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Bipolar Concentration of Risk Taking

The most important type of resource in the state system is the fiscal revenue extracted through taxes and fees. Under China’s postreform public finance system, there are three basic patterns of net fiscal resource flows between lower and higher-level governments: surplus, break-even, and deficit at the lower level. When the economy under a local government generates more fiscal revenue than the local government’s authorized spending, part of the surplus is channeled (e.g., through direct upload known as shangjie under the pre-1994 system) to higher-level governments. When locally generated revenue is just sufficient for the local government to cover its authorized spending, there is little net flow to higher-level governments. When locally generated revenue falls short of authorized local spending, higher-level governments are mainly responsible for covering the gap, as it is not until recent years that local governments have been allowed to issue public debt indirectly or directly to address budgetary shortfalls (see note 32 in chapter 3). In addition, higher- level governments may download additional funds to local governments for special projects that they partially or fully finance, such as poverty eradication, conservation, and education.

Before 1994, the net flow of fiscal resources could be seen as the difference between fiscal uploads (shangjie) from lower-level governments and fiscal downloads or subsidies (buzhu) from higher-level governments.[1] The former represented the contribution of lower-level governments, whereas the latter embodied the obligations of higher-level governments to their subordinate governments. The 1994 fiscal restructuring brought about two major changes. Under the revenue partitioning setup (chapter 3), the “contribution” from a lower-level government now consisted mainly of the locally extracted taxes that were exclusively owned by its superior authority and the latter’s portion of taxes (minus refunds benchmarked to baseline levels) in the “shared” category.[2] The obligation of the higher-level continued to be subsidies, but their amounts substantially increased—largely because of the central government’s much improved fiscal power, and they were more clearly divided into general- purpose funds and funds earmarked for programs specified by the higher level.[3]

Table 6.4 sheds some light on fiscal dependence relations between counties and higher-level governments during 1988-2006,[4] when the main story of this book fully unfolded. What it shows is that some counties were regular recipients of fiscal subsidies from higher-level authorities because of chronic difficulties in revenue generation, whereas some other counties incurred budget deficit that had to be covered with ad hoc subsidies. These two categories overlapped but not entirely, as a regular recipient of subsidies might not have an imbalanced budget in a particularly year but a county not on regular fiscal transfer support might have to be bailed out when an imbalance occurred. Together they made up a sizable portion of the counties (including county-rank cities) in the country during the late 1980s and the 1990s. In contrast, an initially small number of counties were stellar performers with annual revenue of more than RMB100 million. A closer look at the detailed fiscal data from the same source (not shown here due to the limitation of space) reveals that their local economies generated more revenues (including taxes owned and shared by higher-level governments after 1993) than their

Table 6.4 Selected statistics (%) on fiscal conditions of counties

Year

Regular recipients of subsidies

With current-year budget deficit

With revenue of 100 million yuan or more

1988

55

36

3

i989

55

37

5

1990

55

46

6

i99i

53

50

7

1992

n/a

n/a

n/a

1993

57

59

i3

1994

55

59

6

1995

n/a

n/a

n/a

1996

44

4i

i5

1997

43

34

i8

i998

42

32

22

i999

49

35

27

2000

46

36

29

2001

44

36

32

2002

32

25

22

2003

34

23

25

2004

36

2i

28

2005

35

i9

3i

2006

32

i7

37

2007

n/a

i4

42

Sources: Annual local fiscal data sets (Ministry of Finance), 1988-1991; FSPCC1993-2007.

expenditures. In between were counties that had neither significant fiscal shortfalls nor surplus. Over time, the percentage of those heavily dependent on regular and/or ad hoc subsidies decreased, while more counties became fiscal “contributors” to higher-level authorities. There were nonetheless considerable variations among different provinces in terms of both the relative significance of the dependents and contributors, and the changes over time.

What these facts illustrate is that during the 1990s and the early years of the new century (when privatization progressed and deepened), the local policy environments for FDI were conditioned by a wide range of dependence relationships between the gatekeepers and their supervising authorities. Where a local government was a net fiscal contributor, it tended to be in a strong position to leverage this situation for more flexibility in FDI policy implementation, thus containing the political risk of rule bending. Where the opposite was true, such ability tended to be weak, as in the case of “breakeven” locales. At the other end of the spectrum were local governments that not only made no net contribution to higher levels but absorbed large and growing amounts of fiscal subsidies for addressing the basic needs of local public administration. But there is a twist to such seeming disadvantage. These governments represented a drag on the political performance of their supervising authorities and on the fiscal resources that the latter commanded or “filtered” (e.g., from centrally allocated fiscal transfers). The need to contain or reduce such liability thus could engender a special type of dependence relationship, where the more resourceful party might be willing to “trade” policy flexibility for improvement in the self-financing ability of the less resourceful party.

It follows that the resource positions of different local governments were likely to bear a curvilinear rather than a linear correlation with their tendencies to ease centrally imposed restrictions on the entry points and organizational forms of FDI. Other things being equal, rule bending was most likely to occur where the local governments either had extremely strong or extremely weak fiscal resource positions vis-a-vis their immediate supervising authorities.

A case in point is the southern province of Guangdong. Because of its geographic proximity to Hong Kong and Macau, historical ties (as the main region of emigration during the century before the founding of the PRC) with overseas Chinese (who were the main investors in China during the 1980s and 1990s) (Wang 2003), home to three of the initial four special economic zones, and more liberal foreign economic policies adopted by local leaders (Vogel 1989), Guangdong has been the leading province in China’s economic internationalization, especially during the early years of reform. In 1995 it accounted for 27.1% of the inbound FDI and 38% of the export of China (GDSY1996, 238-240; CSY1996, 312-314). It is also a province of enormous internal diversity and variation in terms of economic development. The Pearl River Delta is the most dynamic and developed region, whereas the eastern and western regions of the province have lagged far behind. Northern Guangdong is the least developed region. Situated in mountainous areas, it has had the lowest GDP per capita, as well as two of the three nationally designated poverty-stricken counties in the province and eleven of the thirteen provincially designated poverty-stricken counties. It also has much greater degree of dependence on fiscal transfers from higher-level authorities than other regions in the province, as can be seen from table 6.5, which also profiles some important organizational features of industrial FDI in the province.

Table 6.5 Selected statistics on foreign-invested industrial enterprises in Guangdong, 1995

Region

% of central & provincial SOEs facing FDI firms in the same prefecture & 4-digit sector

%

of WFOEs in total number of FDI firms

% of WFOEs in total number of FDI firms in “restricted” sectors

% of WFOEs in total number of FDI firms in “prohibited” sectors

% of WFOEs in total number of sectors with JV stipulation

% of public- foreign JVs with foreign majority (50+%) shares

% of private- foreign JVs in all JVs

GDP

per

capita

(yuan)

Fiscal download as % of local spending

Pearl River

39.2

20.4

29.6

26.1

20.7

37.5

36.5

22,741

20.3

Delta

Northern

37-i

45.4

31.3

22.6

19.3

41.2

26.1

3,330

62.7

Eastern

20.2

17.7

10.9

13.2

18.4

22.3

25.2

4,704

47.8

Western

13.2

9.7

7.3

9.5

13.1

2.1.7

17.6

5,487

46.8

Note: The Pearl River Delta consists of Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Jiangmen, Dongguan, Huizhou, and Zhaoqing. Northern Guangdong includes Shaoguan, Qingyuan, Heyuan, and Meizhou. Eastern Guangdong includes Chaozhou, Shantou, Shanwei, and Jieyang. Western Guangdong includes Zhanjiang, Yangjiang, Maoming, and Yunfu.

Sources: 1995 industrial census data; GDSY1996; FSPCC1995.

Interestingly, it is the Pearl River Delta and the northern region where the entry and organizational patterns of FDI demonstrated the greatest degrees of inconsistency with the vested interests of higher-level authorities, as shown by the greater threats posed by foreign-invested firms to the public enterprises owned by these authorities and located in the prefectures concerned. They also had more significant deviations from the gatekeeping and regulatory biases and requirements set by the central government pertaining to WFOEs, entry restrictions and bans, foreign controlling stakes in joint ventures with public enterprises, and joint ventures with domestic private enterprises. Nonetheless, the bipolar correlation between resource dependence and apparent local rule bending as suggested by these limited descriptive statistics may be specific to the particular year shown and/or subject to distortions by other relevant factors that are not controlled for. To further investigate the possible causal link suggested by the descriptive statistics, I analyze more systematic data with greater geographic and time span.

The focal issue of my data analysis is how intragovernmental resource dependence, as a key factor shaping the bargaining positions of local governments vis-a-vis higher-level authorities, affected the tendencies of local officials to bend formal and informal rules on the entry points and organizational forms of FDI. Specifically, I explore whether resource dependence, proxied with the local fiscal subsidy-contribution ratio divided by the pertinent provincial average, had a curvilinear or bipolar effect on the likelihood of (a) central and provincial SOEs being directly exposed to FDI entrants in the same prefectures and (four-digit) industrial sectors, (b) bending of centrally imposed restrictions on the entry point and organizational form of FDI, (c) rising foreign shares in public-foreign joint ventures, and (d) growth of joint ventures with domestic private enterprises. The time span is from 1993 to 1999, for which the necessary panel data are available at the prefectural level. It was also the period when ownership restructuring in the public sector built up and reached a crescendo. Details about the data, variables, methods, and regression results are posted at the book site. The main findings are as follows.

First, prefectures that had the strongest or weakest fiscal positions relative to higher-level authorities were more likely to have greater degrees of rule bending than prefectures that were fiscally neither very strong nor very weak. This finding is consistently strong in the regression analyses on the direct local exposure of central and provincial SOEs to FDI entry, the violation of centrally imposed restrictions on the entry point and organizational form of FDI, and the growth of private-foreign joint ventures. As I have pointed out earlier, the political risks associated with these (the first two in particular) types of behavior tended to be greater than reducing public shares in joint ventures (which, as discussed below, could serve as a way to tackle organizational and financial problems faced by the enterprises concerned).

Second, the estimation results from the regressions on rising foreign shares in joint ventures with public enterprises only show a marginally significant curvilinear effect (atp < .10). In the meantime, however, the estimates for financial health (proxied by debt-equity ratio and profitability) yield significantly strong results. This suggests that the declining significance of public shares in joint ventures might be more strongly related to the financial health of the enterprises concerned than to the bargaining positions of the pertinent local government vis-a-vis higher-level authorities. It could be due to weak bargaining positions of the local government concerned vis-a-vis foreign investors in face of poorly performing enterprises in the local public sector, or attempts by the local governments to use FDI as a conduit to rescue financially troubled public enterprises, as argued in Huang’s study (2002), or a combination of both.

Third, forming joint ventures with local public enterprises had an enhancing effect on the abilities of foreign investors to enter the regions and sectors already populated by central and provincial SOEs. This result suggests that the tendencies of local governments to grant entry sought by foreign investors against the interests of higher-level authorities were not only conditioned by their bargaining positions but were also motivated by the incentives and opportunities to address their parochial interests associated with avenues they could directly exploit. Where both conditions were present, privatization through internationalization tended to go farther and faster.

  • [1] There were two types of fiscal upload: (a) remittance of a portion of local (surplus) revenue tohigher-level authorities as an obligation of the local government under the fiscal contract, and (b)remittance of funds for special purposes (e.g., the local government’s share in covering the cost of taxrebates for exports) and funds from a host of locale-specific sources (e.g., port fees in Shanghai duringthe late 1980s and early 1990s). There were also two types of fiscal download: (a) subsidies for localeswith revenue shortfalls, and (b) subsidies for special projects or purposes (e.g., infrastructure, education, poverty eradication, etc.).
  • [2] In central-provincial relations, fiscal upload remained a separate “legacy” category of fiscal flow. Itreferred to the annual remittance equivalent to the amount of contributions required of provincial governments in 1993 (which were in effect offset to various degrees by tax refunds benchmarked to baselinelevels), and to tax rebates for exports. In 2009 these items were deducted from central fiscal downloads,effectively eliminating upload as a flow category in the central-provincial interface.
  • [3] It should be noted that during the decade after the 1994 restructuring fiscal flows at sub-provinciallevels continued to be governed mainly by different variants of the fiscal contract system (Zhang Zhihua2006a and 2006b). Where the revenue partitioning arrangements were adopted, the demarcation ofexclusive and shared ownership of tax categories between superior and subordinate governments wasnot as uniform and stable as that in the central-provincial interface (ibid.).
  • [4] During the 1980s and 1990s, with the exception of Zhejiang and Hainan, public finance of mostcounties was placed under the purview of prefectural cities, which in turn were under the purview ofprovincial governments. Since the turn of the century an increasing number of provinces have carriedout reforms to place counties under the direct purview of provincial governments.
 
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