The political economy of township government debt, township enterprises and rural financial institutions in China

China Quarterly

Volumn , Issue 186, 2006, Pages 377-400

  Ong, Lynette ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

DEBT; FINANCIAL SERVICES; FISCAL POLICY; POLITICAL ECONOMY; STATE ROLE;

ASIA; CHINA; EURASIA; FAR EAST;

EID: 33745955827     PISSN: 03057410     EISSN: 14682648     Source Type: Journal    
DOI: 10.1017/S0305741006000208     Document Type: Article

References (59)

1. See, for instance, "Local gov't debts sound warning," China Business Weekly, 25 April 2004 (available at http://www.chinadaily.com.cn/english/ doc/2004-04/25/content_326118.htm; and "Govt owes building companies 90b yuan," Xinhua, 28 October 2003 (available at http://www.chinadaily.com.cn/en/doc/2003-10/28/content_276044.htm).
2. See Christine Wong (ed.), "Financing local government in the People's Republic of China" (Hong Kong: Oxford University Press for the Asian Development Bank, 1997); and World Bank, "China: National development and sub-national finance - a review of provincial expenditures" (Beijing: Poverty Reduction and Economic Management Unit, East Asia and Pacific Region, 2002).
3. One possible exception is a Chinese language paper by S. Zhao, "Xiangzhen zhaiwu zhilei - 10 sheng (qu) 20 xiangzhen de diaocha" ("Burdens of township government debts - a survey of 20 townships in ten provinces (districts)"), unpublished manuscript, 2004. A slightly different version of the article by the same author, "Kunju zhong de xiangzhen caizheng" ("Township finance in great difficulties") has appeared in Zhongguo jingii shibao (China Economic Times), 6 September 2004.
4. S. Yang, Zhongguo difang caizheng Jazhan yanju baogao: Zhongguo difang zhengfu huoyou zhaiwu wenti yanjiu (Research Report on the Developments of China's Local Government Finance) (Beijing: Zhongguo caizheng jingji chubanshe, 2003), p. 4.
5. N. Wang, Difang caizheng gaige yanjiu (Research on Local Public Finance Reforms) (Chengdu: Xinan caijing daxue chubanshe, 2003), p. 175.
6. World Bank, "National development and sub-national finance - a review of provincial expenditures" (Beijing: Poverty Reduction and Economic Management Unit, East Asia and Pacific Region, World Bank, 2002).
7. Ibid.
8. "Zhongyang he difang de caizheng boyi" ("Conflicts between the central and local government finance"), Caijingjie, 5 April 2004. Available at http://Finance.sina.com.cn.
9. World Bank, "National development and sub-national finance."
10. Ibid.
11. As part of the central government's effort to improve the living standard of the rural residents, Premier Wen Jiabao announced in March 2004 that agricultural tax is to be phased out in five years.
12. For further explanations of the differences between state-owned and collective enterprises, see Qian, "Reforming corporate governance and finance in China," in Masahiko Aoki and Hyung-Ki Kim (eds.), Corporate Governance in Transition Economies: Insider Control and the Role of Banks (Washington DC: The World Bank Press, 1995), pp. 215-252.
13. Zhao, "Burdens of township government debts."
14. "Zhaiwu de kunrao - difang zhengfu zhaiwu wenti" ("Bothered by debt - debt problems of local governments), CaijingJie, 5 April 2004. Available at http://finance.sina.com.
15. Tian Fa and Chenying Zhou, "Chongguo difang zhengfu jian caizheng guanxi" ("Reconstruct financial relations among local governments"), Gaige (Reform), No. 2 (2004).
16. Jia Kang, director of the Institute of Finance under the Ministry of Finance, commented that the reality of the debt problem might be more serious that the figures suggest, as "recorded debts are only part of local governments' liabilities. Their liabilities also include unpaid construction bills for infrastructure, guarantees for loans and some corrupt officials, personal debts." "Local government debts sound warning," China Business Weekly, 25 April 2004.
17. This is a finding from my interviews with bank and rural credit co-operative officials. It is also confirmed by Che and Qian, "Without the community government's involventment, it is usually very difficult, if not impossible, for Township and Village Enterprises to obtain loans directly form either the Agricultural Bank of China or Rural Credit Cooperatives" (p. 6) "Institutional environment, community government, and corporate governance: Understanding China's township-village enterprises," Journal of Law, Economics and Organiztion, Vol. 14, No. 1 (1998), pp. 1-14
18. T. Wen, Nongcun hezhou jijinghui de xingshuai: 1984-1999 (The Rise and Fall of the Rural Co-operative Foundations: 1984-1999) (2000). Available at http://forum50. cei.gov.cn/newwork/cyfx_wtj_20010060704.htm.
19. Of course not all the funds were invested in income-generating activities, some had gone into the pockets of township and village officials, which was a major reason leading to their eventual closure.
20. Ibid.
21. Guo Xiaoming and Lei Xioming, Rural China Entering the 21st Century: Credit, (2000). Available at http://www.usc.cuhk.edu.hk/wk_wzdetails.asp?id=1606.
22. Cheng Enjiang, Christopher Findlay and Andrew Watson. "Institutional innovation without regulation: The collapse of rural credit foundations and lessons for further financial reforms." in Findlay, Watson, Cheng and Zhu (eds.), Rural Financial Markets in China (Canberra: Asia-Pacific Press, 2003).
23. Ibid.
24. Wen, The Rise and Fall of the Rural Co-operative Foundations.
25. Guo and Lei, Rural China Entering the 21st Century.
26. Wen, The Rise and Fall of the Rural Co-operative Foundations.
27. Cheng et al., "Institutional innovation without regulation."
28. The Chinese word caizheng is usually translated as "fiscal" or "finance" in English. However, I have used the term "budgetary system" here to differentiate it from the fiscal system that collects tax revenues, and the financial system that mobilizes and channels financial resources.
29. On Kit Tam, "Rural finance in China," The China Quarterly, No. 113 (1988), pp. 60-76.
30. In the two counties where fieldwork was conducted, township RCC managers have the right to disburse loan amounts below 20,000 yuan. Any loans above 20,000 yuan have to be referred to the county RCC unions.
31. In 2000, pilot reforms to turn existing credit co-operatives into rural commercial banks were carried out in Jiangsu province. By early 2003, all township RCCs in Jiangsu had been merged into RCC county unions, and the provincial RCC federation had been established. In August 2003, the central authority carried out experimental reforms of the RCCs in eight provinces where the management control rights of RCCs were handed to the provincial governments.
32. Personal interview with the Sichuan Ministry of Agriculture, which was the base of the former Sichuan Rural Co-operative Management Station; and some township officials.
33. Personal interview with RCC managers.
34. Personal interview with RCC managers; the Sichuan Ministry of Agriculture, which was the base of the former Sichuan Rural Co-operative Management Station; and some township officials.
35. There were 4,435 RCFs in Sichuan, according to the statistics from the Sichuan Ministry of Agriculture, which was the base of the former Sichuan Co-operative Management Station. Of these, 4,251 or 95.9% were located at townships.
36. Personal interview with the Sichuan Ministry of Agriculture.
37. In township X1 in county X, for the total deposit of 5.2 million yuan, the RCC had to pay depositors about 90,000 yuan extra interest a year to compensate for the difference between the RCF's and the market interest rates between 1999 and 2003. Personal interview with RCC managers.
38. Document No. 3 (1999) issued by the State Council specifies: "The local governments are responsible for doing what they have to in order to protect the legal rights of farmer depositors, and to maintain social stability in the countryside." This implies that the central government had held the local authorities responsible for honouring all individual deposits and for any shortfalls that might arise.
39. When I was told of the various sources of funds, I probed to ask why these particular sources. The interviewee, who used to work at the former Sichuan Rural Co-operative Management Station, provided no direct answer. However, I was given the impression that at those times, the local authorities were in such dire straits that they had to borrow from whoever had surplus funds and were willing to lend.
40. The townships were assigned by the relevant local hosts. I was not aware of any particular reasons why they were selected, though I did express to the hosts an interest in researching localities with dissimilar economic conditions.
41. In X county, secondary sector accounts for 55% of its GDP, and agriculture 21%. In Y county, agriculture accounts for more than half its GDP, and industry 13%.
42. Personal interviews with RCCs' managers and those who used to manage the RCFs.
43. The headquarters of the state-owned Agricultural Bank of China (ABC) in Beijing is a legal entity responsible for the profits and losses of all ABC branches nationwide. Bank officers in the township branches are accountable to those in the counties, provinces and the headquarters. On the other hand, the township RCCs and RCFs were all independent legal entities. Personal interviews with managers from the ABC and the RCC.
44. Tables 4 and 5 are summaries of the financial statements in the two townships. While I have full details of the fiscal data, I have made commitments to protect the identities of the interviewees and those of the townships. Similar data are not available for the townships in Y county.
45. After widespread nationwide wage arrears of teachers' salaries, since 2001 the county governments have been held financially responsible for the teachers' salaries by a central government policy. County governments have also been made responsible for salaries of medical workers since 2003.
46. I have made several attempts to obtain similar data for the other three townships, but these data from a decade ago were only available from X2 township.
47. The definitions of the various fiscal funds were provided by the township finance bureau director.
48. Personal interview with the X1 RCC manager.
49. Personal interviews with the X1 RCC manager and the X1 township Party secretary.
50. Personal interviews with the RCC manager in X2 township and the general manager of X2 Enterprise Pte Ltd.
51. Personal interviews with the county ABC manager, and the general manager of X2 Enterprise Pte Ltd. To my knowledge, the debt has not been paid off as of July 2004.
52. When I asked the RCC and ABC managers how the township government could borrow from the financial institutions when the law specifically prohibited that, the interviewees said that most of the loans were given before the law came into force; and even if the law was in place, most of the dealings between grassroots governments and grassroots financial organizations was generally beyond the knowledge of the higher authorities.
53. Similar data are however unavailable for X county.
54. Personal interview with the Y1 township head.
55. Personal interview with Y2 township officials.
56. My fieldwork investigations suggest that many prefectural and county governments are burdened with heavy debt; and the causes are more varied than those of the township authorities, including bloated government payrolls, losses incurred by the state grain marketing companies, arrears of social welfare payments and debts of state-owned enterprises.
57. The shortfalls in intergovernmental transfers are an escalating problem: a X county finance bureau director complained to me that the county had limited capacity to assist the townships because the county was in a bad shape financially, and many transfers and financial assistance promised by the prefecture never came through. The director then went on to explain that the prefecture government itself was also in financial difficulties, and had to rely heavily on transfers from higher authorities to survive.
58. These are nominal numbers without taking inflation into account.
59. Of course, X1 township has the advantage of being a county seat, and this has helped to boost its service sector that pays business tax (yingye shui). Further, it is notable that business tax is a local tax (difang shui) as 80% of the revenue goes to township government and the remaining 20% goes to a higher level, compared to enterprise income tax that is shared between township and higher governments with a ratio of 4:6.