The politics of fee extraction from private enterprises, 1996-2003

China Journal

Volumn , Issue 62, 2009, Pages 79-102

  Choi, Eun Kyong ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

ECONOMIC DEVELOPMENT; ECONOMIC GROWTH; INDUSTRIAL DEVELOPMENT; POLICY DEVELOPMENT; PRIVATE SECTOR; REGRESSION ANALYSIS; STATE ROLE; STATISTICAL ANALYSIS; TAX SYSTEM;

ASIA; CHINA; EURASIA; FAR EAST;

EID: 70349312725     PISSN: 13249347     EISSN: None     Source Type: Journal    
DOI: 10.1086/tcj.62.20648115     Document Type: Article

References (101)

1. In this study, "private enterprises" refers to firms that are officially registered as private enterprises (siying qiye).
2. Zhongguo jingji pucha nianjian 2004 (China Economic Census Yearbook) (Beijing: Zhongguo Tongji Chubanshe, 2006), Vol. 1, p. 198 and Vol. 2, p. 2.
3. Stephan Haggard and Yasheng Huang, "The Political Economy of Private Sector Development in China", in Loren Brandt and Thomas G. Rawski (eds), China's Great Economic Transformation (Cambridge: Cambridge University Press, 2008), pp. 337-74;
4. Loren Brandt and Hongbin Li, "Bank Discrimination in Transition Economies: Ideology, Information, or Incentives?", Journal of Comparative Economics, Vol. 31 (2003), pp. 387-413.
5. Hereafter, "entrepreneurs" refers to private entrepreneurs.
6. Edward Steinfeld, Forging Reform in China: The Fate of State-Owned Industry (Cambridge: Cambridge University Press, 1998).
7. Susan Whiting, Power and Wealth in Rural China: The Political Economy of Institutional Change (Cambridge: Cambridge University Press, 2001).
8. Thomas P. Bernstein and Xiaobo Lü, Taxation without Representation in Rural China (Cambridge: Cambridge University Press, 2003).
9. These provinces include not only poor inland provinces such as Shanxi, Neimenggu, Jilin, Heilongjiang and Henan but also wealthy coastal provinces such as Zhejiang and Fujian. See Zhongguo siying jingji nianjian 2000-2001 (Yearbook of Private Businesses in China 2000-2001) (Beijing: Zhonghua Gongshang Lianhe Chubanshe, 2002). According to the People's Daily, private businesses in Hunan province are routinely harassed by local governments, which continually demand higher fee payments. See Renmin ribao (People's Daily), 21 June 1999;
10. Zhongguo shuiwu bao (China Taxation Newspaper), 7 May 1998.
11. See Kellee S. Tsai, "Capitalists without a Class: Political Diversity among Private Entrepreneurs in China", Comparative Political Studies, Vol. 38, No. 9 (2005), pp. 1130-58;
12. David L. Wank, Commodifying Communism: Business, Trust, and Politics in a Chinese City (Cambridge: Cambridge University Press, 1999).
13. World Bank, World Development Report 2005: A Better Investment Climate for Everyone (Washington: World Bank, 2005).
14. Simon Johnson, John McMillan, and Christopher Woodruff, "Property Rights and Finance", American Economic Review, Vol. 92, No. 5 (2002), pp. 1335-56.
15. See Ha-Joon Chang, "Understanding the Relationship between Institutions and Economic Development: Some Key Theoretical Issues", in Ha-joon Chang (ed.), Institutional Change and Economic Development (New York: United Nations University Press, 2007), pp. 17-33.
16. Qian makes a similar point, see Yingyi Qian, "How Reform Worked in China", in Dani Rodrik (ed.), In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton: Princeton University Press, 2003), pp. 297-333.
17. Thomas P. Bernstein and Xiaobo Lü, Taxation without Representation;
18. Xin Deng and Russell Smyth, "Non-tax Levies in China: Sources, Problems and Suggestions for Reform", Development Policy Review, Vol. 18 (2000), pp. 391-411;
19. OECD, Challenges for China's Public Spending: Toward Greater Effectiveness and Equity (Paris: Organization for Economic Co-operation and Development, 2006);
20. Kellee S. Tsai, "Off Balance: The Unintended Consequences of Fiscal Federalism in China", Journal of Chinese Political Science, Vol. 9, No. 2 (2004), pp. 7-26.
21. Susan Whiting, Power and Wealth in Rural China;
22. Maria Edin, "Local State Corporatism and Private Business", Journal of Peasant Studies, Vol. 30, No. 3 (2003), pp. 278-95;
23. Maria Edin, "Local State Structure and Developmental Incentives in China", in Richard Boyd and Tak-Wing Ngo (eds), Asian States: Beyond the Developmental Perspective (London: Routledge, 2005), pp. 110-28.
24. Numerous studies have pointed this out. For empirically well-grounded studies, see Susan Whiting, Power and Wealth in Rural China;
25. Maria Edin, "State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective", The China Quarterly, No. 173 (March 2003), pp. 35-52.
26. For the argument which emphasizes the importance of aligned interests between state actors and entrepreneurs for investment and growth, see Mick Moore and Hubert Schmitz, "Idealism, Realism and the Investment Climate in Developing Countries", IDS Working Paper 307 (Brighton: IDS, June 2008).
27. Informants were asked about both current and past experiences of fee collection, their perceptions of the fairness of the level of fees paid across firms, and their understanding of the incentives of local leaders towards private business development. As this research focuses on fee collection practices in the 1990s and early 2000s, many questions were retrospective. This has both advantages and disadvantages. Because excessive fee collection is officially criticized in China, it is much easier for local officials to talk about fee collection in the past. In fact, many of them quickly pointed out that heavy fee extraction is no longer a problem. The disadvantage of retrospective questioning is that it undermines accuracy because a person's memory can be unreliable. This problem is, however, limited in this research because it aims to understand general practices and perceptions on fee collection, rather than gathering specific data such as the amount of fee payment.
28. Although survey data for the years 1993 and 1995 are also available, this study does not include them because they lack information critical to this study.
29. As Wong observes, "In China, users' fees form a significant portion of the sources of extra budgetary finance and self-raised funds. However, a significant portion comes from what amounts to quasi-taxes, which are either levies on the general public or are intended to finance general social obligations." See Christine P. W. Wong, "Fiscal Dualism in China: Gradualist Reform and the Growth of Off-Budget Finance", in Donald J. S. Brean (ed.), Taxation in Modern China (New York: Routledge, 1998), pp. 187-208. The quotation is from page 198.
30. Renmin ribao, 12 April 2005.
31. Interview, local government official in the Local Tax Bureau at the prefectural-level city, Zhejiang, February 2008.
32. Renmin ribao, 12 April 2005.
33. Ibid. Interview, local government official in the Local Tax Bureau at the prefectural-level city, Zhejiang, February 2008.
34. Interview, retired director in the Industrial and Commercial Bureau at the county-level city, Zhejiang, February 2008.
35. Some fee revenues, especially those that are set up by the central government, are also shared among different levels of the government.
36. The central government has made changes to the ways of dividing tax revenues with local governments for the purpose of seizing a portion of local budgetary revenues. For research on this topic which covered the pre-1994 tax reform period, see Jun. Ma, "Modeling Central-Local Fiscal Relations in China", China Economic Review, Vol. 6, No. 1 (1995), pp. 105-36. After the 1994 tax reform, the central government once again changed the ways of dividing budgetary revenues. For example, tax revenues from corporate income tax and personal income tax, which had belonged to local governments since 1994, came to be shared with the central government from 2002.
37. Guangdong caizheng keyansuo ketizu (Research team at the Finance Bureau in Guangdong), "Guangdongsheng difang zhengfu shoufei guifanhua yanjiu" (Research on Regularizing Fee Collection of Local Government in Guangdong), in Jia Kang (ed.), Cong min yuan dao min xiang: difang zhengfu shoufei guifanhua yanjiu (From People's Resentment to Enjoyment: Regularizing Fee Collection of Local Governments) (Changchun: Jilin Kexue Jishu Chubanshe, 2001).
38. Also see Linda Chelan Li, "Towards a Public and Comprehensive Budget: Public Finance Reforms in Guangdong", in Joseph Cheng (ed.), Guangdong: Preparing for the WTO Challenge (Hong Kong: Chinese University of Hong Kong, 2003), pp. 51-80.
39. The seriousness of this problem is reflected by the fact that every year the central government abolishes numerous fees which were not approved by the central or provincial governments. For instance, in 1999, the central government abolished 31, 710 types of fees imposed on enterprises. See Junli Zhang and Congguo Li, Zhongguo qiye zhi luan jian fu bao gao (Report on Reducing Firms' Burden) (Zhengzhou: Henan Renmin Chubanshe, 2000). In 2001, the central government abolished 33, 456 types of fees on enterprises.
40. See Renmin ribao, 28 February 2002. In 2002, the central government eliminated 8, 998 types of fee levied on businesses.
41. See Renmin ribao, 10 February 2003.
42. Interview, local government official in the Local Tax Bureau at the prefectural level city, Zhejiang, February 2008.
43. th Annual Conference (2000).
44. Youzhi Li, Zhengfu feishui shouru guanli (Managing Non-tax Revenues of Governments) (Beijing: Renmin Chubanshe, 2003).
45. Zhongguo shenji bao (China Audit Newspaper), 24 November 2004;
46. Nanfang dushi bao (Southern City Newspaper), 21 December 2005.
47. For example, a study in Shandong Province shows that bureaus' fee collection and expenditure were still linked in order to provide bureaus with incentives for collecting fees. The study claims that the policy of "separating fee collection from expenditures" should not be applied in all circumstances because it would diminish fee revenues. See Qiwei Luo, "Lishun guanxi, gaige he chuangxin feishui shouru guanli moshi" (Reconciling Relations, Reforming and Innovating Management of Non-tax Revenues) in Guo'an Yu (ed.), Feishui shouru guanli tansuo yu shijian (Exploration and Practice in Managing Non-tax Revenues) (Beijing: Jingji Kexue Chubanshe, 2005), pp. 26-33.
48. Renmin ribao, 19 December 2001.
49. Peiyong Gao, Zhongguo shuifei gaige wenti yanjiu (Study on Tax-fee Reform in China) (Beijing: Jingji Kexue Chubanshe, 2004).
50. These include the Industrial and Commercial Bureau, the Public Security Bureau, the Environment Bureau, the Health Bureau, the Quality Supervision Bureau and the Bureau of Land and Resources.
51. A former head of the Bureau at a county-level city in Zhejiang told me in February 2008 that his Bureau had around 200 officials and that every official had responsibility for collecting fees from firms.
52. Kellee Tsai is exceptional in that she emphasizes the diversity of private entrepreneurs. See Kellee S. Tsai, Capitalism without Democracy: The Private Sector in Contemporary China (Ithaca: Cornell University Press, 2007).
53. Kellee S. Tsai, Back-Alley Banking: Private Entrepreneurs in China (Ithaca: Cornell University Press, 2002);
54. Susan Whiting, Power and Wealth in Rural China.
55. In the amended Constitution passed by the People's National Congress in March 1999, the phrase that individually owned and private business is a "complement of public economy" was replaced by a phrase identifying it as an "important part of the Socialist market economy". See Renmin ribao, 16 March 1999. Furthermore, in 2001, the CCP lifted its ban on private entrepreneurs joining the CCP, imposed after the 1989 Tiananmen crackdown.
56. As an anonymous reviewer pointed out, another source of differentiation among private firms is the privatization of collective and state-owned enterprises. The process of privatization has accelerated since the late 1990s. As the reviewer suggested, I examined whether privatized businesses paid higher or lower levels of fees than indigenous private businesses. Since information on whether private firms were established through privatization is contained only in data collected in a 2004 survey, I used this data to examine the question. It turned out that there was no significant difference in the level of fee payment between the two groups of private businesses.
57. Zhongguo tongji nianjian 2005 (China Statistical Yearbook 2005) (Beijing: Zhongguo Tongji Chubanshe, 2005), p. 488;
58. Zhongguo tongji nianjian 2001 (China Statistical Yearbook 2001), p. 401.
59. In some cases, local leaders simply exempt large firms from most fees. Interview, an entrepreneur owning a large firm in Zhejiang, August 2002.
60. Zhongguo shuiwu bao, 29 July 2002.
61. According to the Zhejiang Daily, the Xianju and Shangshan county governments designated large firms for protection against fee extraction. See Zhejiang ribao (Zhejiang Daily), 26 January 1995, 4 June 1998. In Wenzhou City in Zhejiang Province, which is famous for rapid private business development, the local government also took this measure.
62. See Wenzhou ribao (Wenzhou Daily), 24 August 1997, 3 September 1998. The Zaoyang City government in Hubei also designated 35 firms for protection from excessive fee extraction.
63. See Hubei sheng Zaoyang shi caizhengju (The Finance Bureau at Zaoyang city in Hubei Province), "Jiaqiang jiandu, guifan guanli, quanmian tuijin yusuanwai zijin xiang congshen fazhan" (Strengthening Supervision, Standardizing Management, and Supporting for Extra Budgetary Revenue Management Development), in Huaping Liang (ed.), Zonghe caizheng yanjiu 20 nian (Research on Comprehensive Finance for 20 Years) (Beijing: Zhongguo Caizheng Jingji Chubanshe, 2002), pp. 654-66;
64. Similarly, Jiangxi Province designated large private enterprises as "enterprises for protection".
65. See Jiangxi sheng gongshanglian (Jiangxi Provincial Branch of the Federation of Industry and Commerce), "Jiangxi sheng 2000-2001 nian geti siying jingji fazhan qingkuang fenxi" (Analysis on Development of the Individual Economy and the Private Sector in Jiangxi, 2000-2001), in Zhongguo siying jingji nianjian 2000-2001, pp. 638-41.
66. Anhui ribao (Anhui Daily), 16 October 2001.
67. David L. Wank, Commodifying Communism, p. 198.
68. Edward S. Steinfeld, "Market Visions: The Interplay of Ideas and Institutions in Chinese Financial Restructuring", Political Studies, Vol. 32 (2004), pp. 643-63.
69. Interview, entrepreneurs in Zhejiang, February 2008.
70. For research on this topic, refer to Bruce J. Dickson, Red Capitalists in China: The Party, Private Entrepreneurs, and Prospects for Political Change (Cambridge: Cambridge University Press, 2003), and
71. Jae Cheol Kim, "The Political Emergence of Private Entrepreneurs in China", Issues and Studies, Vol. 41, No. 3 (2005), pp. 113-43.
72. Delegates to the PC at the township and county levels are elected directly by local constituents, whereas delegates at the prefectural, provincial and national levels are elected indirectly by delegates at the level below. For details on the election of delegates to the PC at the township level, see Melanie Manion, "Chinese Democratization in Perspective: Electorates and Selectorates at the Township Level", The China Quarterly, No. 163 (September 2002), pp. 763-82.
73. Bruce J. Dickson, Red Capitalists in China.
74. Mara Faccio, "Politically Connected Firms", The American Economic Review, Vol. 96, No. 1 (2006), pp. 369-86;
75. Asim Ijaz Khwaja and Atif Mian, "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market", Quarterly Journal of Economics, Vol. 120, No. 4 (2005), pp. 1371-411.
76. According to the survey guidelines, the sampling frame came from a list of private enterprises registered at the Bureau of Industry and Commerce Management. Samples were drawn from each province based upon their proportion of private enterprises out of the total private enterprises nationwide. Then, those administering the surveys in each province determined the cities and counties where samples would be drawn. Cities and counties were selected in ways that included three different levels of economic development, namely, developed, middle and poor. The sample size for each city and county was based upon their proportion of private enterprises out of the total number of private enterprises in selected cities and counties. Within each stratum of cities and counties, rural and urban areas, and types of businesses, samples were selected randomly.
77. This study draws upon information from 7, 034 cases out of a total of 11, 560. I exclude 335 cases as outliers. First, I exclude enterprises paying 20 per cent or more of sales revenues as fees. Considering that the level of fee payment is calculated based on sales revenue, 20 per cent is an extraordinarily high figure. Remember that, when excluding these cases, the average level of fee payment is 1.2 per cent. Then, I follow the conventional procedure of detecting outliers by using standardized residuals. I exclude cases that record below-2 or above +2 of standardized residuals.
78. I thank Hubert Schmitz for pointing out these two factors.
79. As this study pooled four survey datasets covering the years from 1996 to 2003, sales revenue is converted into comparable prices over years. The variable of Sales Revenue is the log of sales revenues in units of 10, 000 yuan. Since a non-linear relationship between Sales Revenue and the level of fee payment was detected in a scatter plot, the model also includes the square of Sales Revenue.
80. CCP Membership is a dummy variable for which membership was recorded as 1.
81. Although it is a categorical variable, this study treats it as if it is an interval variable, using six scales from 0 to 5;
82. indicates non-delegates, 1 indicates delegates at the township level, 2 indicates delegates at the county level, and so on. This study assumes that the difference in political connections between non-delegates and township delegates is the same as the difference between township delegates and county delegates. Admittedly, this is a crude assumption. Nonetheless, constructing the variable in this way enables us to distinguish between the different types of political connections that can be acquired through the various ladders of the political hierarchy.
83. This variable is constructed in the same way as the variable of delegates to the PC.
84. Cadre Experience is a dummy variable for which experience was recorded as 1.
85. Correlation coefficients are in the range from-0.093 (correlation between CCP membership and delegates to the CPCC) to 0.106 (correlation between CCP membership and delegates to the PC).
86. This is a dummy variable for which business types relying on resources under local government control is recorded as 1.
87. Other business types such as manufacture, construction, commerce and catering, social services, science and technology, agriculture, health and sports are recorded as 0.
88. Coastal Province is a dummy variable for which 1 indicates coastal provinces and the three municipalities. Quite a number of enterprises have subsidiaries in more than one province. Enterprises are considered to be located in coastal provinces for the purposes of this study if their largest subsidiary is located in a coastal province.
89. The year 2003 is used for reference. Thus, coefficients of variables Year 1996, Year 1999 and Year 2001 indicate differences in the level of fee payment in these years compared with the year 2003.
90. The log was taken.
91. The standardized coefficients of these variables are very high, indicating that these variables have strong effects on the level of fee payment.
92. Because of constraints on the length of this paper, statistical results about medium-large enterprises are not presented here. They are available upon request.
93. The coefficient of this variable is 0.386, indicating that the level of fee payment is higher by 0.386 per cent for these firms. Considering that the average level of fee payment is 1.17 per cent, these firms paid 33 per cent higher level of fees than firms in other sectors.
94. Since the models reject the null hypothesis of homoskedasticity (where the variance of the unobservable, conditional on independent variables, is constant) in the Breusch-Pagan and Cook-Weisberg test, this study employs Robust HC 3 standard error to adjust for heteroskedasticity (where the variance of the unobservable, conditional on independent variables, is not constant).
95. For this analysis, the variables of CPCC and PC delegates are combined into one variable, CPCC/PC delegates. This new variable means the sum of scores of each variable.
96. Since the models reject the null hypothesis of homoskedasticity in the Breusch-Pagan and Cook-Weisberg test, this study employs Robust HC 3 standard error to adjust for heteroskedasticity.
97. Chengshi zaobao (City Morning Newspaper), 10 June 2002.
98. On average, private enterprises paid fees equal to one quarter of tax payments. Most taxes in China, such as the value-added tax, the business tax and the corporate income tax, are paid by enterprises. Since local taxes represent roughly half of the total taxes that enterprises pay, local governments obtain fee revenues from private enterprises which amount to as much as half of local tax revenues paid by them.
99. OECD, Challenges for China's Public Spending.
100. Kai-yuen Tsui, "Local Tax System, Intergovernmental Transfers and China's Local Fiscal Disparities", Journal of Comparative Economics, No. 33 (2005), pp. 173-96;
101. Ray Yep, "Can 'Tax for Fee' Reform Reduce Rural Tension in China? The Process, Progress and Limitations", The China Quarterly, No. 177 (March 2004), pp. 42-70.