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Eleven Local Bargaining Relationships and Urban Industrial Finance
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Corporate Ties In Local Industry

One arresting image of China's huge bureaucratic policy is that of fragmentation. Lieberthal and Oksenberg specify the aspects of fragmentation that require such compensating integrative mechanisms as regular meetings, document-transmittal systems, and personal ties, to give it whatever cohesion it may possess.[8] But if one looks at only a part of the whole, in this case a city's industrial system, what strikes the researcher is not its fragmentation but its degree of integration. Here the problem is less to compensate for fragmentation than to allow enterprises significant autonomy in important business decisions. From the mayor's office to the enterprise, there is considerable integration in fiscal and budgetary matters within the municipality's own industrial system.[9] As I describe the relations among actors in the process of budgeting and finance, we shall see that a city's industrial system operates in ways that we associate with large, diversified corporations: carefully regulating financial flows to subsidiaries and blurring organizational boundaries by intervening extensively in important decisions.


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Institutional Actors

There are six kinds of municipal institutions that participate in decisions on the extraction of revenues from enterprises, or the funding of their expansion or renovation. Some seek to support the development of enterprises under them; others seek overall balance in the growth of different industrial sectors—slowing it in some areas, speeding it in others. Some view investment in an enterprise purely from the financial angle; others must balance social utility and local advantage against narrow considerations of profit. Some seek to maximize tax revenues and maintain the city government's ability to guide local development. Others seek to keep resources in the enterprises and protect them against excessive demands from the government.

Enterprises

One of the most important tasks of factory directors and of department heads in charge of finance is to turn the flow of financial resources between their enterprise and the government increasingly in their favor. The greater the proportion of revenues they keep, the more prosperous will be their employees and the greater their ability to fund their own expansion. Such growth and prosperity will be viewed favorably by their superiors.[10] The nominal tax rate on enterprises in China is very high. Taxes on sales revenue or value added usually take from about 10 to 15 percent, and of the remaining "realized profit" (shixian lirun ) there is a standard income tax (shouru shui ) of 55 percent, an individually set adjustment tax (tiaojie shui ) that usually is between 5 and 30 percent, and a variety of smaller local taxes and levies.

The remainder is kept by the enterprise and put into several funds in proportions decided upon by the finance bureau, with participation of their "leading organ" (lingdao bumen or zhuguan bumen )—either an industrial bureau (gongye ju ) or a company (gongsi ). Commonly, a portion is for employee benefits and bonuses, another for development of production, and a third for reserves. Only one of these funds, for bonuses and benefits, comes close to meeting perceived factory needs (though managers commonly feel pressure to enlarge this fund even further).[11] China's reformers also encourage enterprises to pay for more of their own expansion out of retained funds. From 1977 to 1984 the percentage of national investment paid for by enterprises increased from 38 to 44


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percent.[12] But retained profits themselves cover only a fraction of enterprise investment funds: as late as 1982, enterprise depreciation funds were still double the amount of retained profits.[13] In short, enterprises must still rely upon public investment and bank loans to cover their projects, and they must have tax breaks in order to repay these loans.

Therefore, negotiations over investment projects and marginal changes in revenue flows have assumed central importance to the manager; they determine the prosperity and future vitality of the firm. Managers seek to reduce the effective taxation rate on their enterprises in both the long and the short run. Their primary opportunity to do so is when they are given permission to engage in a major construction or renovation project that expands plant capacity or increases the technical efficiency of the firm. When this occurs, the flow of funds must be renegotiated in the short term, because enterprises otherwise will be unable to repay their loans, and in the long term, because plant improvements or expansion can greatly affect the firm's ability to generate revenues. Almost every investment project is accompanied by a corresponding set of tax breaks. The task of the manager, therefore, is to get investment projects approved and to negotiate the most favorable possible tax treatment, both during and after the project. He must draw up financial projections, submit applications to leading organs, and persuasively present the project, both formally and informally, to the members of the city's industrial circles.

Industrial Bureaus

Every industrial bureau manages a cluster of enterprises in similar lines of production. Their finance and planning departments are the ones most actively involved in decisions regarding investment projects and their tax treatments.[14] Whenever an enterprise manager wants to engage in an investment project, he must first get the approval of its industrial bureau. Every project must be approved and put into the city's construction or renovation plan. Small projects that are paid for entirely by an enterprise's own funds are routinely approved, but they must still be approved by the bureau and counted toward its city-delegated quota of industrial investment for the year. Anything


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large enough to require a loan—all but the smallest projects—must be studied, approved by the bureau, and then taken to higher levels of government to arrange financing and put the project into the city's industrial-investment plans.[15]

For the enterprise, the bureau is the first and easiest step in a process that usually takes between three months and a year. Industrial bureaus generally support any project that will improve or expand the capacity of their enterprises. But they are limited by city investment plans, which ration investment projects to various lines of industry and cannot champion every proposal brought to them, at least not immediately. They therefore evaluate enterprise proposals and authorize full-scale feasibility studies for the ones approved, after which they go to other government agencies to get permission and funding. Enterprises whose initial proposals are rejected will work with the relevant officials in the bureau to come up with a better proposal in the immediate future.[16] The bureau's primary function in this area is to strengthen proposals that it forwards to higher levels, while keeping within the overall limits placed on investment.

Finance and Taxation Bureaus

These are the two "comprehensive bureaus" (zonghe ju ), responsible for coordinating the financial activities of industrial bureaus and enterprises.[17] Although their relations are not always harmonious, municipal bureaus of taxation and finance perform closely related functions and indeed have been separated organizationally only in recent years. The scope of responsibility, and power, of the finance bureau is greater than that of the taxation bureau. The finance bureau is responsible for managing both revenues and expenditures for the city. It budgets industrial investments from city revenues to bureaus and enterprises, and it sets tax quotas for collection in the city as a whole and divides them among industrial bureaus, which in turn divide them


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among their enterprises. While it is under the nominal leadership of the Ministry of Finance and must conduct its business in accord with that ministry's regulations and documents, the bureau is in fact an organ of the city government that is directly under the city's planning and economic commissions and ultimately responsible to the mayor's office.[18] The finance bureau must agree to all investment expenditures by enterprises, whether they are made out of city funds, loans from bank deposits, or their own funds. Public finance funds to be loaned to enterprises must be placed in the city budget. The bureau must also approve any tax breaks that are included in financing packages given to enterprises, or any tax bailouts or subsidies of firms in financial trouble.

The taxation bureau was a department within the finance bureau before the tax reforms of the early 1980s. Now it is a separate organ responsible for fulfilling tax quotas set by the finance bureau. Although it conducts its work according to guidelines and regulations sent down from the General Bureau for Taxation in Beijing, the taxation bureau operates under the guidance of local authorities: the finance bureau, which sends down annual tax quotas that serve as targets both for enterprises and for tax collectors; the planning and economic commissions; and ultimately the mayor's office. Its relationship with the finance bureau is an ambiguous one: in many cities, the rank of the bureaus is the same, and their responsibilities overlap, whereas the scope of the finance bureau's responsibility and power are broader. The two organizations must agree to all tax breaks, but the responsibility is often blurred because of an overlap in functions. Many local tax bureaus have tried to assert their independence in recent years and have precipitated discord with finance departments over their mutual powers and responsibilities. These disputes must be ironed out by planning and economic commissions, or by the mayor's office.

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


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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


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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.

Planning and Economic Commissions

In the cities in which I conducted my interviews, these commissions are usually higher in rank than the local industrial bureaus, comprehensive bureaus, and banks, and their task is to coordinate the work of all of them to fit into an overall plan. Their exact division of responsibilities is often vague and varies from city to city. But in general, the planning commission is responsible for the long-term development of the local economy, which includes all aspects of industrial finance and planning, and it is directly responsible for coordinating the work of all of the comprehensive and industrial bureaus in the city. The economic commission, in contrast, is usually responsible for the immediate coordination necessary to iron out bottlenecks and delays that threaten the implementation of annual plans. The planning commission's departments for basic construction and industry (jijian chu, gongye chu ) are responsible for budgeting and arranging funding for major investment items and for fitting these items into its longer-term plans for the development of local industry. The commission deals primarily with the various comprehensive bureaus, especially the tax and finance bureaus, and the banks. The economic commission, on the other hand, approves the technical-renovation projects, which are smaller but more numerous, spending most of its time trying to resolve urgent problems of materials supply, transportation bottlenecks, shortages in operating capital, and energy shortages. Because of its problem-solving role, the economic commission deals much more frequently with industrial bureaus and factory directors.

However they divide their responsibilities, both of these commissions see their mission as "managing local industry on behalf of the city government." Their immediate superiors are the vice-mayor in charge of local


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industry and, ultimately, the mayor himself.[22] The heads of the planning commission's finance and business department (caizheng jingying chu ) act as both coordinators and participants in negotiations over individual investment items and tax breaks. In some cities they have organized coordination groups (tiaojie xiaozu ) made up of representatives from each of the concerned comprehensive bureaus, to resolve disputes and come to decisions on contested items.[23]

The Mayor's Office

The mayor's office is the ultimate source of authority for all decisions on investment and taxation. To be sure, there are regulations and guidelines regarding taxation and industrial investment issued by the Finance Ministry, Central Bureau of Taxation, State Planning Commission, and other central-government agencies. But these guidelines leave broad discretionary powers to local authorities, who have wide latitude in granting tax breaks and who have an abiding interest in directing investment to those sectors high on their development plans.

Unless the enterprise involved is substantially funded by a province or a central ministry, the mayor's office is the appeal of last resort in disputes over these issues. Usually it is only the largest or most controversial cases that are sent to the top for resolution. But such cases are brought to the top with enough frequency that in Dalian a "policy coordination group" (zhengce xietiao xiaozu ) has been established by the mayor's office, headed by the vice-mayor in charge of industry, to foster the prompt resolution of all of these questions; its members include the heads of the


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finance, taxation, price, and labor bureaus. When the mayor's office has spoken on such a matter, that is the end of the issue, at least for the current year.


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Eleven Local Bargaining Relationships and Urban Industrial Finance
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