1/
The relationship between a company’s management and local political leaders can be a material, underappreciated investment factor in China.
A. Political connections have measurable economic value
| Mechanism | Benefit of strong relationships | Risk when relationships weaken |
|---|---|---|
| Bank financing | Easier credit coordination and refinancing | Tighter credit, higher funding costs |
| Local infrastructure | Faster power, land and construction coordination | Delays and additional capex |
| Government contracts | Better access to investment and procurement opportunities | Lost orders or weaker contract pipeline |
| Subsidies | More favorable funding allocation | Reduced grants and incentives |
| Problem resolution | Faster coordination among multiple agencies | Administrative delays |
| Competition | Better access to scarce local resources | Competitors gain priority |
| Financial distress | Potential help coordinating restructuring | Creditors become less accommodating |
B. Leadership turnover could be catalysts.
A study found that local Party secretary turnover increased firm-specific stock crash risk, particularly among private and less transparent companies.
Meanwhile, officials may be promoted, and thus benefit supported companies more; or officials move across country so that companies get into different markets etc.
2/
Forces and relationships between local governments can create interesting phenomenon.
Every city has an incentive to compete for investment, even though they would collectively benefit from less expansion. Even an industry is oversupplied or has low return, a city gets the investment, jobs, tax base and industrial ecosystem.
Other dynamics include local protectionism. A listed company can have superior products and lower costs yet lose procurement contracts because a local government wants to support employers and taxpayers in its jurisdiction. This is particularly relevant to municipal SOE purchasing, government IT, buses, public-sector vehicles and some types of industrial equipment.