"The fundamental problem is that by rewarding speed and scale over productivity and differentiation, the internal plumbing of China’s political economy incentivizes businesses to produce too much stuff."
and
"China’s tendency to overproduce starts in an unlikely place: the Chinese Communist Party’s performance and promotion system. In the CCP bureaucracy, local officials are evaluated primarily on their ability to deliver growth, employment, and tax revenues. But China’s largest single tax, the value-added tax (VAT), is split evenly between the central government and the local government of the place where a good or service is produced, not the place where it is consumed. Since the system allocates tax revenue to regions based on production, it rewards the decision to build larger industrial bases. Local Chinese officials try to retain as much upstream and downstream activity as they can to expand their tax base. (The U.S. tax code, by contrast, apportions much of the corporate tax base to where companies’ customers are, rather than where firms produce goods, so the tax base is more evenly spread across jurisdictions.) This feature of the Chinese tax system explains the proliferation in China of “full stack” industrial clusters: EV assembly lines are located near battery production facilities, and solar panel factories are integrated with raw material and component suppliers.
This system effectively encourages provincial and municipal leaders to act like industrial investors or venture capitalists. And in many cases, it has produced profound efficiencies."
https://archive.is/A7b2u
"The fundamental problem is that by rewarding speed and scale over productivity and differentiation, the internal plumbing of China’s political economy incentivizes businesses to produce too much stuff."
and
"China’s tendency to overproduce starts in an unlikely place: the Chinese Communist Party’s performance and promotion system. In the CCP bureaucracy, local officials are evaluated primarily on their ability to deliver growth, employment, and tax revenues. But China’s largest single tax, the value-added tax (VAT), is split evenly between the central government and the local government of the place where a good or service is produced, not the place where it is consumed. Since the system allocates tax revenue to regions based on production, it rewards the decision to build larger industrial bases. Local Chinese officials try to retain as much upstream and downstream activity as they can to expand their tax base. (The U.S. tax code, by contrast, apportions much of the corporate tax base to where companies’ customers are, rather than where firms produce goods, so the tax base is more evenly spread across jurisdictions.) This feature of the Chinese tax system explains the proliferation in China of “full stack” industrial clusters: EV assembly lines are located near battery production facilities, and solar panel factories are integrated with raw material and component suppliers. This system effectively encourages provincial and municipal leaders to act like industrial investors or venture capitalists. And in many cases, it has produced profound efficiencies."