County

The county has no property rights over the residual of township and village enterprises. It relies primarily on taxation from these enterprises. In the 1990s, counties have become less enthusiastic about township and village enterprises as costs have begun to outweigh benefits and as an increasing number of these enterprises have run into financial difficulty. As table 3 shows, losses in these enterprises are increasing. Between 1985 and 1990, the total deficits of township enterprises increased by 660 percent, from 500 million yuan to 3.8 billion yuan. The 1990 deficits of village-owned enterprises were much less, only 1.2 billion yuan, but still a big increase over the 1985 deficits of 300 million yuan. By 1995, the losses for village enterprises had risen to 4.2 billion yuan. During the same periods, as table 3 shows, the annual tax revenues from the private sector increased at a much higher rate than that from the collective sector.

Some enterprises have gone bankrupt or closed as a result of their losses. National statistics indicate that in 1995, eighty thousand township and village enterprises suffered losses (kuisun). The number was

approximately the same as in 1994, but the total amount of losses had increased by 84.6 percent, which suggests that larger enterprises were having difficulties. According to a Ministry of Agriculture study, the reasons include increases of over 30 percent in wages from 1994, raising average wages to 3,730 yuan per worker in these enterprises.^[87]

The closures of some township and village enterprises have left county banks holding substantial amounts of bad debt. This reflects poorly on the counties at the higher levels and affects future investments. In 1996 approximately sixty township and village enterprises in one North China county had outstanding loans totaling around 40 million yuan that local banks were dubious about ever recovering. Of the total amount, approximately 20 million yuan was owed by thirty enterprises that had already closed. Not surprisingly, government banks to which these loans were owed were increasingly seeing township and village enterprises as liabilities that needed to be restructured or closed. As early as 1992, following a number of failures in the previous year, the banks stopped giving financial ratings to township and village enterprises.^[88] The Agricultural Bank in this county, the major lender for rural enterprises, became highly concerned about debt repayment and became a strong advocate of privatizing township and village enterprises. In the view of one leading bank official, too many loans to township and village enterprises were improperly guaranteed, many by township economic commissions rather than by economic entities. In the 1980s, particularly before the 1988 retrenchment and the downturn in the market, the collective sources of revenue described earlier in this chapter had allowed township and village enterprises to develop rapidly. But in a prolonged economic downturn, when large numbers of factories incurred debt but earned little or no profits, neither the factories nor their corporate parents had sufficient funds to repay what they owed. The root of the problem, according to a local bank official, was in the collective ownership of these firms and the way loans were guaranteed. He said, "This makes it difficult to know who ultimately the bank should pursue for the repayment of these debts."^[89] When banks are expressing such strong

[87] Nongyebu xiangzhen qiyesi jihua caiwuchu, 1995 nian quanguo xiangzhen qiye, p. 27.

[88] CI 21696.

[89] When debts cannot be repaid and an enterprise closes, bankruptcy is declared. Banks receive a portion of the proceeds once an enterprise declares bankruptcy, but they are the last in line to receive payment. Consequently, banks recover only a portion of the original loan. CI 21696.

reservations it is difficult for the county government, which previously had lobbied banks to provide collectively owned enterprises favorable loans, to continue on this course of development.

But the economic rationale has not always prevailed. Why should it now? Why would officials support a group that could undermine their power? Here one finds that the economic impetus for reform is reinforced by a political environment that is now much more hospitable to the private sector. There is some evidence to suggest that in some areas the movement to privatize has been driven by directives from the upper levels. It is the combination of economic and political pressures that has led counties to take steps to increase the efficiency of their remaining collectively owned enterprises and to support the private sector.