The elimination of price controls in the light industry and service sectors has transformed these sectors into high-yield investment prospects for local authorities. In contrast, price controls and state production requirements make the agriculture, infrastructure, and energy sectors less attractive to local authorities. Nonetheless, investment in these sectors is considered essential from the perspective of central authorities. Central bank credit ceilings have lacked sufficient credibility, given the conflicting project valuations between the central and local authorities. While the Central Bank can enforce the credit ceilings, it cannot manage the allocation of credit across all the local state bank branches.
Local authorities exert great influence over local credit allocation.
By underfinancing investments that the central authorities consider to be essential, the local authorities have been able to induce the Central Bank to revise its credit ceilings upward. Such a revision is necessary ex poste to make more credit available for the essential projects that were underfinanced. See this paper for a formal model of the interaction between local and central objectives and the credibility issue.