations with greater capacity.

For South Korea, the need is particularly acute. Japan already has the G7, a mature economic partnership with the EU, and expanding European defense ties. Seoul’s international weight has grown faster than its institutional depth. An EU-Japan-South Korea dialogue would help close that gap.

Horizontalizing alliances is not a vote of no confidence in the United States. It is insurance for the moments when the United States wavers, overreaches, or changes course. The postwar hierarchy cannot simply be preserved by demanding more reassurance from Washington. Its resilience will depend on whether allies can build connective tissue among themselves before the next crisis forces them to improvise.