What causes the local fiscal crisis in China: The role of intermediaries

Journal of Contemporary China

Volumn 24, Issue 94, 2015, Pages 573-593

  Li, Linda Chelan ^a,b   Yang, Zhenjie ^c  

^a Department of Public Policy ^*  (China)

^b CITY UNIVERSITY OF HONG KONG   (Hong Kong)

^c ZHONGNAN UNIVERSITY OF ECONOMICS AND LAW   (China)

Author keywords

[No Author keywords available]

Indexed keywords

FINANCIAL CRISIS; GOVERNANCE APPROACH; INTERGOVERNMENTAL RELATIONS; LOCAL GOVERNMENT; PUBLIC SERVICE; PUBLIC SPENDING; SUBSIDY SYSTEM;

CHINA;

EID: 85027957841     PISSN: 10670564     EISSN: 14699400     Source Type: Journal    
DOI: 10.1080/10670564.2014.975947     Document Type: Article

References (72)

1. If we conduct a snap-shot count in the middle of the first decade in the new millennium, as of 2005 there were 2,862 counties and 41,636 towns/townships nationwide. This means as many as 39-618 local governments at these grassroots levels were/are in trouble financially (three-quarters of 2,862 and 90% of 41,636). For details, please see: Ligang Liu and Shaoqiang Chen, ‘An analysis of local government debt’ [‘Difang zhengfu juzhai tanxi’], (2006), available at: http://www.rieti.go.jp/cn/events/bbl/04122201_cn.pdf (accessed 13 January 2013)
2. ‘National Development and Reform Commission: fiscal debt per county reached 100 million yuan on average’, (2008), available at: http://news.xinhuanet.com/fortune/2008-04/03/content_7913318.htm (accessed 14 January 2013).
3. Roy W. Bahl, Fiscal Policy in China: Taxation and Intergovernmental Fiscal Relations (Ann Arbor, MI: University of Michigan Press, 1999)
4. Era Dabla-Norris, ‘Issues in intergovernmental fiscal relations in China’, (February 2005), available at: http://www.imf.org/external/pubs/ft/wp/2005/wp0530.pdf (accessed 10 June 2012)
5. Research Team of Pay Arrears in Research Institute for Fiscal Science of Ministry of Finance, ‘A study on pay arrears in county and township level governments’ [‘Xianxiang zhengfu qianfa gongzi wenti yanjiu’], Public Finance Research [Caizheng yanjiu] 4, (2002), pp. 36–41
6. Ting Gong and Alfred M. Wu, ‘Central mandates in flux: local noncompliance in China’, Publius: The Journal of Federalism 42(2), (2012), pp. 313–333
7. Wei Lin, ‘Clearing off teachers’ pay arrears’ [‘Changqing tuoqian jiaoshi gongzi jiuzhang’], Outlook [Liaowang] 37, (2008)
8. Xiwen Chen and Jun Han, ‘On fiscal crises of county and township government in China’ [‘Guanzhu woguo xianxiang gonggong caizheng de weiji’], (2002), available at: http://www.dajunzk.com/xianxiangweiji.htm (accessed 6 January 2012).
9. Unofficial estimates of county–township debts as of the early 2000s were between 1,000 billion and 3,000 billion yuan. The Budget Law of China, enacted in 1994, explicitly prescribes that ‘various local tiers of government shall follow the principle of balancing revenue and expenditure in budget formulation, and local governments must not issue local government bonds unless prescribed otherwise by other laws or State Council regulations’ (Article 28). Local government debts have been on the rise, however, reaching a level of some 20,000 billion yuan in 2012, as controls were relaxed in 2008 as part of the economic stimulation policy to encourage investment and spending in the aftermath of the Global Financial Crisis, while the National Audit Report published on 30 December 2013 claims that local debt increased from 15,886 billion yuan at the end of 2012 to 17,890 billion in June 2013, an increase of 12.6%. For details, please see: National People’s Congress, ‘Budget Law of China’, (22 March 1993), available at: http://www.law-lib.com/law/law_view.asp?id¼10301 (accessed 10 June 2014)
10. Gang Zhang, ‘How to solve thousands of billion yuan debt of county and township governments’ [‘Wanyiyuan zhaiwu ruhe huajie’], Development [Fazhan] 5, (2005), p. 31
11. Guanxiang Dong, ‘The former finance minister Xiang Huaicheng estimated Chinese local government debts to surpass 20,000 billion yuan’, (2013), available at: http://finance.chinanews.com/cj/2013/04-06/4705499.shtml (accessed 10 April 2013)
12. National Audit Office, ‘Chinese government debt audit report’ [‘Quanguo zhengfu xingzhai wushenji jieguo’], (30 December 2013), available at: http://www.audit.gov.cn/n1992130/n1992150/n1992500/n3432077.files/n3432112.pdf (accessed 31 December 2013).
13. Kevin J. O’Brien and Lianjiang Li, Rightful Resistance in Rural China (New York: Cambridge University Press, 2006).
14. Local government budgets at the county and below levels have thus been characterized as ‘chifan caizheng’ (literally, government finance for meals) in the Chinese literature.
15. Xiwen Chen, ed., A Study of County and Township Finance and Peasants Income Growth in China [Zhongguo xianxiang caizheng yu nongmin zhenshou wenti yanjiu ] (Taiyuan: Shanxi Economy Press, 2003)
16. Jun Han and Yang Xie, ‘The current situation of county–township finance in China: problems and implications’ [‘Zhongguo xianxiang gonggong caizheng xianzuang: wenti yu yingxiang’], (2005), available at: http://www.ahnw.gov.cn/2006nwkx/html/200509/%7B5AFA12C9-B630-4DEA-90E5-7A6F0AC39E69%7D.shtml (accessed 6 January 2013)
17. World Bank, ‘China: national development and sub-national finance—a review of provincial expenditures’, (9 April 2002), available at: http://ideas.repec.org/p/wbk/wboper/15423.html (accessed 10 June 2014).
18. C. Göbel, The Politics of Rural Reform in China: State Policy and Village Predicament in the Early 2000s (London: Routledge, 2010)
19. Linda Chelan Li, Rural Tax Reform in China: Policy Process and Institutional Change (London: Routledge, 2012).
20. Deyong Zhang, ‘County and town debt of China: problems and solutions’ [‘Zhongguo xianxiang zhaiwu: Wenti yu duice’], Finance & Trade Economics [Caimao jingji ] 7, (2006), pp. 75–80.
21. Chengjun He, ‘Status quo, reasons and way out of county and township fiscal crisis’ [‘Xianxiang caizheng kunnan: xianzhuang chengyin chulu’], Rural Economy in China [Zhongguo nongcun jingji] 2, (2003), pp. 17–22
22. Kang Jia and Jingming Bai, ‘Overcoming county and township governments’ fiscal dilemma and fiscal institutional innovation’ [‘Xianxiang caizheng jiekun yu caizheng tizhi chuangxin’], Economic Research Journal [Jingjiyanjiu] 2, (2002), pp. 3–9
23. Jean C. Oi and Shukai Zhao, ‘Fiscal crisis in China’s townships: causes and consequences’, in Elizabeth J. Perry and Merle Goldman, eds, Grassroots Political Reform in Contemporary China (Cambridge, MA: Harvard University Press, 2007)
24. World Bank, ‘China: national development and sub-national finance’; Project Group of Town Deficit and Debt, ‘Fiscal deficit and debt issues of township governments’ [‘Xiangzhen caizheng chizi yu zhaiwu yanjiu baogao’], Review of Economic Research [Jingji yanjiu cankao ] 78, (2002), pp. 2–11
25. Keyu Zhou, ‘Review of the administrative system of city-managing-counties’ [‘Fanshi woguo “shiguanxian” tizhi’], Urban Research [Xiandai chengshi yanjiu ] 5, (2000), pp. 22–24.
26. Both Galung and Noan are pseudonyms.
27. Kang Jia and Jingming Bai, ‘Overcoming county and township governments’ fiscal crisis and fiscal institutional innovation’; World Bank, ‘China: national development and sub-national finance’.
28. Vivienne Shue and Christine Wong, eds, Paying for Progress in China: Public Finance, Human Welfare and Changing Patterns of Inequality (London and New York: Routledge, 2007).
29. Christine Wong and Richard Bird, ‘China’s fiscal system: a work in progress’, International Tax Program Papers 0515, (2005)
30. Dabla-Norris, ‘Issues in intergovernmental fiscal relations in China
31. World Bank, ‘China: national development and sub-national finance’.
32. The exception was tariffs, which were collected by the National Customs.
33. Central subsidies played a key role in local fiscal balance. See Andrew Wedeman, ‘Agency and fiscal dependence in central–provincial relations in China’, Journal of Contemporary China 8(20), (1999), pp. 103–122.
34. In China, local governments were allowed to collect fees based on regulations promulgated by central and provincial governments, most of which were managed outside of the budget, and most went to local coffers historically. From the late 1990s the central government sought to rationalize the management of these funds by way of incorporating them, gradually, into the budget. Officially this process was completed in 2012, since when all formerly extra-budgetary funds were part of the budget, to give improved oversight of these monies. For details, please see: R. S. Eckaus, ‘Some consequences of fiscal reliance on extrabudgetary revenues in China’, China Economic Review 14, (2003), pp. 72–88
35. Gary H. Jefferson, ‘China’s economic future: a discussion paper’, Journal of Asian Economics 8, (1997), pp. 581–596
36. Jun Ma and John Norregaard, ‘China’s fiscal decentralization’, (1998), available at: http://www.imf.org/external/pubs/ft/seminar/2000/idn/china.pdf (accessed 10 June 2013)
37. Ministry of Finance, ‘Notice on bringing extrabudgetary fund into budgetary management’ [‘Guanyu jiang an yusuanwai zijin guanli de shouru nanru yusuan guanli de tongzhi’], (1 June 2010), available at: http://www.mof.gov.cn/zhengwuxinxi/caizhengwengao/2010nianwengao/wgd5q/201007/t20100723_329410.html (accessed 10 June 2014).
38. The estimates can vary considerably. For example, the Ministry of Finance once estimated the size of extra-budgetary funds at about 8–10% of GDP while officials of the State Administration of Taxation opted for at least 15%. For more information please see: Christine Wong and Guijuan Wang, ‘Tax for fee: Reform of extrabugetary revenue and intergovernmental fiscal relations’ [‘Fei tai shui zhongguo yusuanwai zijin he zhengfujian caizheng guanxi de gaige’], Comparative Economic & Social Systems [Jingji shehui tizhi bijiao] 6, (2000), pp. 14–21.
39. District governments have an administrative rank equivalent to county governments. Noan County became Noan District in 1999 when Galung City was established from the former prefecture.
40. The evaluation system on county economic development (including district and county-level city), which the provincial government of Hubei Province devised to assess county officials, includes these indices, amongst others: GDP, budgetary revenue, per capita GDP, per capita income, tax revenue growth rate, investment and urbanization. Eighty county level units fell into three categories by these indices: good (20 counties), middle level (40 counties) and poor (20 counties). Noan District was in the ‘middle level’ group. For details, please see: General Office of Hubei Provincial Party Committee and General Office of Hubei Province Government, ‘Economic performance evaluation mechanism of county-level government in Hubei Province’ [‘Hubei sheng xianyu jingji fazhan zonghe pingjia kaohe banfa’], (31 August 2009), available at: http://guoqing.china.com.cn/gbbg/2012-04/26/content_25244624.htm (accessed 11 June 2013).
41. The State Council, ‘Notice on reforming the income tax sharing ratio’ [‘Guanyu yinfa suodeshui shouru fenxiang gaige fangan de tongzhi’], (2001), available at: http://yss.mof.gov.cn/zhuantilanmu/zhongguocaizhengtizhi/cztzwj/200806/t20080630_55299.html (accessed 10 June 2014).
42. John P. Burns, ‘China’s nomenklatura system’, Problems of Communism XXVI, (1987), pp. 36–51
43. Hon S. Chan, ‘Cadre personnel management in China: the nomenklatura system, 1990–1998’, The China Quarterly 179, (2004), pp. 703–734
44. Jae Ho Chung and Tao-Chiu Lam, ‘China’s “city system” in flux: explaining post-Mao administrative changes’, The China Quarterly 180, (2004), pp. 945–964.
45. In China’s fiscal management there is a general principle that the government function is directly associated with the personnel number (bianzhi shu) and corresponding budgetary revenue created from this function and expenditure to fulfil this function (including personnel salary and working expenditure) (quanshui shizou, renshui shizou, feishui shizhuan). When the function is transferred from one government to another one, the personnel number and budgetary expenditure and revenue will go with the function. For example, the state-owned enterprises all belong to one tier of government. Management responsibilities for an enterprise of one tier of government bureau align with responsibilities/privilege with the enterprise finances—profit/loss. With the change of the ‘host’ government, the management responsibilities and related enterprise finances will also be transferred to the new government.
46. Huaxin Wang, ‘Implementing the policy of “province directly managing counties” and fostering social and economic development’ [‘Shixing shengguanxian (shi) guanli tizhi cujin xianyu jingji shehui xietiao fazhan’], Review of Economic Research [Jingji yanjiu cankao ] 38, (2005), pp. 38–42.
47. Jinbao Gong and Tao Chen, ‘Analysis of fiscal management mechanism in Hubei Province’ [‘Hubei sheng xianxiang caizheng guanli tizhi shizheng fenxiyu yanjiu’], (2009), available at: http://www.ecz.gov.cn/structure/zthd/nljsn/cjlt/zw_1055_1.htm (accessed 10 February 2013).
48. Shiuh-Shen Chien, ‘Prefectures and prefecture-level cities: the political economy of administrative restructuring’, in Jae Ho Chung and Tao-chiu Lam, eds, China’s Local Administration: Traditions and Changes in the Sub-national Hierarchy (London and New York: Routledge, 2010)
49. Keyu Zhou, ‘Review of the administrative system of city-managing-counties’.
50. Zhejiang Province started the reform after 1992. Since the start of the twenty-first century, many provinces have begun to launch this reform. Nationally, the central government expected all provinces to launch the reform before the end of 2012. However, the Ministry of Finance changed the tone and allowed each province to consider their own situation to promote the province managing counties’ finance.
51. For example, if the enterprise is ‘of the prefecture-city’, this enterprise’s tax will be collected by the prefecture-city tax bureau. The county government cannot share the tax revenue of this enterprise even though geographically the enterprise situates at the county.
52. Barry Naughton, ‘The decline of central control over investment in post-Mao China’, in David M. Lampton, ed., Policy Implementation in Post-Mao China (Berkeley and Los Angeles, CA: University of California Press, 1987)
53. Linda Chelan Li, Centre and Provinces: China, 1978–93. Power as Non-zero-sum (Oxford: Clarendon Press, 1998).
54. Noan District Government, ‘Issues and suggestions in relation to the operation of city–district relations’ [‘Shiqu tizhi yunxing zhong de youguan wenti he jianyi’], internal document, (2005)
55. interview in Noan District, 2008.
56. Noan officials assessed the loss during 2002–2005 to be 15–25 million yuan a year, but it then skyrocketed to 200 million by 2007, as the local economy picked up (interview, 2008).
57. Weiping Qu, ‘Difficulties in regulating private satellite television sets’ [‘Daguogai weixing dianshi zhili nan’], Journal of Broadcasting Equipment and Technology [Guangdian shebei yu jishu ] 1, (2009)
58. Wusan Sun, ‘Top-down policies versus grassroots resistance: the management of illegal satellite dishes in Chinese villages’, in Wangning Sun and Jenny Chio, eds, Mapping Media in China: Region, Province, Locality (New York: Routledge, 2012).
59. Noan District Government, ‘Issues and suggestions in relation to the operation of city–district relations’.
60. Jae Ho Chung, ‘Beijing confronting the provinces: the 1994 tax-sharing reform and its implications for central–provincial relations inChina’, China Information 9(2/3), (Winter 1995), pp. 1–23
61. Shuanglin Lin, ‘The decline of China’s budgetary revenue: reasons and consequences’, Contemporary Economic Policy 18(4), (2000), pp. 477–490
62. The State Council, ‘Decision on implementing tax sharing reform’ [‘Guanyu shixing fenshuizhi caizheng guanli tizhi de jueding’], (15 December 1993), available at: http://www.csj.sh.gov.cn/pub/xxgk/zcfg/swzsgl/200210/t20021010_284358.html (accessed 10 June 2014)
63. Le-yin Zhang, ‘Chinese central–provincial fiscal relationships, budgetary decline, and the impact of the 1994 fiscal reforms: an evaluation’, The China Quarterly 157, (1999), pp. 115–141.
64. The early conflicts led to the issuance of new guidelines by the State Council in 1996, two years after the new system was put in place, in order to adjust some of the early arrangements. Shanghai City also quickly abandoned its attempt to set up the dual national and local tax bureaus and has collected taxes with one unified bureau in practice since 1994. For details, please see: The State Council, ‘Opinion on adjusting tax collecting scope between national tax bureau and local tax bureau’ [‘Guojia shuiwu zongju guanyu tiaozheng guojia shuiwu judi fangshui wuju shuishou zhengguan fanwei de yijian’], (24 January 1996), available at: http://www.csj.sh.gov.cn/pub/xxgk/zcfg/swzsgl/200402/t20040220_284192.html (accessed 10 June 2014).
65. These problems have led to doubts about the viability of the dual hierarchies and discussions over merging local tax bureaus into the national system. For details, please see: Xiaoliang Song, ‘Experts’ comments on the long process ahead in merging the national and local tax bureaus’ [‘Zhuanjia cheng guoshui dishui hebing yao zou henchang de lu hebing liyu tixiao’], China Economic Daily, (25 February 2013), available at: http://finance.sina.com.cn/china/20130225/093114634914.shtml (accessed 15 May 2013).
66. Interview, 2008.
67. Interview, 2008.
68. Reform Drafter Team of Galung City Government, ‘Report on reform plans of demarcating function between the city and district governments’ [‘Shiqu zhineng tiaozhen de fangan de baogao’], internal document, (2006).
69. Interview, 2008.
70. Interview, 2008.
71. Alfred M. Wu and Wen Wang, ‘Determinants of expenditure decentralization: evidence from China’, World Development 46, (2013), pp. 176–184.
72. James Scott, Weapons of the Weak: Everyday Forms of Peasant Resistance (New Haven, CT: Yale University Press, 1987).