The central government has issued a prohibition to local governments, bringing significant changes to local investment promotion.

"Standardize the laws and regulations on local investment promotion, and strictly prohibit illegal and non-compliant granting of policy preferences." The Third Plenary Session of the 20th CPC Central Committee made this major deployment, halting involution-style investment promotion, which has strong practical significance and far-reaching impact.

Investment promotion is an important means for local economic development. However, for some time, some localities have one-sidedly pursued local partial interests, and in order to compete for investment and projects, illegally implemented various preferences such as taxes, fees, and land use, artificially creating "policy lowlands," plunging investment promotion into blind and disorderly competition. A temporary inflow of capital has planted long-term hidden risks.

Involution-style investment promotion that competes on policy preferences has negative impacts that cannot be underestimated. It reduces the overall allocation efficiency of resource factors, to a certain extent leads to low-level repetitive industrial construction and overcapacity, constrains the effective exertion of the advantages of a unified national market, and also damages the fair competition mechanism of the market while increasing the pressure on local finances. In some places, policy preferences were not honored, which affected government credibility.

The prohibition is precisely a strong remedy targeting the problems of local investment promotion, aimed at fundamentally curbing the short-sighted behavior of local governments and guiding them to conduct standardized and sound investment promotion on the track of the rule of law.

The head of a unicorn enterprise in the automotive industry chain told Sanlihe that many local governments had offered preferential terms to attract factory investment, "but we will give priority to using local idle capacity, so as to avoid redundant construction."

"Involution-style investment promotion is not advisable." Wu Sa, deputy director of the Institute of Economics at the Academy of Macroeconomic Research of the National Development and Reform Commission, said in an interview with Sanlihe that local governments should not offer excessive preferences or conditions that do not conform to local realities when attracting investment, so as to avoid triggering involution and reducing overall national welfare.

Sanlihe noted that the Regulations on Fair Competition Review, which officially took effect on August 1, clearly stipulate that without the basis of laws or administrative regulations or without the approval of the State Council, tax preferences, selective and differentiated fiscal rewards or subsidies shall not be granted to specific operators, nor shall preferences be given in areas such as access to factors of production and administrative and institutional charges.

The implementation of the prohibition also provides strong support for building a unified national market, which is conducive to breaking down local protection and market segmentation and promoting the efficient allocation of factor resources across the country.

This is also an inevitable choice for preventing redundant construction, guarding against overcapacity, avoiding excessive consumption of fiscal resources, and enhancing the sustainability of local finances.

Facing the prohibition, some local governments may face challenges: without policy preferences, how to attract high-quality investment projects? How to innovate investment promotion methods?

Opportunities often coexist with challenges. Local governments can further transform their development thinking, shifting from competing on preferential policies to create a "policy lowland" to competing on the business environment to create a "reform highland," attracting more investment and projects through measures such as optimizing the business environment, improving service efficiency, and strengthening industrial chain support.

Relying solely on a "policy lowland" makes it difficult to sustain competitive advantages over the long term; only by building a "reform highland" can a long-term and solid cornerstone of competitiveness be established. The sooner local governments understand this principle, the sooner they can grasp the initiative for the future.

To achieve this transformation, it is necessary to improve the overall coordination and policy guidance for investment promotion, establish laws and regulations standardizing investment promotion, strengthen the implementation of unified national market policies, strive to build a new model of high-level investment promotion, and strengthen supervision and accountability for illegal and non-compliant investment promotion and vicious competition.