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Home arrow Political science arrow Dancing with the devil : the political economy of privatization in China


From Industrial Development to Urbanization

The bandwagon reactions of local officials to the policy change following the Fifteenth Party Congress in 1997 were coupled with a shift in the focus of their self-interest calculus. As I have discussed in chapter 3, the 1994 fiscal restructuring redefined the revenue bases of local governments and drove them to explore and expand revenue sources beyond the industrial sector. In particular increasing attention was directed to urban development, which quickly became the “new locus of economic growth” (xin jingji zengzhang dian) for many locales in the mid to late 1990s and beyond. The adjustment of local officials’ strategies along the way had important implications for the deepening of privatization.

A basic fact of life in the Mao era was that cities were centers of production and government administration rather than hubs of consumption. China’s postrevolution industrialization was achieved in part by limiting urban development despite the fact that the industrial sector absorbed the bulk of investment and most industrial facilities were located in urban areas. What the government did during the first three decades of the People’s Republic was to concentrate investment in capital goods industries that had relatively low demand for labor (Riskin 1987), to restrict rural-urban migration through the hukou (household registration) system (Cheng and Selden 1994), and to suppress citizens’ income and thus effective demand

Urbanization and tertiary sector growth, 1978-2010 Source

FIGURE 7.4 Urbanization and tertiary sector growth, 1978-2010 Source: CSY (various years).

for consumer goods and services (Whyte and Parish 1984). The result is a slow growth of urban population and a contraction of urban services relative to other economic activities. From 1952 to 1978 the share of the industrial sector in China’s GDP went up from 18% to 44%; but the share of urban citizens in the total population only edged up from 13% to 18%, whereas the share of the tertiary sector in GDP declined from 29% to 24% (CSA1999, 23, 77).

That pattern of urban underdevelopment has changed in the post-Mao era, with a drastic expansion of (more labor-intensive) consumer goods industries, massive rural-to-urban migration, and fast growth of service activities in response to rising income, demographic change, and pent-up demand for essential necessities (e.g., housing) and facilities that were grossly undersupplied under the old system. Figure 7.4 shows a strong upward trend of the significance of both the urban population and the tertiary sector during the three decades after reform. Figure 7.5 further shows that in the 1990s and beyond the traditional dominance of the secondary sector in cities was eclipsed by the growth of the tertiary sector, which tends to concentrate in urban areas. Since the secondary sector includes both industry and construction and since urban development also entails an expansion of construction work, the declining relative significance of industrial activities in the urban sector as implied by figure 7.5 was likely to be greater than that of the secondary sector as a whole.

The Tipping Point and Beyond 213

Share (%) of secondary and tertiary sectors in city GDP

FIGURE 7.5 Share (%) of secondary and tertiary sectors in city GDP

Source: CCSY1990, 2000,2010.

A corollary of these developments is the rising importance of urbanization for addressing the employment and revenue imperatives of local governments (Ho 2005; Hsing 2010). Such importance was further enhanced and accentuated by the 1994 fiscal restructuring, which demarcated the lion’s share of industry-related taxes as central government revenue, as noted in chapter 3. The impact of this change on the self-interest calculus of local officials is twofold. It diluted the attention of local officials to industry as a weakening source of revenue and thus drove them to focus on local and nonindustrial revenue sources, such as the business tax, which was defined as a local tax and levied on a wide range of services as well as construction activities. It also reinforced local officials’ attempts to promote land acquisition and transactions for urban development, as the fees for transfers of land use rights and various other proceeds from urban and suburban land transactions were not only local but off-budget revenues (thus subject to more discretionary use).

Yet the tertiary sector and construction were not where the traditional strength of public enterprises lay. Despite the waning fiscal importance of industry-related revenue,[1] in 1995 (when public sector employment peaked) 60% of the workforce of nonfinancial SOEs was still deployed in the industrial sector (CSOAY1996, 450). The percentage was 73% for

Share (%) of public enterprises in total real estate investment, 1997-2012 Source

FIGURE 7.6 Share (%) of public enterprises in total real estate investment, 1997-2012 Source: CRESY1999-2 013.

TVEs in that same year (CTEY1996, 99). On the other hand, private business organizations, especially getihu, had a significant presence in nonindustrial activities. In some sectors that did not exist before the reform, such as real estate, they had even quickly developed an early lead before massive privatization began in 1997,[2] as suggested by the statistics in figure 7.6. To promote urban development, which could also create jobs for placing redundant personnel from the predominantly industrial public sector, it was necessary for local governments to allow the private sector to play a more significant role.

Moreover, a major consequence of the industrial buildup under Mao is that many public enterprises, especially SOEs, were located in areas with close proximity to city centers or even within city centers proper. With the expansion of urbanization, the land they occupied had growing potential for more lucrative alternative uses, especially with the deterioration of their financial performance before the start of massive privatization. Opportunity cost considerations tended to drive local officials to close down the public enterprises

Table 7.5 Industrial enterprises centrally located in urban areas


Number of industrial enterprises

% of public enterprises in industrial

located in urban centers

enterprises located in urban centers







Note: Urban centers are proxied as the postal code zones where the headquarters of prefecture- level governments were located.

Sources: 1995 industrial census data; 2004 economic census data.

located in more centrally located sites or sell them at premium prices to parties that subsequently would also help generate greater benefits through alternative (especially service-related) uses of the underlying space. Table 7.5 shows that from 1995 to 2004 some 60% of the industrial enterprises located in urban centers at the prefectural level disappeared from their previous sites. In 1995 86.3% of those situated in central locations were public enterprises. In 2004 public enterprises only accounted for 25.8% of the ones remaining in the reduced pool.[3]

What these descriptive statistics suggest is a possible link between the new focus of interest for local officials and the fate of public enterprises in urban areas. To explore whether opportunity cost considerations associated with urban development had any accelerating effect on the pace of privatization, I have performed an analysis of data on industrial SOEs during the tidal years of privatization.[4] The main hypothesis tested is whether, other things being equal, the shorter the distance of firm location to the city center the earlier the demise of an industrial SOE. What the analysis reveals is that there is indeed a strong positive correlation between these factors. This suggests that the desideratum ofvacating prime sites occupied by industrial SOEs for urban development probably hastened the elimination of many of these enterprises.

  • [1] In 1980 the industrial sector contributed 77% of government revenue; in 1995 this share droppedto 44% (FYC1996, 517).
  • [2] An interesting twist in this connection is that some of the private business people who earned their“first pot of gold” in China’s first real estate boom in the early 1990s were former government officialsor employees. They used their political connections to leverage opportunities and funds for land acquisition, construction, and speculation. Their activities not only directly expanded the space of the private sector but accelerated the organizational decay of the state and exacerbated the financial woes ofstate-owned banks (with some 400 billion yuan of bank lending lost in various misuses, according toPremier Zhu Rongji [2011, 2:511]), both of which also contributed to the decline of public ownership(Lin 2001).
  • [3] The privatization of industrial SOEs located in or near urban centers did not necessarily leadto their immediate demolition for urban development, as it might take some time to work out thefinancial and regulatory arrangements and to overcome the challenges of accommodating affectedparties (e.g., employees, occupants, neighbors, and so on) for turning such strategic holdings intoreal estate projects. Nor did it necessarily take the form of a complete sell-off of the SOEs concerned,as the process could involve a dilution of public ownership through various quasi-private organizational forms and/or gradually phase into deepening private ownership. There were also cases wherelocal governments acquired or converted poorly performing industrial SOEs for urban developmentthrough real estate companies under their control (e.g., the Greenland Group and the Shenda Groupin Shanghai).
  • [4] Descriptions of the data source, variables and methods, along with regression results, are posted atthe book site.
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