Adapting Maoist Institutions To Market Production

The Maoist legacy provided the political capacity for the local corporatist state, but the aims for which it is used and the way it is applied are significantly changed. This is not the same type of state-led growth practiced during the Mao period. Local governments have adapted the Maoist institutions to promote rapid economic development in an increasingly marketized environment.

From Ideological to Market Planning

There continue to be plans, targets, and meetings, but they operate differently from those of the Maoist period. The closest thing to a central plan is what the Chinese now call an "industrial policy" (chanye

[31] CI 22688.

zhengce), which targets specific sectors the government wants to promote.^[32] But this resembles Japan's industrial policy^[33] more than the mandatory plans of the Maoist period. As in Japan, the targets are general and sectoral in nature.^[34]

In practice, more important than national-level plans is local-level planning. Numerous plans and targets continue to be sent from one local level to another. For example, the county finance bureau sends revenue plans to each of its townships; the county economic commission sends plans to its county-owned industries; the county rural enterprise management bureau sends plans with detailed targets for total production value, tax payments, and income to each of its township economic commissions. Township economic commissions send similarly detailed plans to their township-owned enterprises. Sometimes villages also receive plans from the townships.

While there is planning and local government involvement, the plans are no longer mandatory (zhilingxing jihua). If a locality or an enterprise does not want to produce a certain product, the upper levels will not force the issue.

By the mid-1980s, most plans were "guidance plans" (zhidaoxing jihua).^[35] Theoretically, the difference is that mandatory plans are fulfilled by administrative fiat, whereas guidance plans are fulfilled by the use of economic incentives. In practice, this distinction is ambiguous; "guid-

[32] The degree to which there has been a movement away from central planning is suggested by the debate in Beijing about whether there should be even an industrial policy. According to a member of the State Planning Commission in Beijing, the issue, in part, is that some feel it might look too much like a plan and lead to too much government direction, resulting in the same problems that were experienced under central planning. CI 62094.

[33] According to a State Planning Commission official, after 1984-1985 a group of students from Peking University strongly advocated that China adopt an industrial policy similar to those used in Taiwan, Korea, and Japan. Cl 62094. According to one source, China has consulted with the Japanese on this subject.

[34] Product preference lists are still sent to the provinces. It is understood that these are the products the center is interested in supporting. I was not able to ascertain how specific these lists are.

[35] Few rural enterprises were ever subject to mandatory plans, but there were exceptions. In the mid-1980s, there were some rural enterprises that produced "key items" and acquired supplies from the government at state prices. Their production and sales plans were mandatory. An exhaust-fan factory outside Tianjin received 80 percent of its supplies from the state, specifically the Tianjin Planning Commission, so the majority of its production was dictated by the plan. The factory manager of this plant had no say in who was hired, and he was required to keep on the payroll many unneeded and unwanted personnel. When workers were needed, the township government apportioned jobs among the villages and village small groups (formerly production teams). The township was in charge of labor allocations and administered qualifying examinations to workers when necessary. CI 71886.

ance" plans seem to carry considerable weight. According to an interviewee, "Mandatory plans are like putting a ring through the nose of an ox and pulling it wherever you want it to go. Guidance plans are like letting the ox roam where it wants, but not feeding it if it refuses to go where you want it to go."

While factories need not adhere to their "guidance" production plans, those that do have the best chances for success. Local governments give such factories crucial assistance in the areas of loans, investment opportunities, and raw materials,^[36] and arrange buyers for the finished goods.^[37] Particularly during the early days of reform, when markets were just beginning to grow, the issue was not only price, but access and convenience. What was needed was proper connections (guanxi), which many firms lacked. For instance, a coveted and profitable arrangement for rural industry is a contract with an urban unit. This usually is an industrial unit, but it may also be a "scientific unit," such as a university or scientific lab developing new products. The urban and rural units form a "horizontal linkage" (hengxiang lianhe) in which the rural partner undertakes all or part of the production and assembly process. The urban partner is responsible for supplying the raw materials and for the marketing or purchasing of the output.^[38] Local governments can be instrumental in finding such opportunities. On the outskirts of Tianjin in the 1980s, local officials arranged special tours of rural factories for prospective customers and investors. In Sichuan, near Chengdu, various government offices, including those at the county level, actively sought cooperative relationships for their rural industries.^[39] Officials everywhere repeatedly said: "Guanxi is important for getting business. We have built up old connections and we now use them."

From Equal Allocation to Preferential Treatment

The types of assistance that local governments provide may be reminiscent of central planning in the Maoist state, but a crucial difference be-

[36] Some local governments, usually at the township level and above, assist by investing in factories that produce raw materials needed by their enterprises. This guarantees the needed supplies and provides local authorities with profits.

[37] Byrd and Lin, China's Rural Industry: Structure, Development, and Reform, chaps. 15 and 16, also make this point.

[38] There are exceptions, as in the case of the exhaust-fan factory mentioned earlier, where the factory itself sold its own products. This was not a problem because the demand for fans was high.

[39] Cl 81386.

tween local state corporatism and its Maoist antecedent is that the local corporate state selectively targets certain enterprises for development. Subsidies and assistance are no longer given equally or to all. In this sense, China has switched to a strategy similar to the industrial policies of the East Asian NICs. Local governments use the "carrot" characteristic of the administrative guidance found in Japan. Preferential allocations are given as an inducement.

Under local state corporatism, enterprises most likely to receive this assistance are those deemed most capable of contributing to the corporate good. What that means changes over time. The corporate good may be defined more broadly than in terms of mere economic interests and profits. During the 1980s, it included such social interests as the provision of employment. As profits have decreased in the 1990s, the emphasis has seemed to shift increasingly to profitability, competitiveness, and growth.

Local governments began relatively early, in the 1980s, to rank enterprises for the purpose of determining the level of services and assistance they would receive from the government and its affiliated institutions. The strategy was to concentrate the use of limited resources. The various bureaucratic funds held by the county bureaus were given to favored enterprises. Tax breaks were similarly concentrated. In one county, for example, in 1989 123 enterprises received tax breaks and exemptions totaling 2.42 million yuan, which equaled 6.07 percent of the total taxes paid by the village and township enterprises. However, closer inspection of the records shows that one enterprise alone received 800,000 yuan in tax breaks.^[40]

There are two types of selective allocation. The first grew out of the remains of national planning that still existed when rural industry began its rapid growth in the mid-1980s. Favored enterprises were given privileged access to items that were rationed or were being sold at the low state-set prices. This included anything from steel to cement to lumber. The amounts of such inputs allocated to the rural areas under the plan were extremely restricted, if there were any at all. Localities made use of what remained of central allocations to help favored enterprises, but most of the time they had little discretion with regard to production materials, which were usually earmarked for specific enterprises that were producing for the national plan. By the late 1980s, this type of allocation was almost nonexistent. The most that a locality could hope for

[40] CI 52290.

was access to state-supplied goods that were sold at higher than rationed prices but lower than market prices.

The second and more common type of selective allocation is privileged access to inputs that are not rationed but simply scarce. Over time, various items fell into this category. Fuel oil, electricity, and certain raw materials have topped the list. These allocations are similar to the allocations made under administrative guidance. However, whereas in places such as Japan the goods and resources are usually provided at belowmarket prices, in China they are secured and sold at market prices. Like the privileged access that came from using connections and "going through the back door" in the Maoist period, what is being given is not necessarily a cheaper price but the chance to be first in line to buy the best available items at the posted prices. In China's market context, preferential access means having the chance to buy the one ton of steel that the material supply bureau was able to procure at a favorable market price. It might also mean the opportunity to be hooked up to the special electric generator the county or township installed to provide its most important industries with uninterrupted power. As the market economy has developed, this type of selective allocation of raw materials has decreased in importance, but it may still make a difference in an enterprise's profit margin.

Using State-Allocated Credit to Target Local Growth

Credit falls under the second type of selective allocation: scarce resources. As the literature on the state and economic development points out, credit control is one of the most important policy instruments a government can possess for shaping industrial growth.^[41] China, like many of the East Asian NICs, is primarily a credit-based rather than a capitalbased system, allowing for the coordinated intervention necessary for an effective industrial policy. During the Maoist period, private banks were prohibited. Firms did not sell stock to raise capital; in fact, all firms looked to the government for their capital, as well as for all of their operating budget. The state, through its allocation of credit and capital— as well as other production inputs—was the exclusive arbiter of devel-

[41] See, for example, Zysman, Governments, Markets, and Growth; on the East Asian NICs, see the work of Robert Wade. One of his best short statements is "The Role of Government in Overcoming Market Failure: Taiwan, Republic of Korea and Japan."

opment. Government policy directly dictated bank activity. Banks in China were an administrative arm of the government, not commercial operations, as will be described further in chapter 6.

Control of bank credit by local governments has remained strong during the reform period. In the rural areas, the organization of the banking system corresponds roughly to the levels of bureaucratic administration. It is similarly hierarchical and is subject to the influence of officials at each level of government, even though bank officials are not directly appointed at the level at which they operate (e.g., the county Agricultural Bank officials are not appointed by the county government). In the 1980s, county officials could exempt certain enterprises from penalty interest payments, extend the payback period, or allow the use of tax payments for loan repayments. Village and township governments could intervene to grant subsidies so that their enterprises could pay interest on loans. The close relationships between banks, finance and tax offices, and local officials facilitated the rapid growth in the 1980s, but, as I describe in chapter 3, they are also the cause of the problems that have come to haunt banks in the 1990s as bad debt has mounted.^[42]

The major bank serving peasants and rural enterprises at the county level is the Agricultural Bank (nongye yinhang).^[43] Below the county, at the township level, are branches of that bank, known as business offices (yingye suo). There are also credit cooperatives (xinyongshe).^[44] Officially

[42] Some have criticized these relationships as too close. See, for example, "Township Enterprises Should Also Implement Reform," Jingji cankao, 18 November 1987, p. 1, translated inJPRS-CAR-88-005, 18 February 1988, pp. 20-21; also Xu Hao and Wang Qingshan, "China's Rural Financial Markets: Current Situation and Strategy," Nongye jingji wenti, 23 September 1987, no. 9, pp. 39-43, translated in JPRS-CAR-88-002, 5 February 1988, pp. 54-57.

[43] The structure of the Agricultural Bank remains strikingly similar to what it was during the commune period, as described by Barnett and Vogel, except that what were formerly branches of the People's Bank are now township branches of the Agricultural Bank. Barnett with Vogel, Cadres, Bureaucracy, and Political Power, pp. 293-94.

[44] The relationship between the Agricultural Bank and the credit cooperatives is ambiguous and complex. Both make loans, both accept savings deposits, and peasants and enterprises use both. The difference involves ownership and interest rates. The credit cooperative is a collectively owned institution. Each peasant is allowed to own one share and receives interest on savings and dividends from shares. The citizen management board (minguan hui), a committee of peasants, government leaders, bank officials, and entrepreneurs governs the credit cooperative. This committee receives an annual report, but it does not approve loans. Its members are elected by the stockholders of the cooperative. Each person with a share has a vote in the election of representatives, who then elect the citizen management board. The representatives are elected once every two years. Every ten agricultural households that hold shares are allotted one representative, but in some cases an entire village may be represented by one or two people. At the end of the year, the representatives meet and the bank makes its report. A subgroup of representatives is elected to deal with the bank. This working body consists of the township head, the head of the salesand marketing cooperative, the head of the township economic commission, the head of the Agricultural Bank, and the head of the savings and loan cooperative; the rest are peasant representatives. Cl 22688. The county Agricultural Bank takes a management fee from the credit cooperatives in the townships. This is not more than 1 percent of all income. In one county, the Agricultural Bank took only about .04 percent. Cl 8991.

the business offices of the Agricultural Bank and the credit cooperatives are separate organizations, but in practice their funds are linked. The difference is that funds in the branches of the Agricultural Bank are state funds. They are therefore loaned at lower interest rates, which is why they are preferred by local enterprises. The credit cooperative funds are from local savings. Below the township level are substations of the credit cooperative or of the Agricultural Bank, but these exist only in the larger villages.^[45]

The approval process for loans also conforms to the bureaucratic structure. A graduated approval system sets limits on the size of loans that different levels of the banking system can approve and allows for county input into the investment process.^[46] Local government control over credit and investment was further strengthened by a State Council requirement that all enterprise loans had to have guarantors to ensure repayment.^[47] In practice, for much of the 1980s, the guarantors for loans were local government agencies such as the township economic commission.

To make maximum use of the limited funds available to develop rural industry, county officials began in the mid-1980s to provide annual ratings of enterprises, which determined how much fixed-capital credit and what level of financial services enterprises should be given by local banks and savings cooperatives.^[48] In some counties, such ratings continued into the early 1990s, until many collectively owned enterprises started having difficulties (see chapter 3). This system identified for the banks those

[45] In one county, about 80 percent of the villages had substations.

[46] The county branch of the Agricultural Bank must approve all loans above 10,000 yuan; townships have authority to approve loans under that amount.

[47] This order came approximately at the same time that rural enterprises began to develop. Prior to this requirement, the enterprises would repay as much as possible whenever possible. The bank would try to get back whatever it could, and the county branch of the Agricultural Bank would make up for any shortfall. Previously, the amount that could be borrowed depended on the amount of circulating funds in the enterprise, which could not be less than 50 percent of the amount it wanted to borrow. The enterprise was entirely responsible for the loan; there was no guarantor requirement. Cl 22688.

[48] The rating committee was made up of members of the county Agricultural Bank, the township economic commission, the county rural enterprise management bureau, and the township branch of the Agricultural Bank. Ratings were set at the beginning of each year, based on fixed-capital assets, circulating funds, and the overall credit plan of the enterprise. A credit limit could not be more than 30-50 percent of an enterprise's circulating funds. In most cases, it was no more than 30 percent. Cl 22688.

enterprises deemed important by the local government. For loans within their prescribed credit limit, enterprises with the highest rating were given automatic approval from the township savings and loan cooperative or the local branch of the Agricultural Bank; county approval was not required. Moreover, once an enterprise was designated important, local governments tried to ensure that it received credit, especially during periods of centrally mandated retrenchment when bank credit was greatly restricted.^[49]

Even the rating system was selective; only enterprises that paid their debts each month received a rating.^[50] Enterprises that were found to be in deficit (kuisun) were automatically disqualified.

Among those that did receive a rating, there were further distinctions, such as "special first class" and "first class." However, these were rarely awarded. For example, in 1991, of the seventy to eighty firms that were rated in one county, only two enterprises received the special-first-class rating and only ten the first-class rating. The previous year, no enterprise obtained the special-first ranking and only eight were ranked first class. Most of the ranked rural enterprises were at the township level; very few village enterprises were rated, although highly successful village enterprises were exceptions.

The differences in the service and credit accorded each rating were almost imperceptible, but in times of tight credit, they were significant. For example, those enterprises that had a first-class rating received almost the same benefits as the special-first enterprises, but the latter had priority in getting what limited credit was available at the best interest rate, and as long as they stayed within their assigned limit they did not need to obtain a guarantor. Enterprises with special-first ratings could exceed their credit limits for large projects.^[51]

[49] Cl 22688.

[50] In one county, only 70 to 80 of 119 township enterprises were rated. In one township, the number of enterprises that received a rating and the amounts of their preapproved credit were as follows: in 1987, five enterprises, 580,000 yuan; in 1988, three enterprises, 460,000 yuan. The number decreased in 1988 because two of the five enterprises went under. In 1988 the credit limits were raised for the three remaining enterprises. An agricultural tool factory had its limit raised from 310,000 yuan to 320,000 yuan; a construction company went from 40,000 yuan to 70,000 yuan; and a fertilizer company from 60,000 yuan to 70,000 yuan. The head of the township Agricultural Bank said the large increase for the construction company was due in part to the fact that it was repaving the roads. CI 22688.

[51] In those cases, they had to go through the regular application process and secure a guarantor. The guarantor had to have average deposits equal to the amount of the loan; otherwise there were no other restrictions. The guarantor did not have to be the township economic commission. A number of enterprises could act as a joint guarantor to spread the risk. Cl 22688.

The Bureaucracy as a Source of Information and Technology

The bureaucracy is often identified as a source of red tape, but it has also proven to be a valuable resource in providing assistance to local enterprises. Local officials have turned the bureaucracy into a channel for information and resources that facilitate market production. Many of the institutional supports it has provided fledging firms have allowed them to succeed in China's transitional economy.

Using information and contacts gained through their routine conduct of administrative work, local officials provide an array of essential services and information about new products, technology, and markets for finished goods. The degree to which officials get involved in product development, market research, and the acquisition of technology suggests that this is not the usual provision of bureaucratic services but the activity of an entrepreneurial developmental state.

The cadre networks are among the most important personal connections through which firms gain access to information, technology, and business. This was particularly the case in the early days of rural industrialization. In many cases, the cadre network was the means for obtaining sales or processing contracts with large state enterprises, and for making contacts that eventually led to the establishment of joint ventures and export orders. Individual enterprises are free to do their own market research and product development, but cadre networks and government are there for factories that do not themselves have the resources for product development and market research. Such help has been particularly useful as these firms try to enter the more competitive international market.^[52] Here one sees how having a developed and experienced bureaucracy works to China's advantage.

The bureaucracy is an information grid where government officials are the primary nodes in the network that provides information to local enterprises. The precise form of the information grid may vary from locality to locality, but much of the flow of information follows the contours of the administrative bureaucracy. It passes through routine channels of communication within and between levels of government, from

[52] See Jean C. Oi, "Cadre Networks," for more details about these networks and how they provide information to local enterprises.

the village to the township to the county, and then on to the prefecture, the province, and finally to Beijing.

Not all officials are equally plugged into each level, nor do all officials have a direct line to all nodes. As I suggest in the discussion of village leaders, the success of local economic development is dependent on how well local decision makers are connected into this network and how far up and across they can operate. The normal order of communication is to pass information through the successive levels of the bureaucratic hierarchy, but those who are well connected, such as those successful village leaders who have established personal ties with county officials, can bypass certain levels and go directly to higher levels.

The branches of this network multiply as one goes higher in the bureaucracy. In the rural areas, the county has the widest network of personal and professional relationships along with the broadest knowledge of developments outside the county. When a village needs help, the township is the first stop in the search for information. If the township is unable to help, the village can go to the county, either directly or through township officials. Enterprises are the ultimate consumers and beneficiaries in this information hierarchy. Regardless of the type of ownershipstate, collective, or private—all enterprises have the potential to benefit from information that flows from the cadre networks. The amount of help that is provided to the different types of enterprises has varied over the course of the reforms as local development strategies have evolved. As detailed in chapter 3, the collective sector received most of the attention during the 1980s.

The diffusion of information and technology takes place through various channels. Some are new, but a significant number are adaptations of Maoist modes of bureaucratic operation.

Meetings

Official meetings, the staple of any bureaucratic system, have been adapted to provide market and technological information. When a locality wants to develop local industry, it can call rural enterprise development meetings. These may be countywide, or they may be more localized, with only selected townships and villages invited. Township and village officials have recounted meetings in which the county has suggested specific products and enterprises for its different townships. Such practices were common in the 1980s, when enterprises were most in need of market information and collectively owned enterprises were at

their strongest. For example, it was at a three-day rural enterprise development meeting in 1984 that a Shandong county worked out plans to have one of its townships start a tire factory, which has since grown to be the largest business in the township. The meeting was for all thirtyfive townships in the county. During part of the meeting, the townships were divided into small groups, led by county officials. These groups met for about half a day to solve concrete problems of individual townships.

A number of examples suggest that entrepreneurial initiative on the part of the county is sometimes in response to lower-level concerns and sometimes to specific inquiries. In the example above, the township tapped to started the tire factory had previously consulted county officials about the need to convert an unprofitable machine factory into a more profitable product line. The county rural enterprise management bureau had discussed the matter with the township heads and with the economic commission, which manages all township-owned enterprises. The vice head of the township economic commission initiated the idea of a tire factory, after noticing a shortage of tires in Qingdao and seeing a very successful tire factory in Shantou. After the county and township decided that this was the route to take, the vice head of the township economic commission used personal and professional connections to secure the needed technology. A key contact was an old classmate who was working in Qingdao but who had maintained good connections with his hometown of Shantou. It was through this classmate that the township eventually secured the needed technology from Shantou.^[53]

In another example, the county rural enterprise management bureau organized a meeting to promote the production of chemical products, which it thought would be profitable and suited to local conditions. The county convened the meeting in one of its townships and had a township official chair it. Notices had been sent to the villages, and the meeting was attended both by those that already had chemical plants as well as by those that had an interest in starting such ventures. The same county held similar meetings to promote rug making; again, these were held at the township level. The idea of producing rugs stemmed from a township that had been subcontracting production for a Tianjin carpet company since 1986. Once the township began making rugs, a number of private entrepreneurs started to subcontract for the township-owned carpet factory. One of the county's townships now exports rugs to the United States.^[54]

[53] CI 62694.

[54] CI 62294.

Assistance

In other instances, a township or a village comes up with an idea for an enterprise or product and then seeks the help of county officials to carry out the project. Aside from shepherding the project through the bureaucratic process of licensing and approvals, county officials can provide technical assistance. For complex projects, they will help seek outside expertise. For example, a Shandong village cornstarch factory came across a highly marketable type of cornstarch byproduct in a trade magazine, but its managers knew nothing about the technology involved. At a provincial people's congress meeting, the village party secretary discovered that the developer of this product was the Wuxi Light Industrial Research Institute.^[55] He followed up by pursuing his connections in the county and enlisting the support of various county officials, including the county magistrate. The project was turned over to the county rural enterprise management bureau. One of the bureau vice heads, who often took the lead in searching out relevant technology, knew about the product and had good connections in Wuxi, having gone there a number of times on official business. He took the village official with him to Wuxi to negotiate with the research institute. Together they succeeded in convincing the institute that the village, with the help of the county, would be capable of producing the product. A deal was concluded in which the village paid the institute 520,000 yuan in technical fees for training, resident experts, and equipment.^[56]

Visits to Models and Study Tours

The old Maoist practice of visiting model units has been adapted to gain firsthand technical and market information. Many local officials, particularly those at the county level, take factory managers and township or village leaders to the most industrially developed areas, such as Jiangsu and Guangdong, and to nationally famous models like Daqiuzhuang village outside Tianjin to study management techniques and to see what

[55] The acquisition of technical assistance has become much more feasible for local levels in recent years as specialized research units have been established, often by professors linked to universities or academies. These units may provide both expertise and specialized equipment. In some cases, research units seek out local enterprises to produce items that they have designed for profit-making purposes.

[56] CI 62494.

products can be made. Once they find a product, they use connections to learn how to copy or adapt the item for local production.

In recent years, local officials have expanded upon the traditional study tours to go abroad to gain contracts, buy machinery, and search for products. Heads of successful factories are sometimes included in delegations. Foreign companies trying to sell technology to China have also invited important prospective buyers to visit their countries to see their equipment in operation. Some county-level factory managers, even in interior provinces such as Henan, have taken advantage of such opportunities.

Regardless of whether a factory manager goes along, local government officials who take these tours are well versed in the production processes and technological needs of their key industries.^[57] While abroad, officials scour the stores in search of products that their localities can produce or export. They take products back to be studied, modified, and reproduced. This practice of copying foreign products seems to be particularly widespread in provinces close to Hong Kong. Officials in Guangdong, including managers of large enterprises, have special visas that allow them easily and regularly to go to Hong Kong to do market research.^[58]

Equipment Supply Corporations

In addition to long-established bureaucratic channels, local governments have established new instruments in response to current market conditions. Some provinces have set up companies such as the Guangdong Engineering and Equipment Supply Company that provide complete machinery systems, including technical assistance. The provision of such services is available to all types of enterprises, private as well as state and collective. The supply company researches and procures the equipment and charges a percentage of the total cost of the package as its commission.^[59]

[57] The degree of attention local officials pay to their important industries was evident in the barrage of technical questions that a county magistrate asked when touring the Sam Adams Brewery in Boston. This is not surprising given the concentration of investment by the county in its local brewery, which was the top revenue earner for the county. Andrew Walder, "County Government."

[58] Others have to go through a long, complicated process that allows them only a single entry.

[59] CI 7394.