Recently, many business owners of various localities in China have shared a common observation that the government and state-owned enterprise (SOE) procurement contracts are becoming increasingly difficult for small and medium-sized private enterprises (SMEs) to secure. A closer examination of the underlying reasons reveals a core shift in the current landscape of local Chinese SOEs. Local government financing vehicles (LGFVs), known in Chinese as chengtou, as the category of local SOEs with the largest volume and broadest business coverage, are currently in a critical period of market-oriented transformation across all sectors. Bidding farewell to their past functional positioning of purely raising debt and financing on behalf of governments, they urgently need to independently revitalize projects, retain revenue, solidify cash flows, and defuse debt pressures. This has also heavily driven the willingness of local state-owned capital to engage in closed-loop operations. Local SOEs across the country have capitalized on this trend to firmly hold onto projects, funds, and resources, quietly constructing a "super internal circulation" system. From early-stage planning, event execution, and property services, to landscaping, media publicity, and supply chain supporting services, the entire chain is centrally contracted and subcontracted by LGFV subsidiaries, forming a closed loop. This has turned a market that should be fully competitive into the "private reserve" of a few SOEs, excluding small and medium-sized private enterprises.
This kind of exclusive phenomenon of "internal circulation" among local LGFVs and SOEs is not an isolated case. According to years of field research and observations by ANBOUND, it exists widely in multiple regions across the country, primarily concentrated in provinces or regions such as Jiangsu, Shandong, Anhui, Yunnan, Guizhou, Guangxi, and Hunan, with third- and fourth-tier cities, county-level areas, and resource-based regions being particularly hard-hit, constituting a hidden commonality in local development.
Looking at the specifics, although the "internal circulation" plays differ across regions in the country, the main logic is highly consistent. LGFVs in northern Jiangsu, Xuzhou, Huai'an, Lianyungang, and other places have long since handed over businesses such as municipal engineering, property services, cultural tourism operations, advertising media, and supply chain supporting services to their subsidiaries for full-chain execution. Hidden barriers are often concealed within the bidding and tendering process, and private enterprises are mostly excluded from core bidding segments, leaving them with projects like labor subcontracting, which offer low profits, require high capital advancement, and carry significant risks. In southern Shandong, LGFVs in cities like Linyi, Zaozhuang, and Jining have set their sights on franchise businesses such as environmental sanitation, municipal maintenance, smart parking, and sewage treatment. Some projects simply bypass public bidding and utilize "direct selection" or targeted entrustment, thus shutting out external competitors directly. Meanwhile, in Anhui, municipal and urban management projects in places like Hefei, Bozhou, and Fengyang are mostly operated by provincial state-owned construction groups or local state-owned consortia, leaving virtually no room for small and medium-sized private enterprises to participate.
The situation is even more typical in resource-rich provinces like Yunnan and Guizhou. Provincial SOEs, such as Yunnan Construction Investment Holding Group and Yunnan Investment Holding Group, hold a dominant position in sectors including mineral development, cultural tourism scenic areas, expressways, water utilities, and gas. Some areas even use "resource integration" and "environmental protection rectification" as pretexts to require private mining enterprises to accept equity participation or even controlling stakes from LGFVs. Otherwise, they obstruct the approval process for the renewal of mining rights, forcing private enterprises to exit core resource sectors. The situation in Guizhou is similar. In some areas, applications from private enterprises for exploration and mining rights are subject to prolonged delays, while state-owned platforms enjoy being granted permissions continuously. Cultural tourism and infrastructure projects are also basically spearheaded and implemented by provincial SOEs, leaving private enterprises to act more or less like accompaniments.
At the county level, this "internal circulation" is so widespread that it has become a normal occurrence. In many counties, LGFVs monopolize almost all public-sector businesses, including resettlement housing construction, industrial park development, school cafeterias, public property management, and river harness, with funds circulating in a closed loop within the state-owned capital system. Small and medium-sized private enterprises, on the other hand, face a "triple dilemma" of difficulty in access, where they cannot even reach the threshold; slow payments that make capital turnover extremely hard; and thin profits, forcing them to struggle. In response, localities often offer explanations of "integrating resources, reducing costs and increasing efficiency, and preventing risks". This essentially builds market barriers through administrative means and replaces fair competition with intra-system circulation. It not only squeezes the survival space of small and medium-sized private enterprises but also weakens market vitality and the drive for innovation, while building up the risks of resource misallocation, low efficiency, and debt accumulation.
Faced with this phenomenon, one must first return to the essence of the market economy to examine it.
ANBOUND's founder Mr. Kung Chan has emphasized that the reason the market economy is important lies fundamentally in the fact that it is an "incremental economy", in the sense that it can continuously create new wealth, making the economic pie larger and larger, so that the economic resources and wealth available for distribution to the entire country and society increase continuously. More crucially, the market economy is an open and inclusive system that encourages fair competition among various economic entities, the free flow of production factors between regions and countries, and innovative exploration by enterprises and individuals. Hence, only an open system can maintain continuous vitality, move forward continuously, and evolve upward. Conversely, if a closed system runs for a long time, it will inevitably lead to decline and obsolescence. The planned economy, by contrast, is precisely a closed development model; its focus is not on "making the pie bigger" but on "dividing the pie". It is a "zero-sum economy" that attempts to quiet various problems by means of "equalizing wealth and poverty".
Therefore, this "super internal circulation" system built by local LGFVs and SOEs is, in the process of marketization, unconsciously and in a disguised form moving closer to a planned economy, and is gradually exhibiting a form of "Northeastification". Previously, Northeast China was entirely the domain of SOEs, yet ultimately the economy lost its vitality; when there was a desire to rebuild the market, no one was willing to invest anymore.
From the perspective of local governments and SOEs themselves, such behavior has its realistic motivations. Under the macro background of local fiscal pressures and the prevention of hidden debt, integrating the entire chain of businesses such as urban construction, cultural tourism operations, and municipal property management through LGFVs can facilitate unified local coordination of urban resources, control project quality, and stabilize the volume of local assets. It can also evade potential qualification chaos, capital advancement risks, and performance instability that may arise in market-oriented bidding. At the same time, it can stabilize the revenue and employment of local SOEs, a realistic choice for localities to control risks and centrally allocate resources. This is also the main reason why many localities interpret it as "resource integration, cost reduction, and efficiency enhancement", and to some extent, it is also a helpless move under pressure.
However, stepping outside the local perspective, the disadvantages of this "internal circulation" become highly prominent when viewed from the standpoints of private economic development, market fairness, and the country's long-term development. As Mr. Kung Chan noted, the vitality of a market economy stems from openness and competition, whereas the essence of the LGFV "internal circulation" is to construct market barriers using administrative endorsement and state-owned status. It replaces open, fair, and just market competition with task allocation within the system, rigidly blocking small and medium-sized private enterprises out of core projects, leaving them only with peripheral labor businesses characterized by low profits, high capital advancement, and high intensity. Over the long term, the market mechanism of survival of the fittest will be completely stifled. SOE subsidiaries lacking external competition can easily fall into the dilemma of relatively low efficiency, rigid services, and insufficient motivation for innovation. Meanwhile, as the survival space of small and medium-sized private enterprises is squeezed, private investment confidence will be severely battered, and the vitality of the local business environment will be weakened, ultimately forming small circles of industry ossification and closed interests, which is in contrast to the essence of a market economy. More importantly, this phenomenon also runs completely counter to the country's policy direction of establishing a unified national market.
Indeed, this phenomenon is not a policy direction born of top-level design, but rather a spontaneous behavior by localities out of risk aversion, resource control, and volume stabilization. In essence, it is a localized regression in the advancement of market-oriented reforms and is an unconsciously formed regional and industrial quasi-planned economic configuration. Notably, this "internal circulation" does not cover all areas but is mainly confined to specific fields such as urban operations, public supporting facilities, and municipal infrastructure. In areas such as people's livelihood and consumption, as well as general industry and commerce, the basic rules of the market economy are still followed, which is a partial resurgence of administrative control under the larger market economy environment.
In the long run, the rational way out of this dilemma is not to completely eliminate the overall coordination by state-owned capital as its dominant role in the public sectors remains indispensable, but rather to clearly delineate the business boundaries of SOEs. The public services and infrastructure sectors that ought to be dominated by state-owned capital must be well-coordinated and standardized. At the same time, competitive fields must be completely opened up to access, bidding and procurement rules must be standardized, and various hidden barriers must be dismantled, allowing SOEs and private enterprises to compete fairly on the same starting line. Only in this way can the bottom line of local risks be maintained while market vitality is activated, thereby achieving a win-win outcome of "making the pie bigger" and "dividing the pie well".
Final analysis conclusion:
The phenomenon of the "super internal circulation" of local LGFVs and SOEs in China is widespread across multiple provinces nationwide. This is particularly prominent in third- and fourth-tier cities, county-level areas, and resource-based regions. Such a situation has realistic motivations rooted in local risk aversion and resource control, but in essence, it is a localized regression of marketization and a shift toward a planned economy in disguise. As the market economy is an open "incremental economy", resolving this dilemma requires delineating the business boundaries of SOEs, dismantling barriers, and achieving fair competition between SOEs and private enterprises.
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He Yan is a researcher at ANBOUND, an independent think tank.
