+ All Categories
Home > Documents > Structural change in local finance during China’s reform era: A case study

Structural change in local finance during China’s reform era: A case study

Date post: 26-Aug-2016
Category:
Upload: chang-liu
View: 213 times
Download: 0 times
Share this document with a friend
26
Front. Hist. China 2011, 6(4): 562–587 DOI 10.1007/s11462-011-0142-z Chang Liu ( ) Center for New Political Economy, Fudan University, Shanghai 200433, China E-mail: [email protected] RESEARCH ARTICLE Chang Liu Structural Change in Local Finance during China’s Reform Era: A Case Study © Higher Education Press and Springer-Verlag 2011 Abstract By looking at one particular case, this study determines what resources were available to local governments in order to finance local economic development in the reform era. It finds that although local finance expanded tremendously in this era, and extra-budgetary revenue also increased, those two things did not produce much financial surplus for capital construction and fixed investment. The only source at the local government’s disposal was cheap land expropriated from local peasants. Land thus becomes the key to understanding local finance during the reform era. Keywords local government, tax distribution system, extra-budgetary finance, land finance The role played by local governments in China’s economic reforms has attracted much scholarly attention. Increasingly, scholars agree that the success of China’s reform and development lies in the fact that local governments have played an indispensable role in promoting local economies. 1 This case study, focused on pseudonymous “T County,” examines structural changes in local finances during the reform era (beginning in 1978 and running to about 2004). It identifies what resources, other than favorable policies and services, were available to local government to allow rural areas to finance their economic development. Local 1 Shi Zhengfu, “Decentralization and Chinese Economic Reform,” unpublished conference paper (1994); Yinyi Qian and Weingast, “Federalism as a Commitment to Preserving Market Incentives,” Journal of Economic Perspectives, no. 11 (1997), 83–92; Oliver Blanchard and Andrei Shleifer, “Federalism with and without Political Centralization. China versus Russia,” (2000) MIT Dept. of Economics Working Paper No. 00–15; Harvard Institute of Economics Research Paper No. 1889. Available at SSRN: http://ssrn.com/abstract=236127 or DOI: 10.2139/ssrn. 236127; Steven N.S.Cheung, The Economic System of China (Beijing: China CITIC Press, 2008).
Transcript
Page 1: Structural change in local finance during China’s reform era: A case study

Front. Hist. China 2011, 6(4): 562–587 DOI 10.1007/s11462-011-0142-z   

Chang Liu ( ) Center for New Political Economy, Fudan University, Shanghai 200433, China E-mail: [email protected]

RESEARCH ARTICLE

Chang Liu

Structural Change in Local Finance during China’s Reform Era: A Case Study

© Higher Education Press and Springer-Verlag 2011

Abstract By looking at one particular case, this study determines what resources were available to local governments in order to finance local economic development in the reform era. It finds that although local finance expanded tremendously in this era, and extra-budgetary revenue also increased, those two things did not produce much financial surplus for capital construction and fixed investment. The only source at the local government’s disposal was cheap land expropriated from local peasants. Land thus becomes the key to understanding local finance during the reform era. Keywords local government, tax distribution system, extra-budgetary finance, land finance The role played by local governments in China’s economic reforms has attracted much scholarly attention. Increasingly, scholars agree that the success of China’s reform and development lies in the fact that local governments have played an indispensable role in promoting local economies.1 This case study, focused on pseudonymous “T County,” examines structural changes in local finances during the reform era (beginning in 1978 and running to about 2004). It identifies what resources, other than favorable policies and services, were available to local government to allow rural areas to finance their economic development. Local                                                                1 Shi Zhengfu, “Decentralization and Chinese Economic Reform,” unpublished conference paper (1994); Yinyi Qian and Weingast, “Federalism as a Commitment to Preserving Market Incentives,” Journal of Economic Perspectives, no. 11 (1997), 83–92; Oliver Blanchard and Andrei Shleifer, “Federalism with and without Political Centralization. China versus Russia,” (2000) MIT Dept. of Economics Working Paper No. 00–15; Harvard Institute of Economics Research Paper No. 1889. Available at SSRN: http://ssrn.com/abstract=236127 or DOI: 10.2139/ssrn. 236127; Steven N.S.Cheung, The Economic System of China (Beijing: China CITIC Press, 2008).  

Page 2: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 563

finance expanded tremendously in the era under study, and extra-budgetary revenue also increased. However, such revenue did not produce a strong financial surplus for capital construction and fixed investment. The sole resource for necessary revenue at the county government’s disposal was cheap land expropriated from local peasants. This cheap land allowed the government to finance local economic development without spending a cent from its budget, making land per se a key factor in local finance during the reform era, at least in this particular case.

Using cheap land to finance local development is very common in China; lately the topic has aroused a great deal of public concern and academic research, and has resulted in numerous studies. People generally agree that revenues from land expropriation and transfer have constituted a secondary form of finance for many local governments in the reform era, especially since the 1990s, and that they have provided capital investment in local development. The practice is now properly termed land finance in China. One pioneering study was produced by a group of scholars between 2004 and 2006, sponsored by the Center for Development Research of the State Council. They conducted a large-scale survey in nine provinces. Their findings are summarized in the report “Zhongguo tudi xianzhuang jiemi: Tudi caizheng yu difang zhengfu” [Deciphering the land situation in today’s China: Land finance and local government], published in Caijing 财经 (Finance and economy), February 20, 2006. According to this study, cheap land has been the driving force for rapid urbanization and industrialization in recent decades, and revenues from land transfer have become an important source of revenue for local finance and public investment. In many regions, incomes from land finance make up more than half of local state revenue. The authors argue that the main reasons for land finance are two-fold: on the one hand, the existing finance and tax system leaves little room for local governments to legitimately increase income, while making large demands on their finances. On the other hand, the monopoly on land expropriation (from peasants) and supply (to the market) by the local government and the enormous revenues generated from land transfers give local governments an extremely strong incentive to depend on this sort of land financing. Many later studies on the subject have supported the findings of this pioneering inquiry.2                                                                2 For a literature review on land finance please refer to: Liu Hongmei, Zhang Zhibin, and Wang Keqiang, “Woguo tudi caizheng shouru yanjiu zongshu” [A summary of studies on land finance in China], Kaifa yanjiu [Research on development], no. 1 (2008), 141–44; Shao Yuan, “Guanyu tudi caizheng yu caishui tizhi gaige wenti zongshu” [A review of studies concerning the problems of land finance and the reforms in finance and taxes], Jingji yanjiu cankao [Review of economic research] no. 24 (2010), 36–45; Cheng Ruixian and Li Yan, “Guonei tudi caizheng yanjiu shuping” [Review of studies on internal land finance], Jingji wenti tansuo [Inquiry into economic issues], no. 2 (2011), 127–31.  

Page 3: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 564

The purpose of the present paper is not to challenge these general findings, instead its humble aim is to find out, through research on just one locale, how land finance has actually operated and been practiced in a local setting against the background of structural changes in local finance in the reform era. The paper therefore may enrich our empirical knowledge about land finance. Though many studies have explored the topic, a careful case study is still wanting. It is hoped that the case brought forward here will add fresh and valuable details about land finance and better our understanding about this important phenomenon, one that has been critical to local development in recent decades and provocative today in academic and policy circles.

Local Finance in Historical Perspective

In imperial China, there was simply no place for local finance in a highly centralized political system. The political goal of the imperial government was to maintain domestic order and to guard against foreign invasions, especially by nomadic “barbarians” from the north and northwest, and by doing so to sustain the rule of the dynasty. To achieve this goal, the primary concern of the central government was to stamp out any centrifugal and feudal regionalism and localism. Ever since the first unification of Chinese polities by the Qin Empire (221–207 BCE), all political, economic, military, as well as financial measures and arrangements were devised to strengthen central control over localities.

With regard to financial systems, the local government was not allowed to have independence; all tax revenues collected locally had to be remitted to the central treasury, and only a tiny portion was retained locally for salaries of local officials and for government operational expenses. According to Ray Huang, in the mid-16th century, the portion retained for local expenses was merely 4 percent of all taxes collected locally.3 Zelin’s study of local finance in the early Qing tells us the same story: in that period, only 5 percent of the land tax collected in Suzhou was retained for local expenses.4 Such a tiny amount of revenue was not even enough to keep local government itself running normally, let alone finance any local public projects and development. Of course, the modern notion of development, with its connotations of industrialization, urbanization, and advancement in general living standard, was simply not an issue in local government agendas then. Yet to feed his staff and maintain clerks and runners a magistrate had to rely on customary fees, levies and surcharges,5 a practice often                                                                3 Ray Huang, Taxation and Governmental Finance in Sixteenth-Century Ming China (Cambridge: Cambridge University Press, 1974). 4 Madeleine Zelin, The Magistrate’s Tael (Berkerley: University of California Press, 1984). 5 Kung-ch’üan Hsiao, Rural China: Imperial Control in the Nineteenth Century (Seattle: University of Washington Press, 1960). 

Page 4: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 565

condemned as corrupt. This situation remained unchanged until the last decades of the Qing dynasty.

During the mid-19th century, in order to cope with serious challenges and threats from the Western powers, the Qing dynasty was forced to make reforms following Western models, and local resources were expected to finance many of these reform projects. Under these circumstances, for the first time in China’s imperial history, local finance became a key focus of politics and administration, and consequently grew rapidly. By 1900, the total scale of local finance was already equal to that of the Qing central government.6 However, by statute, local finance remained illegitimate even towards the end of the dynasty.

In the Republican Period, following the collapse of the Qing, the Beijing Beiyang government tried twice (1912, 1923) to make local finance independent and separate from central finance, but to no avail. The Nationalist government followed suit when it was established in Nanjing. In November of 1928, the Nationalist government issued a new tax law, the Standard Resolution for Dividing Central Revenue and Local Revenue, which divided all government taxes into central and local revenue. It also stipulated the financial rights and regulations for both central and provincial governments.7

According to the new tax law of 1928, land taxes was yielded to the province and became a provincial key source of provincial revenue, together along with the deed tax, brokerage tax, business tax, and some other taxes. While the central government retained the salt tax, customs taxes, taxes on tobacco and liquor, lijin 厘金 (a transit tax imposed on commodities), the income tax, inheritance tax, etc., and other assorted taxes.8 Within a province the division of taxes between province and county or city was determined by the particular province itself.

The 1928 tax law was of great significance in Chinese financial history: for the first time it granted local governments, both the provincial and county levels, separate and independent tax sources, and hence their own independent finance and budget. However, the law did not create a substantial impact over time because critical domestic and international circumstances would leave little room for it to be fully implemented, and in any event the Nationalist government itself was short-lived.

In October of 1949, a highly centralized fiscal system was established. Its guiding principle was the so-called tongshou tongzhi (统收统支 ), meaning “unified                                                                6 Zhou Yuming, Wanqing caizheng yu shehui bianqian [Finance and social change in the late Qing] (Shanghai: Shanghai renmin chubanshe, 2000), 295. 7 Wu Zhaoshen, Zhongguo shuizhi shi [A history of Chinese taxation] (Taipei: Shangwu yinshuguan, 1965 [1937]), 2: 129–31. 8 Business tax, income tax and inheritance tax were the new taxes to be collected after implementing the law. Lijin was to be abolished and it was finally terminated in the beginning of 1931, Wu Zhaoshen, Zhongguo shuizhi shi, 2: 130–31. 

Page 5: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 566

collection and allocation of (all tax revenues).” All tax categories and their rates were determined by the central government and the responsibility of local governments was only to collect and remit them to the central treasury. The central government would then allocate and transfer tax revenues to different provinces following its own agenda rather than according to any local needs for development.9 Though a certain degree of financial decentralization did exist due to the fact that local governments in practice controlled and managed limited amounts of local assets and resources,10 this kind of financial decentralization was never allowed by the central authorities to grow too large. Theoretically, but also in practice, the central government had an ultimate claim on all local revenue surpluses for redistriction, thus, giving local governments little room to maneuver for their own advantage.11

Local Finance in the Reform Era, 1978–2004

The economic reforms inaugurated by the third plenum of the CPC’s Eleventh Central Committee in late 1978 loosened rigid central control over local finance. As a matter of fact, the fiscal system bore the brunt of urban and macroeconomic reforms. Since 1979, fiscal relations between the central government and local governments, mainly provinces, have undergone radical and continuous changes. The old principle of unified collection and allocation had now been replaced by a new one which emphasizes separation of budgets and fiscal operations between the central government and the provinces, as well as between province and local government. This provides more autonomy and gives more incentives to these government entities. Popularly, the revised system has been called fenzao chifan (分灶吃饭), literally, “cooking meals on separate stoves and eating separately” (distinguishing central from local government).

In the 1980s, fiscal reform revolved around the so-called fiscal responsibility system (caizheng baogan 财政包干). The essence of this system was quite similar to the household responsibility system adopted in rural reform then. The central government would contract out revenue quotas to the provinces, and in                                                                9 Ping Xinqiao, Caizheng yuanli yu bijiao caizheng zhidu [Principles of finance and comparative financial systems] (Shanghai: Shanghai sanlian shudian, 1995), 380–81. 10 For example, most small and mid-sized state enterprises were controlled and managed by local governments, and the revenues and profits generated from these enterprises were retained by the local government (Barry Naughton, Growing out of the Plan: Chinese Economic Reform, 1978–1993 [Cambridge: Cambridge University Press, 1995], 43; Ping Xinqiao, Caizheng yuanli yu bijiao caizheng zhidu, 382–85. 11 Naughton, Growing out of the plan, 43; Ping Xinqiao, Caizheng yuanli yu bijiao caizheng zhidu, 382–85. 

Page 6: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 567

the meantime grant them more financial autonomy. While there were several versions of fiscal responsibility, the one applied to most provinces was called the “Jiangsu model,”12 which divides all revenues accruing within a province between the center and the province according to a negotiated ratio. The average ratio then was 20% of revenue to be remitted to the centre and 80% to be retained in the province. Further downward, contracting or sharing was to be negotiated between the provincial government and the local (municipal or county) government.

The fiscal responsibility system granted local government extensive financial autonomy for the first time since 1949, and indeed in Chinese history, and made the local government, whether it was a province, municipality, or county, an independent entity, with its own economic interests differentiated from that of the central government. The local government now had an ever greater stake in its economic growth and development. The reform thus brought about a development-oriented local government and contributed tremendously to the success of China’s economic reforms generally.

However, as many people have criticized, the fiscal responsibility system was merely a form of administrative decentralization (xingzheng fenquan 行政分权), rather than a real fiscal decentralization. Because the responsibility system only divides tax revenues between the center and the provinces, it does not create a real separation of tax categories and collections. Thus, the fiscal responsibility system did not give local finance an independent legal footing.13 In practice, it also caused many problems. Among them, the most troublesome is that the central share in national revenue declined sharply.14 It is against this background, in the beginning of 1994, that a more dramatic reform, the tax distribution system (fenshui zhi 分税制), was adopted. This aimed at restructuring the overall tax system to address many practical problems caused by the fiscal responsibility system. The guiding principle of the new system was to divide and separate tax categories between central and local finances, giving each a separate and independent base.

The new system divided all taxes into three groups: central revenue, local revenue, and the revenue shared by both.

Central revenue includes consumption tax, tariff, business taxes on banks,                                                                12 This is because it was first experimented in Jiangsu province in 1977.  13 For a summary of such discussion and criticism, please see Yang Zhigang, Caizheng fenquan lilun yu jiceng gonggong caizheng gaige [Theory on fiscal decentralization and reform of local public finance in China] (Beijing: Jingji kexue chubanshe, 2006), 74–78. 14 Wang Shaoguang and Hu Angang, Zhongguo guojia nengli baogao [Report on Chinese state capabilities] (Shenyang: Liaoning renmin chubanshe), 1993. 

Page 7: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 568

 

railways, and insurance companies, and income tax on central SOEs (state-owned enterprises), etc. Local revenue includes business taxes (excluding railways, banks, insurance companies), taxes on local SOEs, individual income tax, land use tax, urban maintenance tax, real estate tax, increment tax from land, land transfer fees, deed tax, agriculture tax, etc.

Revenues shared by localities and the center parties include the value-added tax (VAT), resource tax, and security exchange tax. Among these, VAT is especially important to the central budget for it is now the main source of central revenue. To ensure this revenue, the central government has its own tax collection agency to collect all VAT and refund about 25 percent of it to local coffers.

The central government is the big winner of the 1994 tax reform, as can be seen clearly from the fact that the center’s share of national revenue has risen quickly since 1994. (Table 1 shows that the local share in national budgetary revenue dropped to 44 percent in 1994 from 78 percent a year before, which means the central share rose to 56 percent that year from 22 percent a year before.) Local governments, however, have not necessarily been the losers in this exchange. They actually have had gains in exchange for surrender of taxation authority: “They should experience less central government interference and growing tax revenues with a more efficient tax system.” 15 Moreover, as Naughton correctly predicted in 1995, “the most dynamic and wealthy provinces could see the benefits from a market-conforming tax system.”16

Though the 1994 tax reform has represented major progress in China’s fiscal relations and systems, it has had drawbacks. The two major ones are, as one expert pointed out: first, it caused financial distress at the county government level, and below; second, it widened the gap between rich and poor regions.17 Table 1 Changes of Local Share in National Budget

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

(1) 66.2 70.2 71.9 78 44.3 47.8 50.6 51.1 50.5 48.9 47.8 47.6 45.1

(2) 67.4 67.8 68.7 71.7 69.7 70.8 72.9 72.6 71.1 68.5 65.3 69.5 69.3

(1) Percent of local revenue in national budgetary revenue. (2) Percent of local expenditure in national budgetary expenditure. Source: Jia Kang, Difang caizheng wenti yanjiu [A study of local finance] (Beijing: Jingji kexue chubanshe, 2004), 15–16.                                                                15 Naughton, Growing Out of the Plan, 294. 16 Ibid. 17 Yang Zhigang, Caizheng fenquan lilun, 87. 

Page 8: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 569

 

 

T County: A Case Study of Local Finance in the Reform Era

Background Information T County is located in central part of eastern Zhejiang province. It covers a mostly mountainous area of 1,421 sq. km that is not richly endowed with resources. In the first half of the 20th century, the population fluctuated at around a quarter million, and has grown steadily since 1949. By the 1980s it reached half million, and it is a little more than that today. Total land under cultivation is about 1.55 million mu. The per capita acreage is around three mu, or half an acre.

For centuries, until to the eve of the reform, agriculture (including forestry) constituted the main economic sector of T County. Economically backward, it maintained a meager budget in Republican times after 1928. Local revenue could barely meet the needs for keeping local order and little funds were available for economic development. The first complete county budget is found in 1937, the year that the Japanese launched a full-scale invasion into China. It gives us a glimpse of the county’s finance (Table 2). After 1937 until to 1949, continuous war caused enormous inflation, which make it impossible to do comparisons with the county’s earlier budgets.

Table 2 Budgetary Revenue and Expenditure, 1937

(Unit: yuan)

Total Revenue Land taxes Subsidies from province Administrative fees Interests from

public property 118,200 72,200 29,600 2,900 8,700

Total Expenditure

Administrative expenses

Law enforcement

Education, culture, health

Economic development

118,200 27,000 42,800 23,800 2,900

Source: T xianzhi [T County gazetteer] (Shanghai: Hanyu dacidian chubanshe, 1995). Note: For each row, the original source only lists the major itemized figures. The sum of these figures does

not match total revenue or total expenditure.

Since 1949, though the county’s economy fluctuated with political upheavals in the period 1949–1976, it was still able to achieve progress in economic growth. From 1950 to 1976, the county’s total GDP almost quadrupled, and per capita GDP more than doubled. Agriculture remained primary, but its share in GDP dropped from three quarters to a half, while industry rose from a negligible 6 percent in 1950 to slightly more than a quarter in 1976. Table 3 gives us a general picture of T County’s economic performance during this period.

Page 9: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 570

 

 

Table 3 Economic Performance, 1950–1976

Population (in 1000)

GDP (million yuan)

Per capita GDP

(yuan)

% of agriculture

% of industry

% of service sector

1950 261 17.06 66 73 6 21

1952 270 18.87 71 66 8 26

1956 290 21.80 76 59 9 32

1960 313 25.77 83 59 8 33

1965 316 33.82 95 66 4 30

1970 393 41.00 105 60 11 29

1976 442 66.36 151 50 26 24

1976/1950 169% 389% 229%

Source: T xianzhi. Economic Performance in the Reform Era T County’s economy performed quite impressively in the reform era. As Table 4 shows, between 1977 and 2003, total GDP increased more than 60-fold, per capita GDP is 50 times the 1977 figure. During the same period the price index rose about 350 percent. Inflation deducted, the real GDP in 2003 is 18 times that of 1977, and per capita GDP is 14.7 times. On the other hand, the structure of the local economy also changed fundamentally, because the share of agriculture in total GDP dropped from 49 percent in 1977 to 11 percent in 2003, while the shares of industry and service rose from 29 percent and 22 percent to 52 percent and 37 percent, respectively, during the same period. However, local people told us in 2004 that T County’s economy was only among the lower-middle for Zhejiang province. Though its status might be low in provincial performance ranking, T County has certainly outperformed most counties in the country. What role has the county government played in the area’s economic development during this period? An examination of shifts in the county’s finances during the reform era may help provide answers. Table 4 Economic Growth and Change, 1977–2003

Population in 1000

GDP (millionyuan)

Per capita GDP (yuan)

% of agriculture

% of industry

% of service sector

1977  448  74.68  168  49  29  22 

1980 465 113.69 246 48 31 21

1985  495  255.67  519  46  31  23 

(To be continued)

Page 10: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 571

 

 

(Continued) Population

in 1000 GDP (million

yuan) Per capita

GDP (yuan)% of

agriculture% of

industry% of service

sector

1990  517  610.69  1,181  29  43  28 

1995  531  2099.56  3,964  19  49  32 

2000  554  3,141.94  5,684  16  49  35 

2001  555  3,499.09  6,310  14  50  36 

2002  555  4,044.88  7,289  13  51  36 

2003  555  4,742.89  8,543  11  52  37 

2003/1977 124%  6,351%  5,085%       

Sources: T xianzhi; T xian tongji nianjian [Annual statistics of T County], 1992, 1997, 2002, 2003.

Budgetary Finance  Government finance experienced similar dynamic growth and dramatic change during the reform era. With regard to budgetary finance, during 1949–1976 T County’s budgetary revenue quadrupled, while budgetary expenditure grew more than 17-fold. But these achievements pale when compared with the reform era. During the reform era between 1977 and 2003, budgetary revenue increased 28 times, while expenditure expanded more than 72 times. If we compare the two periods, we find that the total budgetary revenue in the reform era is more than 16 times of that of 1949–1976, and the total budgetary expenditure is 27 times greater (see Table 5). Table 5 Growth of T County Budget, 1950–2003

(In million yuan) Budgetary revenue Budgetary expenditure

1952 1.61 0.33 1955 2.20 1.03 1960 3.56 5.08 1965 4.43 2.54 1970 4.36 4.25 1976 6.45 5.77

1976/1952 401% 1,748% Total 1950–1976 96.72 93.45

1977 9.22 6.24 1980 11.55 10.48 1985 23.42 23.01 1990 49.40 44.99 1994 48.56 90.47 2000 131.27 228.48

(To be continued)

Page 11: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 572

 

 

 

(Continued) Budgetary revenue Budgetary expenditure

2003 258.41 451.77 2003/1977 2,803% 7,240%

Total 1977–2003 1,663.75 2,533.25 Reform era / 1949–1976 1,665% 2,711%

Sources: T xianzhi; T xian tongji nianjian. 

Quantitative growth is only one side of the story. More important is the structural change in local finance. Comparing 1949–76 with the reform era, we can see that the main sources of budgetary revenue changed significantly (see Table 6). In 1949–76, taxes from agriculture counted for a quarter of budgetary revenue; in the reform era, this item of revenue dropped to a negligible 5–7 percent.18 On the other hand, taxes from industry and commerce grew steadily to become the main source of county revenue. Further changes are found during the reform era: while profits from state enterprises remained as important in the 1980s as they were from 1949–76, they were no longer a source of revenue in the 1990s, especially after 1994, due to a series of financial and economic reforms. Instead, some new tax categories such as individual income tax and deed tax became more and more important in government budgetary revenues (see Table 6 & Table 7).19

Table 6 Structural Change of T County Budget

(In million yuan)  

Period

Total budgetary revenue

Agricultural tax

Industry & commerce taxes

Enterprise profits

1950–1976 96.72 25.50(26%) 52.36(54%) 16.41(17%) 1977–1988 217.95 15.15(7%) 169.83(78%) 30.42(14%) 1992–2003 1,303.32 68.50(5%) 899.58(69%) 101.50(11%)*

Period Total

budgetary expenditure

Agricultural input

Industrial & urban

development

Education science

culture health

Administrative expenses

1950–1976 93.45 15.83(17%) 20.85(22%) 31.87(34%) 16.18(17%) 1977–1988 202.10 33.05(16%) 11.36(6%) 84.04(42%) 39.27(19%) 1992–2003 2,196.55 151.61(7%) 185.11(8%) 913.60(42%) 440.09(20%)

Sources: T xianzhi; T xian tongji nianjian. Note: 1.* This figure is the sum of individual income tax from 1998 to 2003. The percentage also reflects

the same period. 2. Numbers in parentheses are the percentage of those categories in total revenue or expenditure.

                                                               18 This can help us to understand why it became possible and feasible to abolish this tax once for all in 2007. 19 All data for Table 7 through Table 15 are unpublished information provided by T County government during our field study. 

Page 12: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 573

 

 

Table 7 Structure of Budgetary Revenue, 1993–2003 (In million yuan)

Budgetary items  1993  1994 1995 1996 1997 1998 1999 2000 2001 2002  2003 Value added tax  81.91  4.01 43.28 54.87 50.00 25.62 31.00 42.68 40.89 51.42  56.93 Sales tax    18.51 21.11 28.94 34.73 37.24  73.27 Business income

tax  1.16  6.97 7.09 0.44 7.58 7.27 13.57 49.77 97.44 50.35  39.97 

SOE deficit allowance  –5.00  –1.96 –5.30 –5.49 –5.05 –9.38 –9.30 –34.61 –59.80 –21.50  –3.25 

Individual income tax    7.01 9.96 13.14 32.27 21.23  17.89 

Urban maintenance & construction tax 

  5.30 4.73 6.98 8.24 11.12  14.08 

Real estate & urban land taxes    2.21 2.68 3.65 4.06 4.49  6.77 

Agricultural tax  2.57  7.19 10.73 9.99 7.95 5.97 5.30 4.71 4.13 3.87  3.21 Farm land

occupation tax    3.76 2.15 1.91 3.21 14.64  6.35 

Deed tax    1.12 1.34 3.56 3.81 8.12  24.88 Fines & forfeits    0.82 0.45 0.67 1.60 1.54 5.30 5.98 10.70  7.25 Other income  2.38  2.35 1.39 1.63 2.71 3.94 5.24 5.57 9.40  11.06 Total  83.02  48.56 58.01 61.89 61.15 71.70 88.02 131.27 180.53 201.08  258.41 Central revenue    10000             258.97  301.69 

More interesting changes are found on the expenditure side. In 1949–76 under

the planned economy, the county government was responsible for all local capital constructions and fixed investments. Though the absolute amount of funds available for such undertakings was limited, their share in the government budget was very big compared to those of the reform era. For example, in 1949–76, 22 percent of budgetary expenditure was spent for industrial and urban development, in the reform era this figure dropped to only 6–8 percent. Government input in agriculture also dropped sharply, from 17 percent in 1949–76 to 8 percent in the 1990s and early 2000s. On the other hand, we see substantial increase of government expenditure in social development and public services during the reform era (see also Table 8).

Table 8 Structure of Budgetary Expenditure, 1993–2003

(In million yuan) Budgetary items  1993  1994  1995  1996 1997 1998 1999 2000 2001  2002  2003 Science, education,

culture & health  28.16  40.06  44.54 53.84 55.58 62.42 75.74 87.89 109.88  153.69  179.48 

Administration  14.99  20.89  21.20 21.99 22.98 28.52 31.42 42.44 61.68  77.89  84.55 

Law enforcement  3.67  5.39  6.23 8.15 8.87 11.06 12.77 17.17 23.18  23.56  32.69 Infrastructure & maintenance  2.82  3.32  3.57 3.96 4.84 3.47 5.10 8.30 7.84  14.41  27.82 

(To be continued)

Page 13: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 574

 

(Continued) Budgetary items  1993  1994  1995  1996 1997 1998 1999 2000 2001  2002  2003 

Technology upgrading 

5.80  1.58  1.89 1.56 1.78 3.09 5.12 11.61 16.00  15.45  31.95 

Agricultural input  5.49  6.95  8.71 7.91 8.58 9.82 12.24 18.92 20.00  22.50  25.19 

Social welfare  1.81  2.96  3.09 3.51 4.75 5.23 7.01 8.74 7.66  18.07  19.01 

Subsidies  1.61  0.69  0.63 2.66 2.82 0.74 0.48 0.30 1.67  1.43  2.55 Operation expenses

for finance & taxation 

2.46  3.48  3.15 4.82 5.30 5.75 8.62 14.81 17.36  23.71  27.56 

Other expenses  8.07  5.15  8.48 2.57 5.89 7.10 7.99 18.30 19.37  22.33  20.97 

Grand Total  74.88  90.47  101.49 110.97 121.39 137.20 166.49 228.48 284.64  373.04  451.77 

Judging from the above evidence, it would be difficult to conclude that the

government contributed directly and substantially to local economic development during the reform era. We can, however, argue that the significant increase of government spending in social development and public services will no doubt help to improve the local investment environment, and thus indirectly contribute to local economic growth and development.

As we have seen, although government budgetary finance expanded greatly during the reform era, revenue barely kept pace with expenditure. No budget surplus was available for development. The local officials of T County repeatedly told us that since the area was relatively backward county their finances were merely an “eating” budget (chifan caizheng 吃饭财政). This budget could barely feed all the mouths in the government and public service sectors, such as teachers, doctors, and nurses. The county’s primary concern was therefore simply to make ends meet.20

We have noticed that since the 1994 tax reform the delicate budget balance that T County managed to maintain for decades has toppled. Every year, there has been a serious deficit in the county’s budget (compare Table 7 with Table 8). The county can only expect subsidies (transfer payments) from the province to balance its books and to make ends meet. In most years between 1994 and 2003, the provincial subsidies surpassed budgetary revenue to become the number-one item in the county’s budgetary income (see Table 9). Of course, each year, the county also had to remit a certain amount of its revenue to the province. But the remittance in each year was only tantamount to a small portion of that year’s subsidy. The county still depended on provincial subsidies to balance its books.21 Fortunately, T County is under the jurisdiction of Zhejiang province, one of the                                                                20 Interview with the Finance Bureau of T County, July 13, 2004. 21 Actually, after the 1994 tax reform, most local governments at county level depend on transfer payments to balance their budget (Yang Zhigang, Caizheng fenquan lilun, 219–21, 239–42). T County is thus not exceptional. 

Page 14: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 575

 

richest provinces in China. Otherwise, it would certainly face grave financial troubles, as did many of its counterparts in economically backward provinces.22 Though the 1994 tax reform changed the structure of budgetary revenue, it ultimately has not changed the “eating” nature of T County’s finance. Therefore, the county has had to tap resources outside the budget to pursue ambitious local development goals.

Table 9 Balance Sheet, 1993–2003

(In million yuan) Subject  1993  1994  1995 1996 1997 1998 1999 2000 2001 2002  2003 Budgetary

revenue  83.02  48.56  58.01 61.89 61.15 71.70 88.02 131.27 180.53  201.08  258.41 

Provincial subsidies  7.17  59.68  66.81 71.21 76.52 81.42 93.51 116.12 149.17  261.24  313.60 

Other  8.92  9.74  18.00 29.93 29.03 10.50 15.75 17.86 19.07  0.99  52.16 Roll-over from

last year  10.49  10.61  10.01 13.36 18.26 17.06 8.86 7.62 4.44  12.41  39.80 

Total Revenue  109.60  128.59  152.83 176.39 184.96 171.23 206.14 272.87 353.21  475.72  663.97            

Budgetary expenditure  74.88  90.47  101.49 110.97 121.39 137.20 166.49 228.48 284.64  373.04  451.77 

Remittance to provincial treasury 

14.61  20.50  22.48 23.71 23.53 25.17 32.03 39.95 56.16  62.88  86.56 

Other  9.50  7.61  15.50 22.94 23.70 0 0 0 0   0   32.70 Surplus,

roll-over to next year 

10.61  10.01  13.36 18.77 16.34 8.86 7.62 4.44 12.41  39.80  92.94 

Total Expenditure 109.60  128.59  152.83 176.39 184.96 171.23 206.14 272.87 353.21  475.72  663.97 

Note: The roll-over figures for 1996 and 1997 surplus, and 1997 and 1998 revenue do not match, the original runs thus.

Extra-Budgetary Finance  Extra-budgetary finance refers to the revenues and expenditures that are outside the formal budget and its regulations, but which are necessary for government to perform its various functions and fulfill its administrative tasks. According to the 1996 State Council’s Resolution on Tightening the Control over Extra-budgetary Funds, 23 “extra-budgetary funds” refers to various funds collected by                                                                22 A good example for this can be found in Zhou Qingzhi, Zhongguo xianji xingzheng jiegou jiqi yunxing—dui W xian de shehuixue kaocha [Administration and operation of the county government of China: A sociological study of W County] (Guiyang: Guizhou renmin chubanshe, 2004), especially chapter 5. 23 “Guowuyuan guanyu jiaqiang yusuanwai zijin guanli de jueding” [The State Council circular concerning strengthening the control of the funds out of budget], published on July 6, 1996. 

Page 15: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 576

government agencies following state laws and regulations in order to perform certain government functions. Unlike the formal budget, which is always subject to rigid regulation and supervision, extra-budgetary finance is less rigidly regulated. Local governments thus enjoy more discretion in handling extra-budget items to suit their agendas.24 Though it is widely believed that extra-budget finance expanded rapidly in the reform era due to rapid socio-economic transformation and changes in government functions, empirical study of this subject is hampered by the lack of direct information.

In T County, we have found some extra-budgetary figures published in the county gazetteer. For example, we are told that extra-budgetary revenue and expenditure in 1949–76 varied from ten thousand to a half million yuan. The total sum of revenue during this period was 4.48 million, and the total sum of expenditure was 4.64 million. Entering the reform era, the scale of extra-budget financing expanded substantially; data up to 1988 show that annual revenue and expenditure varied from 100,000 yuan to 1.5 million yuan. The total sum of extra-budget revenues from 1977 to 1988 was 8.83 million yuan, and expenditures 9.82 million.25 However, we know nothing about the sources and uses of these extra-budgetary funds. We also cannot judge if these figures are accurate; they are very likely deflated.

Through field-work, we obtained first-hand data of T County’s extra-budgetary finances for 1993 to 2003, thanks to the trust and understanding of local officials. These materials allow us to have a closer look at extra-budgetary finance (Table 10). The evidence demonstrates that extra-budgetary finance was astonishingly huge in this county in the 1990s and early 2000s. In most years during this period, extra-budgetary revenue was larger than the budgetary one, and was also larger than subsidies from the province (Table 11). It also grew very fast; during these eleven years, the total extra-budget activity expanded more than four times.26                                                                24 Anwar Shah and Qiao Baoyun, Difang caizheng yu difang zhengfu zhili: guoji jingyan pingshu [Local finance and governance: A review of international experiences] (Beijing: Renmen chubanshe, 2006), 20–23. 25 T xianzhi [T county gazetteer] (Shanghai: Hanyu dachidian chubanshe, 1992), 338–39. 26 This is a normal not exceptional situation. Many studies have found that in the reform era extra-budgetary revenue in local finance has become equal to or even larger than budgetary revenue, and its size and scale is closely related to the level of local economic development (Huang Peihua, Zhongguo: goujia fazhan yu difang caizheng [China: State development and local finance] (Beijing: Zhongxin chubanshe, 2003); Yang Zhigang, Caizheng fenquan lilun. Recently, the Central Government is determined to end extra-budget practices once for all. A new draft of the amendment to the budget law has been circulated and debated, suggesting that all extra-budgetary revenues be put into budgets (“Yusuanfa xiuzheng’an zhengqiu yijian, yusuanwai zijin jiangcheng lishi” [Draft amendment to the budget law is soliciting opinions, extra-budgetary funds will become history], Caijing guojia zhoukan [Economy and nation weekly], November 9, 2010.  

Page 16: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 577

 

 

Table 10 Extra-Budgetary Finance, 1993–2003 (In million yuan)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Revenue Administrative

service fees 31.81 42.75 73.87 114.64 77.72 48.57 78.89 93.22 108.00 138.95 156.34

Special levies & surcharges 9.47 23.33 17.09 2.34 8.12 28.38 4.19 12.83 14.23 9.63

Township self financing 17.74 16.17 15.34 24.50 7.40 21.17 21.97 27.67

Other 0.64 0.94 0.10 22.94 23.70 29.12 10.69 30.92 0.37 0.77 Roll-over from

last year 14.29 16.53 26.17 47.47 69.65 30.72 22.74 19.41 37.46 46.03 44.63

Total 56.21 83.55 117.23 205.13 187.24 131.87 165.20 155.14 179.83 221.95 238.27

Expenditure Administrative

expenses 24.35 28.42 41.40 59.43 61.17 69.68 82.33 116.71 99.38 107.05 103.05

Capital construction 9.24 11.63 28.68 40.23 20.06 17.29 24.02 7.44 10.64 15.82 26.83

Urban maintenance 2.12 1.71 1.71 4.15 2.91 2.69 4.12 3.39 3.40 2.97

Township expenditure 3.24 12.27 21.02 22.84 5.35 20.97 22.04 27.59

Other 3.97 13.71 19.18 23.82 22.14 1.14 1.69 8.84 10.09 4.11 3.46 Convert to

budgetary revenue

1.00 8.00 8.00 12.00

Roll-over to next year 16.53 28.08 26.26 74.22 68.69 22.74 30.63 12.68 27.54 61.53 62.37

Total 56.21 83.55 117.23 205.09 187.24 131.87 165.20 155.14 180.01 221.95 238.27

Table 11 Total Revenue and Expenditure, 1993–2003

(In million yuan) Budgetary

revenue

Extra- budgetary revenue

Subsidies Budgetary expenditure

Extra- budgetary

expenditure Remittance

1993 80.32 41.92 7.17 74.88 39.68 14.61 1994 48.56 67.02 59.68 90.47 55.47 20.50 1995 58.01 91.06 66.81 101.49 90.97 22.48 1996 61.89 139.92 71.21 110.97 127.63 23.71 1997 61.15 101.42 76.52 121.39 106.28 23.53 1998 71.70 85.81 81.42 137.20 88.11 25.17 1999 88.02 117.95 93.51 166.49 111.73 32.03 2000 131.27 128.33 116.12 228.48 137.11 39.95 2001 185.03 121.20 149.17 284.64 131.50 56.16 2002 201.08 153.95 261.24 373.04 138.38 62.88 2003 258.41 165.97 313.60 451.77 148.31 86.56

1993–2003 1,245.44 1,214.55 1,296.45 2,140.82 1,175.17 407.58

Page 17: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 578

 

It seems that with this large amount of funding the county government could do something significant in local development, but a careful examination shows us otherwise. The main source of extra-budgetary revenue, as we may expect, came from fees for various administrative services. The main outlay of extra-budgetary expenditure was, to our surprise, for administrative expenses. That means that extra-budgetary finance is basically a self-serving business: the administration collects these funds to support itself to continue to collect more of these funds. Just as finance officials told us, fees collected by various administrative agencies in most cases could only offset their own expenses; some even fell short.27

To be sure, there were funds spent in capital construction and urban mainten- ance (Table 10), however, in most cases, the money spent in such undertakings was not for the local economy. Rather it was for non-productive purposes, mostly to serve the needs of administration and government personnel. Here, a very detailed balance sheet of extra-budget items for the year 2000 is illustrative (Table 12). That year, administrative expenses surpassed administrative service fees and special levies combined. The money was used to pay government staffs, especially to pay government business expenses, also to pay for office equipment, etc. The money spent on capital construction is clearly stated as non-productive; officials in the finance bureau told us this category of extra-budgetary expenditure was used for government office buildings and school buildings.28 Of course, this expenditure would also create jobs thus increase local employment and consumption, but this is certainly different from the effects of capital construction for productive purposes of the local economy.

Table 12 Extra-Budgetary Balance Sheet, 2000

(In million yuan) Revenue Expenditure

I Administrative service fees 93.31 I Administrative expenses 116.71

II Special levies & surcharges 4.11 Personnel expenses 27.47

Social security expenses 10.47

Business expenses 50.43

Equipment purchases 6.72

Repair expenses 7.66

Other 13.96

II Capital construction 7.44

(To be continued)                                                                27 Interview with the Finance Bureau. 28 Ibid. 

Page 18: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 579

 

 

(Continued) Revenue Expenditure

Productive expense 0.26

Non-productive expense 7.18

III Urban maintenance 4.12

III Township self financing 7.40 IV Township expense 5.35

IV Other income 30.91 V Other expenses 8.84

Subtotal 135.73 Subtotal 142.46

V Roll-over from last year 19.41 VI Roll-over to next year 12.68

Total 155.14 Total 155.14

Although the extra-budgetary finances were huge, the contribution to T

County’s local development was limited, judging in monetary terms. Combining both budgetary and extra-budgetary expenditure, the government contribution in fixed investment during the reform era was still quite small. This can be attested by Table 13.

Table 13 Government Share of Fixed Investments, 1993–2003

(In million yuan)

Year All fixed investments

Budgetary investments

Extra-budgetary investments

Government share

1993 410.88 8.62 11.36 5%

1994 363.63 4.90 13.34 5%

1995 508.96 5.46 30.39 7%

1996 592.62 5.52 44.38 8% 1997 423.66 6.62 22.97 7%

1998 553.70 6.56 17.29 4%

1999 814.17 10.22 26.71 5%

2000 1,294.49 19.91 11.56 2%

2001 1,302.36 23.84 14.03 3%

2002 1,600.46 29.86 19.22 3%

2003 2,398.02 59.77 29.80 4%

Total 10,262.95 181.28 241.05 4%

Note: Both government budgetary and extra-budgetary investments included urban maintenance expenses. 

Extra-Fiscal or Extra-Institutional Finance Since budgetary finance was “eating” expenditure and extra-budgetary finance

Page 19: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 580

was self-serving, what else was available to the county government to finance the local economy? Officials from the county finance bureau told us in a very straightforward manner that the greatest source of revenue was fees from land transfers (tudi churangjin 土地出让金). They told us that in recent years, land transfer fees had greatly surpassed regular revenues.29

According to regulations, land transfer fees are budgetary revenue in the context of local finance, or at least extra-budgetary revenue.30 However, we did not find this category in both books. In budgetary revenue there were the real estate tax and urban land tax, also farmland occupation tax found (Table 7), but their total is relatively small in the whole budget. They first appeared as separate revenue categories in 1998, totaling 9 million yuan, against a total budgetary revenue near 72 million. In 2003, their sum was only 20 million yuan as against 258 million of total budgetary revenue. This means that in T County land transfer fees were kept outside the fiscal regime and therefore were extra-fiscal funds.

In China, the fact that local governments run via extra-fiscal finance is not a secret, but practice and knowledge of it have become nearly universal in the reform era. People label the practice extra-institutional (tizhiwai 体制外). Since it is outside the fiscal regime, it is not subject to any fiscal regulations. However, from another perspective, extra-fiscal finance remains a closely guarded secret. No local government wants it to become the target of criticism and scrutiny. Therefore, extra-fiscal finance is a more sensitive topic than extra-budget matters.

Fortunately, in T County we were able to get access to information about land transfer and related issues. According to officials from the Land and Resources Bureau (国土资源局) of T County, in the 1990s annual land expropriation was about 1,000 mu. Entering the new century, the scale of expropriation swelled significantly to reach 4–5,000 mu a year. According to their estimate, the total of land transfer fees since 2000 was around 2 billion yuan.31 This amount almost equals all budgetary, extra-budgetary revenues and transfer payments combined in these years! However, we could not find these striking, astronomical figures anywhere in the county’s fiscal accounts.

The information we obtained from the Land and Resources Bureau included all land transactions registered by the bureau between 1994 and 1999, and between 2000 and June 2004. They are summarized in Table 14 and Table 15. Table 14 shows that between 1994 and 1999, there were 123 land transactions and the total acreage transferred was 646 mu. Between 2001 and June 2004, land                                                                29 Interview with the Finance Bureau. 30 The 1994 tax distribution system provides that land transfer fees are a legitimate source of local revenue, and the 1994 state budget law requires all government revenue be brought into government budgets and managed following government regulations and law. 31 Interview with the Land and Resources Bureau of T County, July 16, 2004. 

Page 20: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 581

 

 

transaction cases were 123, and total acreage transferred was, however, 2,413.5 mu. Both figures are far smaller than what the officials from this bureau have told us. Information about land transfer fees in the period 1994–99 is not available, and the total of these fees for 2001–2004 is 1.65 billion yuan. This figure is quite close to the estimate by officials from the bureau. Table 14 Land Transaction Summary, 1994–2004 (as granted)

Total transactions

Industrial use

Commercial, residential &

other use

Acreage transacted

(mu)*

Industry (mu)

All others (mu)

Land transferring fees (million yuan)

1994 35 30 5 169.19 ? 1995 36 29 7 232.18 ? 1996 24 16 8 123.04 ? 1997 14 8 6 61.9 ? 1998 5 1 4 35.27 ? 1999 9 8 1 24.52 ?

Subtotal 123 92 31 646.1 398.64 247.45 ? 2001 54 29 25 435.77 199.93 2002 28 5 23 1533.96 796.74 2003 21 0 21 111.82 125.55

2004(1–6) 20 0 20 331.96 535.21 Subtotal 123 34 89 2413.51 862.81 1550.7 1,657.43

Total 246 126 120 3059.61 (2001–2004) 1,657.43

Note: 1 Chinese mu equals 1/6 acre. Table 15 Land Transactions in Category, 2001–2004

2001 2002 2003 2004 Total/ average

Commercial & residential use

Number of transactions 25 23 21 20 89

Total acreage (mu) 151.87 955.05 111.82 331.96 1550.7

Land transfering fees (million yuan) 172.98 743.23 125.55 535.21 1,576.97

Price/mu, (million yuan) 1.139 0.78 1.12 1.61 1.02

Industrial use

Number of transactions 29 5 0 0 34

Total acreage (mu) 283.9 578.91 862.81

Land transfering fees (million yuan) 26.95 53.50 80.46

Price/mu, (million yuan) 0.095 0.092 0.093

Though the land transaction registry seems incomplete, it does reveal some

enlightening truths about how land was used to finance local development. For example, Table 14 tells us that between 1994 and 1999, a total of 92 land

Page 21: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 582

transactions were for industrial purposes, with a total acreage close to 400 mu; and during 2001–2004, 34 land transactions were industrial, with total acreage of 863 mu. Information from Table 15 is more revealing: transfer fees charged on land for industrial use during 2001–2004 was only 93,300 yuan per mu, while land for commercial and residential use was charged more than one million yuan per mu! To be sure, the cost of land for industrial use was cheaper than that for commercial and residential development, but the difference certainly should not have been that large. Local officials told us that the money charged for industrial land simply could not cover the cost of land expropriation and preparation. The cost for expropriation (to compensate peasants for lost of land and income from the land and also for relocation sometimes. This is required by law32) from peasants was 50,000 yuan per mu, for land leveling (to prepare farmland ready for industrial construction) was 25,000 yuan per mu, plus various fees, the total cost will be 80,000 yuan.33 These figures certainly do not include costs for transportation and communication facilities and utility connections, which were significant.

We found this land story to be two-sided: on the one hand, huge amounts of revenue came in from the frequent land transactions at increasingly higher selling prices; on the other hand, land transferred for industrial use sold almost for nothing. Obviously, a zero price for land was to attract investments in industry. This is the way that local government financed local industrial development. The question that remains unanswered is where were those astronomical fees from land transactions since they were not found in the county government accounts? What were the outlays of these funds?

In T County, land transfers and transactions were not directly handled by the government administration. Instead, in most cases, it was handled by registered companies set up by county government agencies. All revenues generated from land transactions were kept in the accounts of these companies. They were therefore extra-fiscal and also extra-institutional. The county government could use these funds to pursue its goals without subjecting itself to fiscal regulations and hard budget constraint. A typical case of this is the Commission for New Town Development.

The New Town Story  The Commission for New Town Development was set up by the T County government in February of 2001. Members in the commission were mostly chief                                                                32 The pertaining law is Tudi guanli fa [The land management law]. The latest amendment was made in 2005. 33 Interview with the Commission for New Town Development, July 14, 2004. 

Page 22: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 583

officials from different county bureaus. The task of the commission was to build a new town southwest outside the old county seat.

Before this new commission was launched, urban development in T County focused on renovation of the old county seat. Since 1991, almost all the major streets of the old town had been renovated. Originally narrow streets were greatly widened (four lanes for motorcars, plus bike lanes and pedestrian sidewalks on each side), residents who lived there for decades, even generations, were relocated, and many fancy shops then came to occupy the new commercial blocks. All the renovation projects were finished without government funding, budgetary or extra-budgetary. The secret was, as we can guess, cheap land. The government expropriated land in the outskirts of the county seat from peasants to relocate old town residents; the expropriated parcels along major streets were then auctioned to developers. This policy provided a really lucrative business: the land transfer fees collected from developers are much higher than the combined costs for land expropriation and residents’ relocation. The initial capital was always bank loans. The government, however, did not directly handle land expropriation and land money. Instead, for each renovation project, a command bureau (zhihuibu 指挥部), a quasi-government agency headed by a county official as well as a registered company, was set up. The government granted free land to these bureaus for their renovation projects. Each command bureau kept land transfer fees in its own coffers, which were not subject to fiscal regulations. Renovations of older town areas proceeded forcefully and aggressively, and the face of the old town was changed in just a decade. Accomplishments notwithstanding, this process also caused many problems, including the abuse of authority in land expropriation and relocation, and the mishandling funds and other corruption. Mounting pressures from above and below finally brought to an end to all seventeen bureaus in 2003. They were reorganized and merged into a single entity, the Commission for Old Town Renovation, whose mission was just to tie up a few loose ends left by these bureaus. All their assets (about 1,200 mu of land) and debts were transferred to a newly-founded company called the T County State Assets Management Company, Ltd. The manager of the company estimated the market value of these land assets was 500 to 600 million yuan.34

Starting in the new century, the county government decided to launch a more ambitious plan for urbanization, that is, to build a totally new town outside the old county seat. The Commission for New Town Development was set up to execute the plan. According to this plan, the new town would cover 20 sq. km in area; 10 of them in the west would be the administrative and commercial center, as well as a residential area to host 100,000 residents (about the same area and                                                                34 Interview with the Commission for Old Town Renovation, July 22, 2004; Interview with T County’s Management Company of State Assets, Ltd. July 19, 2004). 

Page 23: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 584

population size of the old town); and the other 10 in the south was for an industrial park. In terms of financing and operation, the new town development followed exactly the pattern of old town renovation.

Since the Commission was a government agency which was not allowed by law and regulations to do business, it registered a company under the name of T County New Town Development & Construction Co., Ltd. The personnel of the company were exactly those of the commission.

The county government granted 6,000 mu to the company as a first installment of land investment. Using this land-on-paper as a guarantee, the company got a loan of 30 million yuan from a bank. With this loan money, the company expropriated several hundred mu from local peasants and made initial investments in infrastructure. The company then crafted a plan for real estate development. Instead of selling land to commercial developers, the company decided to sell houses still at the blueprint stage directly to homebuyers. The sale turned out successfully, and within a week all the 608 planned townhouses were sold. The total sales garnered 235 million yuan in cash. After taxes and fees the company pocketed a huge amount of revenue. With this revenue as working capital, the company could continue to expropriate land to keep development plans moving. By June, 2004, more than one billion yuan in land transfer fees had been accrued from the development of new town. After deduction of taxes, fees, and costs, the New Town Development & Construction Co. kept the remainder.35 The Land and Resources Bureau recorded 14 land transactions from the development company between July, 2002, and June, 2004, the acreage transferred was 579 mu, and the total fees collected by the company was 702 million yuan.

With such enormous funding, the company was able to finance new town development without spending a cent from the government’s budget. In order to attract more people who would like to live in the new town once its construction was complete, the company gave 300 mu of land free of charge to the T County Middle School, a provincial magnet school, encouraging it to move to the new town from the old town. According to the new town development plan laid out by the county government, the government itself would also eventually move to the new town. The company thus gave 300 mu of land free of charge to the county government (both the middle school and the county administrative buildings were completed in 2006). The company also granted land to the county hospital without charge. In the new industrial park, the company offered land for almost nothing (80,000 yuan/mu) to attract as many enterprises as possible. By 2006, a total of 43 companies moved in and have begun production. They created 1.2 billion yuan of GDP, contributed 110 million yuan of tax revenue.36 The                                                                35 Interview with the Commission for New Town Development. 36 http://www.tzfdc.com/fc/tzcj/200807/6985.html. 

Page 24: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 585

most important landmark event was the completion and opening of the commercial center of the new town in May 2004. A huge celebration was held to mark the historical inauguration of the new town.

The development of new town is a very successful story. In less than five years, a totally new and modern town rose up from former rice paddy fields. The speed of development would have been unimaginable in the pre-reform era. However, local people did not seem to appreciate the new town. Until 2008, the new town was just like a ghost town and very few people had actually moved in to live there.37 During the daytime, its streets have been quiet and empty; only in hot summer evenings do people gather in the huge square in its commercial center to enjoy the outdoor cool. Local people satirize this situation in a doggerel posted on the web: “The new town is really great, you can drive your car backwards without hitting anybody, you can sing at midnight without bothering anybody, and you can pee in the street in daylight without being noticed by anybody.”38 In addition, the development produced such problems as corruption, and grievances from land-deprived peasants, and the abuse and waste of land resources.

Concluding Remarks

T County’s case is typical, not unique. In the reform era, local governments have been granted great deal of autonomy to develop the local economy. However, under the existing fiscal system, for an average, not richly endowed, county like T County, the resources available to finance local development are very limited. Nonetheless, that local finance has expanded significantly. The key resource at local government’s disposal has been cheap land expropriated from peasants. Land thus is the key for us to understand local finance and local development in the reform era. This land finance has been made possible and often successful by the institutional arrangements embedded in China’s political economy. Of course, not all local governments have been able to benefit from land finance in the same manner and to the same extent. In addition to China’s macro political factors, for land finance to work a local area must first reach a certain level of economic development so that it can attract more and more people and businesses, which will dramatically push up land price. Otherwise, land finance will not work. That is why in general land finance is more successful in the eastern part of the country and less successful in the west.39 However, questions remain: is this                                                                37 Even today, housing prices in the new town are much lower than in the old town (both rental and purchase), suggesting more people want to live in the old town rather than the new town (this can be easily found on the real estate websites of T County). 38 http://www.tt.zj.cn/bbs/dispbbs.asp?boardid=55&Id=48650. 39 “Zhongguo tudi xianzhuang jiemi.” See also, Li Baochun, “Woguo tudi caizheng xianxiang ruogan sikao” [Some thoughts on China’s phenomenon of land finance], Caizheng yanjiu [Public finance research], no.7 (2010), 12–14. 

Page 25: Structural change in local finance during China’s reform era: A case study

                        Chang Liu 586

strategy of development sustainable and what challenges will it face in the near future?40 In addition, can this model of development be copied elsewhere and to what extent? Acknowledgements This paper is based on the information and data collected in a field study conducted by the Center for New Political Economy of Fudan University in July 2004. First, I would like to thank T County government and officials of various county bureaus for their understanding and help in our study. A dozen students and young teachers from Peking University, Fudan University, and Shanghai University participated in the field study, and I appreciate their efforts and contributions. I also appreciate the inputs and comments from my colleagues, Dr. Shi Zhengfu, Dr. Chen Ping, Dr. Cui Zhiyuan, and from professors of Cornell University: Chen Jian, Sherman Cochran, and Annelise Riles. Finally, I would like to thank two anonymous readers for their comments and suggestions, thank anonymous copy editor for her/his painstaking efforts to improve my English writing. I alone am responsible for mistakes that remain.

Chinese-Language Sources

Cheng Ruixian and Li Yan 程睿娴,李妍,《国内土地财政研究述评》,《经济问题探索》

2011 年 2 期, 127–31 页。 “Guojia shenjishu: 10 shengshi 600 yi tudi churangjin wei naru yusuan” 《国家审计署: 10 省

市 600 亿土地出让金未纳入预算》,《新京报》, 2009 年 7 月 18 日. “Guowuyuan guanyu jiaqiang tudi tiaokong youguan wenti de tongzhi” 《国务院关于加强土

地调控有关问题的通知》,2006 年 8 月 31 日。 “Guowuyuan guanyu jiaqiang yusuanwai zijin guanli de jueding” 《国务院关于加强预算外

资金管理的决定》,1996 年 7 月 6 日颁布。 Huang Peihua 黄佩华, 《中国:国家发展与地方财政》,北京:中信出版社,2003 年。 Jia Kang 贾康,《地方财政问题研究》,北京:经济科学出版社,2004 年。 Li Baochun 李保春, 《我国土地财政现象若干思考》,《财政研究》,2010 年,7 期,12–14

                                                               40 The central policy makers have become aware of the problems of land finance. As early as in August 2006, the State Council of the Central Government issued an official circular requiring all land transfer fees to be brought into government budgets, their revenue and expenditure strictly managed per fiscal regulations and procedures. Also the Ministry of Land and Resources will substantially strengthen its control over the change of land category (“Guowuyuan guanyu jiaqiang tudi tiaokong youguan wenti de tongzhi” [The State Council circular concerning questions involving the strengthening of local control], August 31, 2006). However, local governments did not follow the order faithfully, as the National Audit Office reported in July 2009; that year, 60 billion yuan of land transfer fees in ten provinces were not brought into government budgets (“Guojia shenjishu: 10 shengshi 600 yi tudi churangjin wei naru yusuan” [The National Audit Office: 60 billion yuan of land transfer fees in ten provinces have not been brought into government budgets], Xinjingbao [Beijing news], July 18, 2009). It may suggest that the jockeying between the central and local governments over land finance will not end any time soon. 

Page 26: Structural change in local finance during China’s reform era: A case study

Structural Change in Local Finance during China’s Reform Era 587

页。 Liu Hongmei, Zhang Zhibin, and Wang Keqiang 刘红梅、张志斌、王克强,《我国土地财政

收入研究综述》,《开发研究》,2008 年,1 期,141–44 页。 Shah Anwar and Qiao Baoyun 沙安文、乔宝云主编,《地方财政与地方政府治理:国际经

验评述》,北京:人民出版社,2006 年。 Shao Yuan 邵源, 《关于土地财政与财税体制改革问题综述》,《经济研究参考》,2010 年,

24 期,36–45 页。 T xian tongji nianjian《T 县统计年鉴》,1992 年,1997 年,2002 年,2003 年。 T xianzhi《T 县志》,上海:汉语大辞典出版社,1995 年。 Wang Shaoguang and Hu Angang 王绍光、胡鞍钢,《中国国家能力报告》,沈阳:辽宁人

民出版社,1993 年。 Wu Zhaoshen 吴兆莘,《中国税制史》,台北:商务印书馆,1965 [1937]年。 Yang Zhigang 杨之刚,《财政分权理论与中国地方公共财政改革》,北京:经济科学出版

社,2006 年。 “Yusuanfa xiuzheng’an zhengqiu yijian, yusuanwai zijin jiangcheng lishi”《预算法修正案草

案征求意见——预算外资金将成历史》,《财经国家周刊》,2010 年 11 月 9 日。 “Zhongguo tudi xianzhuang jiemi: tudi caizheng yu difang zhengfu”《中国土地现状解密:土

地财政与地方政府》,根据国务院发展研究中心中国土地政策课题组研究报告改写,《财

经》,2002 年 2 月 20 日。 Zhou Qingzhi 周庆智,《中国县级行政结构及其运行:对 W 县的社会学考察》,贵阳:贵

州人民出版社,2004 年。 Zhou Yuming 周育民,《晚清财政与社会变迁》,上海:上海人民出版社,2000 年。


Recommended