Local Bank Branches

Local banks—primarily branches of the Construction Bank in the case of capital-construction (jiben jianshe ) projects that involve significant expansion of plant capacity, and the Industrial-Commercial Bank in the case of technical renovation (jishu gaizao ) and equipment purchases—have sharply defined and different interests in these matters than do the bureaus of taxation and finance. Banks study every loan application from an enterprise for its financial prospects. They want evidence that the firm's profitability will be significantly improved by the project (xiangmu ) and that the firm can repay the loan

[18] When mayors attend national or provincial financial work conferences in the fall of each year, the head of the finance bureau accompanies him and bargains on behalf of the locality for a larger share of collected revenues.

within the specified period of time entirely from its increased profits . Banks reject proposals that do not meet these financial criteria, unless the bureaus of taxation and finance, with the permission of the planning commission, are willing to cut taxes to allow the firm to repay. Since that is usually what happens, banks rarely end up killing investment projects.

The bank's attitude toward a loan application depends on the proposed source of funding. The great majority of funds for capital-construction projects are made through the Construction Bank and come not from bank deposits but from public finance funds or credits (caizhengxing jinrong or xindai ) from the budget of the city or a higher level of government.^[19] If the funding for the project is to come from the budget of the city or another level of government, it reaches the bank in the form of a grant earmarked for a specific enterprise. The bank manages the investment for the government, eventually returning all repaid principal to the public coffers while keeping the interest as a service fee. This practice is known as "loans from grants" (bo gai dai ). In these cases the role of the bank is largely to inform the finance bureau of the prospects for repayment of the loan. It is up to the finance and tax bureaus to come up with a package of tax breaks to allow the firm to repay if that is necessary.^[20] But whether the firm can repay does not greatly affect the bank, since its own credit reserves (xindai jijin ) are not at risk.

In many cases, however, a firm's municipal sponsors would prefer to have the project funded with the bank's own funds. This is the case for the great majority of loans for technical-renovation projects made by the Industrial-Commercial Bank.^[21] These loans, usually smaller than the

[19] Of the total loans made by the Beijing branch of the Construction Bank in 1985, "most" (da bufen ) were publicly financed (interview 107, July 1986); in Shenyang, 67 percent (interview 113, July 1986).

[20] The manager of one enterprise oversimplified the issue, but he pinpointed the cause of banks' continuing lack of independence when he said, "Banks are supposed to be independent now but in reality they can't ignore the government. Investment loans are set by the planning commissions at various levels. Banks simply carry out their orders once the project is put into the plan" (interview 90, Beijing, May 1986). An economic commission official stated the matter more precisely: "The planning commission makes decisions on individual cases for all investment loans. The bank can offer objections, and theoretically has the right to refuse in the end, but the planning commission decides who should get how much and for what purpose. The bank cannot plan and distribute funds, only check and approve" (interview 92, Beijing, May 1986). Another factory director said: "Generally speaking, after the commissions have agreed, the bank won't block you. They have participated in these meetings all along" (interview 98, Beijing, June 1986).

[21] Regardless of the banks that disbursed the funds, investment from public finance was 46 billion, and from bank funds 18 billion yuan in 1984. See Naughton, "Finance and Planning Reforms," 629.

construction projects but much more numerous, are made from the substantial deposits that this bank keeps as manager of the accounts of local industrial enterprises. On loans of this type the bank involved will inspect the application more carefully and object more pointedly if there is too much risk. From the bank's perspective, the finance system can risk its own funds on marginal projects but has no right to force the bank to use its own funds to do so. The bank's protection of its own funds affects the funding process in two ways. First, bureaus and planning commissions will generally send only the better projects to apply for bank funds. Second, recalcitrant bank officers need to be "convinced" by local officials—usually from the planning commission or the vice-mayor's office—to "think over" their denial. In almost all cases, the city "convinces" the bank by tailoring a package of subsidies and tax breaks that will virtually guarantee that the firm can repay.