Nonbank Sources of Capital

The erosion of central control over local banks is in itself insufficient to explain the ability of the localities to continue to grow during the period of retrenchment. The diversion of funds was similar to the evasive strategies that local officials used during the Maoist period. They could frustrate the center's attempts at control, but the diversion of such resources was not sufficient to make up for the cutbacks. Localities survived the retrenchment period because they also had locally owned funds.

Chapter 4 outlines various support loans and unofficial credit that counties, townships, and villages were able to provide rural enterprises. Those funds existed because of the property rights that local governments had over a portion of the tax revenues and, most important, the rights to extrabudgetary funds that were exempt from revenue sharing, as well as to funds raised at the township and village levels. The substantial amount of these funds played a crucial role in allowing township and village enterprises to survive the retrenchment. In the longer term, they have dramatically affected the balance of resources between the center and the localities.^[86]

Alternative Credit Institutions

In the latter part of the 1980s localities established local savings and loan institutions outside the central banking system.^[87] A township official proudly stated that his township had been able to survive the tight credit policies because it had set up a financial service center (jinrong fuwu suo) to accumulate funds for use in the development of rural enterprises and agriculture.^[88] He carefully pointed out that this money was not spent for education or health, only for economic development. He went on to explain that the service center had been set up in response to the

[86] Chinese analysis strongly echoes this view. See, for example, Yu Jinman and Weng Xing'ou, "A Humble Opinion about Current Problems in Macroeconomic Management and How to Deal With Them," Zhongguo jingji wenti, 20 March 1990, no. 2, pp. 16-19, translated in JPRS-CAR-90-049, 11 July 1990, pp. 36-39.

[87] The importance of these channels is also noted by Hua, Zhang, and Luo, China.

[88] Unless otherwise noted, the information in this section is from Cl 52490.

difficulties and the red tape involved in securing loans at the local credit cooperative. The financial service center made credit available to collective enterprises and private entrepreneurs. It was set up in 1988, and by May 1990 it had granted three hundred loans. The application procedure was fairly simple. For loans over 20,000 yuan, approval had to be obtained from a financial service center management committee (jinrong fuwu suo guanli weiyuan hui).

It is apparent that the financial service center was set up by local officials to circumvent the regulations that constrained funds held at local banks and credit cooperatives. Top local officials usually did not serve on the boards of these financial centers, but their tacit support was evident. In the above case, two of the nine board members held minor government positions.^[89] One-quarter of the funds of the financial service center came from the county Agricultural Bank.^[90] The largest percentage of its funds—more than 60 percent—came from the local peasant population. The rest of the money came from local enterprises themselves, which deposited their funds here rather than in the banks or savings and loan cooperatives.

Such semiprivate credit institutions were unlike the official savings and loan cooperatives. Most important, these institutions were outside the credit restrictions imposed by the retrenchment policies. In the case just described, the township's ten enterprises had all borrowed from the financial service center. The biggest borrower was a construction materials company that obtained 600,000 yuan in a number of small loans in February 1990. Moreover, because there was no residence requirement for those who used the service center, villages from other townships could also borrow from the institution. In fact, one of the largest loans given by the financial service center was to a village from a nearby township. In March 1990, this village borrowed 1.8 million yuan for use in a textile factory. The village was charged an interest rate of 15.8 percent and was given one year to repay.

It is difficult to determine how widespread such institutions were during the 1988-1990 period. Statistical information about them is not included in the various yearbooks. Similar organizations, some privately operated, have been reported in areas such as Wenzhou. The local offi-

[89] One was a member of the town government and the other a head of one of the township administrative offices.

[90] At the end of 1989, the service center received from the Agricultural Bank 2 million yuan in loans, which were repayable with interest.

cials who spoke about the financial service center cited above boasted that theirs was the only such organization in their prefecture. By the mid1990s, however, as I indicate in chapter 4, there was an explosion of such private or semiprivate financial institutions. Some counties had one in each township. They ranged from village-level credit cooperatives that rivaled the township credit cooperatives to pawn shops.^[91] All had the implicit, if not explicit, support of the localities.

County Support Funds

Retrenchment policies called for localities to stop adding funds to the pots of the various government agencies that provided low- or no-interest loans to local enterprises. Some localities may have followed this instruction, but some agencies already had sufficient funds to continue offering loans to selected enterprises by the time the cuts were mandated. The increase in extrabudgetary funds at the county level undermined the effectiveness of the center's attempts to cut off sources of credit. Moreover, there is evidence that during the retrenchment period, the funds were not summarily cut off. The money for these pots continued to be provided by local governments, from the province on down, during the retrenchment. Local governments at all levels tried to help their localities weather the tight money situation by directly granting economic assistance to enterprises through low-cost agency loans from their own funds.

Detailed county-level data reveal the resources potentially available through local government channels. The finance bureau in one North China county had various forms of support that it doled out on a caseby-case basis. There was a "develop agriculture" fund (nongye fazhan zijin) that was established as a result of a provincial-level directive. In 1990 this account contained 3 million yuan.^[92] There was also a special extrabudgetary fund known as the "support agriculture" fund (zhinong zhouzhuanjin), which in 1990 totaled 2.365 million yuan.^[93] Within this fund, there was a "finance support fund" (caizheng fuchi zijin) designated specifically for the support of collective enterprises; in 1988 it

[91] See, for example, "Credit Cooperatives Help Rural Economic Growth," China Daily, 7 November 1992, p. 1, in FBIS-CHI-92-217, 9 November 1992, pp. 50-51; "Lun nongcun xinyongsuode"; Zhongguo nongcun jingji; "Diandang ye yingyou mingquede jingying guifan" (Pawnshops Should Have Well-Defined Operational Rules), Guangming ribao, 11 August 1993, p. 3.

[92] Cl 8891.

[93] CI 8791.

amounted to 640,000 yuan. Between 1981 and 1987, a total of 2.03 million yuan was lent from this fund. The county government determined the amount to be put into the fund, which included repayments as well as new allocations.^[94] Table 7 illustrates the amounts provided by the province, the prefecture, and the county as supplements to the finance bureau loans. The county gave less in 1989 than in 1988, but the funds from the province and the prefecture increased significantly in 1989, despite the retrenchment.

A similar situation existed with regard to the county tax bureau loans, as table 8 shows. Total funds lent to more than sixty enterprises between 1984 and 1987 amounted to 400,000 yuan. After 1988, there were yearly increases, from 300,000 yuan in 1988 to more than double that amount by 1991. In 1989 the tax bureau handed out 470,000 yuan in

[94] CI 6288.

loans to about twenty enterprises.^[95] Interviews with tax officials reveal that for this bureau, at least, the sources of funding were relatively secure and substantial by the time of the retrenchment. The funds the county tax bureau used for enterprise loans were drawn from a number of local sources. One source was taxes on the private sector. The bureau was allowed to keep slightly more than 2 percent of these.^[96] In addition to tax moneys, supplementary amounts came from surplus allocations in the tax bureau budget granted by the county finance bureau.^[97] The tax bureau was able to retain 20,000 yuan from these allocations. In addition, a temporary sales tax (linshi jingyingshui) was levied on traders (fanmaizhe) at a rate of 5-8 percent, depending on the prices of the goods sold. This tax amounted to about 500,000 yuan in 1987.^[98]

Funds from county science and technology commissions were particularly valuable because enterprises had to repay only 70 percent of such loans.^[99] When local sources were insufficient, the county science and technology commission could request project loans from the prefecture or the province. Projects to be aided could be designated at the province, prefecture, or county level. The level that designated the project provided the funding, and the loan was repaid to that level. In the case of money provided by the county, it was up to the county science and technology commission to decide how much had to be repaid. In 1988 one county gave its science and technology commission 200,000 yuan; the province gave 220,000 yuan; and the prefecture gave 80,000 yuan.^[100] The science and technology commission, like the tax bureau, could also go to a local bank to secure loans for an enterprise. The commission might make

[95] Cl 52290.

[96] According to local officials, this was a uniform rate for Shandong province, decided upon by the provincial tax office. Cl 52290.

[97] The surplus allocations stemmed from the slack in the budget provided by the prefectural tax office to the county tax bureau.

[98] Of this amount, 30 percent was kept by the county and 70 percent went to the prefecture. The temporary sales tax was instituted in 1984, the year that local governments started actively to promote enterprises. CI 62288.

[99] No interest was charged. Moreover, if a project was selected by the science and technology commission for aid, the enterprise would be guaranteed a set amount of materials at low within-plan (jihua nei) prices. CI 71888.

[100] The total amount was a huge increase from 1987, when the commission had only 50,000 yuan, which was loaned to twenty applicants, five of which were rural enterprises. The largest loan was 15,000 yuan for a provincial-level apple production project. CI 71888. Within the county, the county finance bureau made an allocation to the science and technology commission in the form of a technology development fund (keji fazhan jijin). The bureau was not concerned with how the money was doled out. Beginning in 1986, the commission kept any loan money that was repaid.

the loan proposal more acceptable to the bank by agreeing to pay part of the interest on behalf of the enterprise.^[101]

Township, Village, and Intra-Enterprise Funds

Probably the single most important source of financing that allowed township and village enterprises to survive the retrenchment was collective funds. The ways in which these were used are described in chapter 3. It is not that collectives had an abundance of funds. Rather, the township or, particularly, the village could mobilize funds from within the community when necessary.

Economists using fieldwork survey data have gathered evidence showing that the dependence of villages on outside loans for industrial expansion decreased significantly over the decade of reform. ^[102] This is consistent with the decrease in credit provided by the state banks to village enterprises that is detailed in chapter 3. My own fieldwork confirms this trend. Well-off villages could generate their own funds, both from existing rural enterprises and, in some cases, from successful agricultural endeavors. A World Bank report also points to the prevalence of such redistribution and self-raised funds as sources for investment in fixed assets in rural collective industry, at least since 1985.^[103] The relevant point for this discussion is that these funds fall outside the scope of central extractions through taxes and outside the net of central controls operating at the local levels.

Intravillage Funds

Villages as well as townships used the system of redistribution (described in chapter 3), in which one factory borrowed from more financially healthy factories within the village or township to deal with the fiscal austerity. For example, in one highly industrialized and wealthy village in August 1989, a new cotton mill borrowed 1 million yuan from other village factories, including 250,000 yuan from a forging factory.

As noted in chapter 3, finding the funds was not easy, especially when everyone was short. In the above case the party secretary realized that

[101] The commission's resources come from its technology development fund.

[102] See Scott Rozelle, "Principals and Agents."

[103] Ody, Rural Enterprise Development.

each factory wanted to protect its own resources, especially during the retrenchment, even if all were part of the same family. The forging plant had tried to resist (the factory had "its own opinions" [yijian], as the Chinese say), but in the end was "persuaded" (shuofu) to make the loan. The plant manager knew that at some time in the future, it might need to be on the receiving end. In this particular case, the request was much more difficult to turn down because the village party secretary who was trying to negotiate the loan also personally ran the cotton mill. To make the transaction as palatable as possible, the village party secretary promised to repay the loan within three years, at 15 percent annual interest.^[104]

Funds were also raised within enterprises from the deposits paid by their new workers. This practice had been in use for a number of years, but did not yield large sums of money. It was of limited effectiveness during periods of fiscal austerity, when factories generally did not hire new workers. The job bonding discussed in chapter 3 was more lucrative. This practice was resorted to in one Shandong county in 1989 when the local bank and savings and loan cooperatives gave out almost no money in loans.^[105]

If village government failed to raise sufficient capital from its enterprises, it could borrow from villagers, usually from those who work in the enterprises. Fairly large sums were raised in this way during the retrenchment period. For example, in 1989 an industrialized village needed circulation funds to buy materials so that a factory could continue to operate. The village decided to have all of its factories sell shares ^[106] to their workers. Each worker contributed a lump sum of 5,000 -10,000 yuan. ^[107] In return, the village paid each shareholder interest, at a rate higher than that of the bank. Workers could take out their money at any time. During the first half of 1989, the village amassed 700,000 yuan through these sales. ^[108]

Such methods became institutionalized and continued to be used after the retrenchment period. For example, in 1991, approximately

[104] CI 52090.

[105] CI 6490.

[106] This system should not be confused with the shareholding system described earlier. Here, what was sold were simply shares in a cooperative savings scheme.

[107] When asked if 5,000-10,000 yuan was a large amount for peasants, the village party secretary replied that it was no problem because each family had large savings. He said that those village workers who did not have enough funds were not required to buy shares. CI 52090. This village was particularly rich; in other villages, the amounts were more modest, only 300-500 yuan per worker.

[108] Cl 52090.

80 percent of the enterprises in the village cited above were still engaging in various forms of fund-raising (jizi). In that year, the village mobilized approximately 3 million yuan. In 1995, when the village had eighteen village enterprises, with total annual profits of more than 5 million yuan, it was still raising approximately 2 million yuan per year from its savings schemes.^[109]