In China, Xi Jinping's ambitions as a “financial superpower” are fueling the local struggle for resources

China's economic powers are vying for more financial resources to boost their development, hoping to benefit from the tailwinds of President Xi Jinping's ambition to transform the country into a financial superpower.

Five of China's 10 largest provincial economies, including Guangdong, Jiangsu and Zhejiang, have shared their visions for flexing their financial muscles. The plans include introducing more financial institutions to finance local construction projects, while adding value to the broader financial ecosystem, for example through more diverse services and support, according to official government documents.

For example, authorities in eastern China's Jiangsu pledged to ease the flow of capital into the real economy, which they said would help “resolve local debt risks and meet the appropriate financing needs of both state-owned and private real estate firms alike.”

The central province of Henan, known for its local iPhone assembly plants and as the country's breadbasket, is also looking to attract foreign financial institutions to provide additional funding for the local manufacturing industry.

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The southwestern province of Sichuan also vowed to become a financial epicenter for the region, with the sector's value added accounting for a larger share of the province's gross domestic product (GDP) by 2025 – 7.3 percent – up from 6.9 percent in 2020.

These five provinces, representing more than a third of China's total economic output, have been tasked with carrying a larger share of the country's economic recovery.

Financial resources remain crucial to China's investment-driven growth, even as Beijing has sought in recent years to shift the economic engine toward consumption and technological innovation.

As their tax and land revenues have fallen, local authorities are particularly keen to secure construction funds, either from banks or state coffers.

The economy of Guangdong, the southern manufacturing and technology hub that accounts for about a tenth of the country's GDP, grew 4.8 percent last year, above the national average of 5.2 percent.

And the province's aggregate funding, China's benchmark for financing the real economy, totaled 3.14 trillion yuan ($326.7 billion) last year, or 8.8 percent of the country's total funding.

The province has been overtaken by eastern China's Zhejiang in terms of social financing and GDP growth.

Zhejiang's total capital totaled 3.73 trillion yuan, including bank loans, stock market financing, bond proceeds and government bonds, and its GDP grew 6 percent last year.

Meanwhile, the rush to secure funding has raised fears among analysts that such local initiatives could jeopardize Beijing's financial de-risking campaign, as real estate and local government debt crises continue to pose outsized threats to the financial system.

If they focus solely on the number of financial institutions, they could develop large but ineffective financial systemsPeng Peng, Guangdong Society of Reform

“As local governments strive to become 'financial powerhouses,' they should prioritize controlling financial risks over tracking transaction volumes and deposits alone,” said Peng Peng, chief executive of the Guangdong Society of Reform.

“If they focus solely on the number of financial institutions and do not take into account the above conditions, they could develop large but ineffective financial systems,” Peng added.

At a high-level meeting last month, President Xi outlined his goal of making China a “financial superpower” – with a financing model that is “different from Western models” as it focuses on financing support to the real economy.

Peng said that the five provinces mentioned above already have large manufacturing industries and they need financing to facilitate their industrial transformation and upgrading.

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“However, since the five companies have different industrial strengths, they should avoid the copycat model in achieving their financing goals,” he added.

Beijing is widely expected to ease its monetary policy stance to ensure a solid foundation for China's economic recovery this year after the country's banks, largely controlled by the central government, issued record new loans last year 22.75 trillion yuan awarded.

Domestic investment banks and securities firms widely expect bank lending to be between 4.5 trillion and 4.7 trillion yuan last month, which would be the second-highest monthly figure ever, after 4.9 trillion yuan in January 2023.

The tax authorities will announce higher quotas for local bonds this year, which would provide another important source of financing for local construction.