Such cronyism skews the investment decisions of entrepreneurs in several ways. First, it creates significant uncertainty that contracts will be legally enforced such that entrepreneurs are less likely to make long-term investments, reducing the growth potential of the economy. Second, it incentivizes entrepreneurs to invest resources unproductively into gaining political favoritism as opposed to productively in the development of new products or processes that make their firm more competitive. Economists refer to the phenomenon of (mis)allocating resources towards gaining a political advantage as rent-seeking, which also reduces the growth prospects of an economy.
Reforms that move China towards a more equitable rule of law would give its economy a big boost in the long-run, but it remains to be seen whether the planned changes will have any teeth without instituting an independent judiciary that would separate legal decision making from the one-party rule in China. After all, such reforms will have distributional effects that harm the economic livelihoods of corrupt officials and their cronies