SSRScientific and Social Research2661-43322981-9946Bio-Byword Scientific Publishing Pty. Ltd.10.26689/ssr.v8i8.15299ArticleFrom Fiscal Black Holes to Rent-Free Havens: An Institutional Analysis of China’s Local Governancehttps://artdesignp.com/journal/SSR/8/8/10.26689/ssr.v8i8.15299MenglongLi2026882026-08-31This paper performs an institutional analysis of the escalating fiscal distress and aggressive competitive strategies observed among China’s local governments. Drawing on the principles of New Institutional Economics (NIE), I argue that these phenomena are direct and predictable outcomes of the fundamental institutional clash established by the 1994 fiscal decentralization and the accompanying growth-oriented official promotion system. Specifically, the paper analyzes the causal link between the structural fiscal gap (the “fiscal black hole”) and local authorities’ recourse to informal, off-balance-sheet mechanisms, such as Local Government Financing Vehicles (LGFVs) and, more recently, non-transparent subsidies like “zero-rent” policies. The essay demonstrates that informal institutions—primarily the career incentives tied to GDP growth—effectively override formal rules (the Budget Law), forcing local governments into a “race to the bottom” where fiscal health is sacrificed for short-term investment attraction. The central government’s attempts to impose formal discipline (zero-based budgeting) only prompt local actors to innovate new, riskier informal workarounds, creating an unsustainable institutional equilibrium. This analysis contributes to understanding the inherent tensions in China’s development model and suggests that sustainable stability requires a fundamental realignment of fiscal responsibilities and performance metrics.China, Local governance, Institutional economics, Fiscal decentralization, Local government debt, LGFVs, Regional competition, Zero-rent policy

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