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Part Four Subnational Levels
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Part Four
Subnational Levels


Territorial Actors as Competitors for Power: The Case of Hubei and Wuhan

Paul E. Schroeder

The competition for power between Hubei province and its capital city, Wuhan, reveals Chinese political and legal systems little changed by urban reforms. These systems are still unable to determine how to handle the sharing of decision-making authority between different levels of government. The formula adopted by central leaders to spur regional economic growth, namely, the central-cities policy, offers only a carbon copy of the earlier Center-province decentralization, this time from provinces to central cities. The strategy offers no new political, constitutional, or legal formula by which new territorial competitors for power might more easily reach accommodation. Through all this, China's administrative system, with its multiple lines of authority that hold units and individuals under tight control, has shown a tenacity for self-preservation. Efforts to cut these lines of authority have resulted only in their multiplication.

In the absence of political, constitutional, or legal formulas that might guide the policy process, Chinese units engage in lengthy bargaining over the specifics of any general policy that is to be implemented. Such bargaining is done within certain limits. Bargaining positions can change over time and from issue to issue. Success often depends on the issue at hand, the context in which it is debated, and the nature of coalitions that form on either side of the bargaining table.

Such was clearly the case with Wuhan and Hubei. The 1984 policy decision to give Wuhan provincial-level status in economic affairs was taken only after the Center, siding with Wuhan, mediated extensive bargaining between the city and the province. From then until late 1988, when the province—with central backing—resumed authority in the face of economic retrenchment, a continuing stalemate between Hubei


and Wuhan as to the definition of this new power revealed that bargaining, even in a system characterized by bargaining,[1] does have limits. The stalemate was caused by political and legal systems that lack proper definitions of authority and offer no formula for allowing those definitions to be developed. Definitions of the limits of authority are given by fiat and are often intentionally left vague.[2] China's legal system is not mature enough to permit development of legal definitions through the gradual building of any substantive body of case law. Nor is the court system mature enough to permit dispassionate settlement of disputes and the enforcement of those settlements. Given that the two actors in question are sitting on top of each other, the result is competition for power characterized by irrational policy proposals and the inertia that arises from an inability to find accommodation.

These factors are evidence that, though featuring many changes, late-twentieth-century China has changed little since the days of the Qin dynasty in terms of finding an appropriate balance of power between Center, region, and locality. Territorial actors in China are the key to the strength or weakness of any regime, and each of China's dynasties, including the Republic and the People's Republic, has struggled to find an adequate formula for determining the proper distribution of decision-making power between Center and region.

Following the economic and administrative reforms that began in China in late 1978, research has focused on the competition between provincial-level actors and the Center. This competition was heightened as the Center gave to these governments greater decision-making power and greater resources with which to implement their decisions. Provincially based commodity blockades, wars over export-commodity prices, resistance to resource sharing, and increased provincial financial resources have been documented since the reform era began.[3] In some respects, provinces, with autarkic tendencies, still seek to become self-


reliant in as many areas as possible to reduce dependence on other Chinese provinces.[4]

Close examination of provincial-government activities, both with the Center and with lower-level governmental units and enterprises under their jurisdictions, provides a clearer picture of the nature of China's political system. The number of units with some authority in any functional setting, their interlocking connections with central leading organs (tiao-tiao lingdao guanxi ) and local leading organs (kuai-kuai lingdao guanxi ), the relative inability to obtain resources easily (what some blame on a scarcity of these resources), the complexity of decisions demanded by modern commercial activity, the lack of formalized decision-making rules, and weak institutions—all constrain policymakers. The Center, lacking the capability to enforce policy choices, is thus forced to issue implementation guidelines that are vague and open to broad, conflicting interpretation by implementing agencies. Things get accomplished more often than not by bargaining among the many actors involved.[5]

The research on interprovincial competition raises a second set of questions about the Chinese political system. Do territorial units within a province compete? If decentralization focuses power at the provincial level, do subprovincial groups attempt to have power decentralized further? Is the Chinese political system institutionalized enough to handle any further decentralization? Does the Chinese bureaucracy at different levels exhibit the same characteristics as bureaus found in other countries?

The case of Hubei and Wuhan shows that intraprovincial competition for power does exist. While provinces may view power as decentralized, subprovincial governments clearly do not. Writing in Liaowang , Wuhan's first Party secretary, Zheng Yunfei, linked the success of economic reform to political reform, which he said was needed to overcome "excessive centralization of power."[6] China's decision to make central cities a focal point for economic development during the Seventh Five-Year Plan (1986–90) provides an opportunity to examine the competition between city and province, the structural characteristics affecting implementation


of this policy, the bureaucratic behavior prompted by this policy decision, and the structural changes required if the policy is to work.

The competition between Hubei and Wuhan reveals much about the nature of bureaucratic behavior in China and the limits of Party cohesion when territorial interests are at stake. Strategies to minimize the conflict, such as problem solving, persuasion, or bargaining,[7] have given way to what Downs called "excessive territorial sensitivity" as both Hubei and Wuhan struggle for policy-making and policy-implementation autonomy.[8]

Though designed to push economic growth by decentralizing power to levels below provincial governments, the central-cities policy shows clearly the structural constraints that inhibit the development of the Chinese economy, no matter where decentralization stops. Without full implementation of the reform of the economic management system, without "smashing" the tiao-kuai lines of authority that bind all units and individuals, the central-cities policy has had and will have limited success. Indeed, Wuhan's Zheng Yunfei, referring to city and provincial governments, complained that these "have ... become major obstacles [to] the perfection and development" of enterprise reform.[9] Before turning to the nature of the competition between Hubei and Wuhan, a brief discussion of structural reform and the central-cities policy is in order.

Structural Reform And The Central-Cities Policy

In China's unitary system, tiao-tiao lines of authority tie each unit vertically to superior organs of power at the Center, whereas kuai-kuai lines of authority tie them horizontally to local organs of power. In the Chinese scheme of things, both tiao-tiao and kuai-kuai authorities are to share power cooperatively according to a system of dual rule, or shuangchong lingdao . Problems that arise in this dual-rule scheme are supposed to be ironed out by the unifying authority of the Communist Party, dang tongyi lingdao , a hierarchical organization that theoretically has only a single leading organ at the Center.

This system, instituted after much debate in the decentralization drive of 1957, does not work as leaders at the time stated it would. There is no dual rule; instead, there is rule by either tiao-tiao or kuai-kuai authorities, depending on the issue at hand and the relative power of each. The relative power of tiao-kuai authorities changes with time and with differ-


ent functional systems.[10] In the decentralization that followed 1978, provincial governments have gained considerable decision-making authority, thereby enhancing the relative power of these kuai-kuai leaders. These locally based authorities have shown themselves (as have tiao-tiao authorities at the Center ) to be quite resilient despite efforts designed to curtail their authority (such as periodic recentralization of foreign trade), in large measure because the Center is relying on these same kuai-kuai (and tiao-tiao ) authorities to implement the reform policies that would replace administrative authorities with economic networks.

The basic goal of China's urban economic reforms is to break the administrative lines of authority that bind China's economy and to replace them with market-logical ties that instill competition, make use of comparative advantages, allow for informational (market and otherwise) efficiency, and spur economic growth.[11] These governmental, bureaucratic lines of authority, the tiao-tiao lingdao guanxi and kuai-kuai lingdao guanxi already mentioned, tie each unit to multiple other units in fishnet fashion.[12] This makes it difficult for any single unit, or danwei , in any functional setting to act quickly enough to take advantage of opportunities as they arise—in short, to act economically. The entrepreneurship so essential to any economic-development plan is hampered by these artificial lines of authority.

For example, initial reforms designed to curtail governmental interference in economic activity and to spur horizontal economic ties across territorial boundaries resulted in the establishment of many new industrial corporations and research institutes. The Wuhan Hydraulic Cylinder Plant is one of twelve such factories that constitute the Wuhan Hydraulic and Pneumatic Industry Corporation. The plant had been the former Machinery Research Institute of the Wuhan Machinery Bureau. The name changed, but the personnel and facilities remained the same.


The new corporation is owned by the Wuhan Municipal Government and answers to the Wuhan Economic Commission.[13]

The aim here was to put the administrative bureaus onto a business footing, letting them make money, and, at the same time, to cut government spending by putting them on a profit-loss basis. Theoretically, this step was to cut tiao-kuai lines of authority and permit the growth of horizontal economic ties. Actually, the tiao-kuai lines of authority were increased rather than reduced. The twelve hydraulic factories under the Wuhan Machinery Bureau continue to answer to their original tiao-kuai authorities, but now they must also answer to the Hydraulic and Pneumatic Industry Corporation, which has what is termed yewu guanxi , or business authority, over them.

Many Chinese, however, see yewu lines of authority in terms of tiao-tiao and kuai-kuai authority. A Chinese economist explained yewu guanxi in theoretical terms as tiao-tiao "all the way to the Center. A pure administrative relationship is kuai-kuai up to the Center."[14] This theoretical approach, obviously, can lead to confusion because the line between administration and business is blurred in a Communist system. Business managers who deal not in theory but in the real world of determining to whom they answer tend to ignore the distinction.

In an interview, the manager of a rubber factory in Bengbu city, Anhui province, said his plant was attached to the Bengbu City Chemical Industry Corporation through yewu guanxi . "In some ways this is tiao-tiao because it connects us to similar corporations in Beijing. But this corporation is owned by Bengbu city's Economic Commission, which is our kuai-kuai authority. Actually, they both [the corporation and the Economic Commission] are kuai-kuai authorities. Nothing has been eliminated."[15]

Whether China's system is decentralized, then, depends on where one is within that system. Post-1978 China is certainly decentralized from the point of view of provincial governments, but to the manager of the Bengbu factory, and to Wuhan's Zheng Yunfei, it remains centralized, albeit at levels lower than Beijing.

In an atmosphere of continuing administrative interference, then, where economic management reform is not fully implemented, the Center, under Zhao Ziyang, listened closely to any proposal aimed at reducing the tiao-kuai network and instilling some economic logic into China's development strategy.

Such was the case in 1979 and 1980 as the era of economic reform got under way. The hierarchical nature of urban economies was dictated by


the Stalinist command-economy model chosen by China's Communist leadership in the 1950s. All trade within and between cities was monopolized by government agencies. The results of this—a collection of urban economies that were closed to each other, related only by administrative bureaus at the top of the governmental hierarchy—was seen as hampering China's development.

In 1980 economist Xue Muqiao promoted the idea of Chinese cities rebuilding the interurban economic networks that existed before the 1950s. The focus on cities as economic centers was given political life in 1982 by the then premier, Zhao Ziyang, at the Fifth Session of the Fifth National People's Congress, where it became one of his ten principles for economic development.

Then, in October 1984, at its Third Plenum, the Twelfth Communist Party Central Committee formally adopted the central-cities policy as part of its urban economic reform program. Large central cities would be given the necessary authority to break tiao-kuai control and act, as Solinger states, "as the nuclei of several large economic regional networks and markets across the nation."[16] Wuhan's participation in the central-cities strategy was first espoused in 1983 by Dr. Li Chonghuai, professor of economic management at Wuhan University.[17] In brief, this was an effort to tap the economic potential of larger cities in China's interior, which are not part of the coastal-cities program nor of the provincial-level cities of Beijing, Shanghai, and Tianjin. The stated goal, as in the creation of industrial corporations, was to cut tiao-kuai lines of authority and allow larger cities to act as economic magnets, building regional economies that would tap their respective comparative advantages, foster foreign trade, and thereby help build the national economy.

In 1983 Li put forward an overall central-cities strategy for Wuhan's economic development.[18] Among the twelve measures was an effort to "establish a rational economic network while implementing economic management reform." In discussing this step, Li went directly to the


heart of China's problem: "In China's current economic management system, the major abuse is too many centralized authorities, the failure to break tiao-kuai [lines of authority] and to separate government and enterprises so that we still cannot handle affairs according to economic laws. This is done not only in business but in all aspects of industry, planning, and finance."[19] Li pointed out that most enterprises in Wuhan were "under the direction" of the Center and the province. City-run firms were very few. The value of fixed assets for enterprises under city management was less than one-third of the total value of fixed assets for all enterprises within the city limits.[20] Using Wuhan's machinery industry as an example, Li said the 1,141 factories (in 1983) were "interlocked vertically and horizontally and subordinated to more than forty xitongs (functional systems) and departments at the five administrative levels of Center, province, city, district, and neighborhood. Vertically and horizontally they have no mutual relationship." The result was operation at only 30 percent of what local economists considered potential industrial capacity.[21]

Li's remedy was the central-cities policy. These cities, not their provincial authorities, should manage all economic activity within their borders. A city should be given "enough authority in economics, enabling it to be engaged in essential construction and technology and equipment renovation and transformation, to break tiao-tiao kuai-kuai fetters, and, according to economic needs, carry out cooperative ventures across regions, departments, and trade and organize regions in rational economic networks."[22] This was to be done through separate listing in the state plan, jihua danlie . Briefly, a city's annual plan would be given its own listing in the national plan separate from the provincial plan. Municipal officials would deal directly with central planners regarding the contents of the city plan. Without jihua danlie , a city's annual plan would be subsumed in the provincial plan. The city would deal directly with provincial planners in this case. With separate listing, municipal construction projects and products would be able to "enter the national plan" directly. Provincial leaders initially welcomed the idea but soon came to see it as a direct assault on their planning prerogatives, especially when Li coupled jihua danlie with greater autonomy and authority in finance and foreign and domestic commerce, giving central cities "ample economic strength to bring into play the effects of an economic center."[23]


Li's formula, as I said at the outset, sought only further decentralization, this time from provinces to central cities, mirroring earlier efforts by provinces to decentralize from the Center. His strategy offered no new political, constitutional, or legal formula by which the new territorial competitors for power might more easily reach accommodation. Li pinned hopes for his strategy on successful implementation of the management system reform and decentralization to the enterprises, what one Wuhan economist called a long-term prospect, given the intransigence of both local and provincial authorities about giving up power.[24] But, as Zheng Yunfei wrote, this policy was blocked by a lack of political structural reform and clear definitions of the functions of Party, government, and enterprises.[25]

By simply decentralizing authority lower to the central cities without any fundamental change in tiao-kuai relationships, the bargaining inherent in the Chinese system was increasingly to be found in the localities as well as Beijing.


Throughout early 1983 Li Chonghuai was busy publicizing his strategy for Wuhan's development. A series of articles in the local media and academic journals pushed the idea of Wuhan's relying on "liang tong," or liutong , meaning circulation (of commodities), and jiaotong , meaning communications.[26] Thus Wuhan should rely on its geographic position in China's center, equidistant along the main rail line from Beijing in the north and Guangzhou in the south and along the Yangtze River from Chongqing to the west and Shanghai to the east. By relying on this position, Wuhan could recapture the leading position it had early in the twentieth century as the core city of a central China economic region. It would once again become the "thoroughfare of nine provinces."

The central-cities program was a national policy, as was stated earlier. Separate listing in the state plan for central cities was not limited to Wuhan. Chongqing was granted jihua danlie in early 1983. Implementing the policy there, however, was much less difficult than in Wuhan because "Chongqing is not the seat of provincial government. Wuhan is, and that makes it much more difficult. The closer authorities are to each other, the more difficulties there are."[27] Wuhan was the first provincial capital to be


given jihua danlie status and, as such, drew special attention from central leaders. By early 1989 twelve other cities, in addition to Wuhan and Chongqing, were granted jihua danlie: Guangzhou, Shenyang, Dalian, Chengdu, Harbin, Xian, Qingdao, Ningbo, Xiamen, Shenzhen, Nanjing, and Changchun.[28]

At the start it appeared that implementation would be easy. The Center and Wuhan both used bargaining strategies designed to convince Hubei officials of the policy's benefits for all concerned. While Center, province, and city watched developments in Chongqing closely, municipal officials and the State Commission on Restructuring the Economy communicated the need to approach Hubei about giving Wuhan separate listing in the state plan.[29] With prodding from the commission's vice-minister, Zhou Taihe, Wuhan sent Hubei a proposal, which provincial officials accepted. "Hubei didn't know what it would mean, so with Zhou's encouragement they accepted the plan gladly. Hubei sent the proposal to the Center, which acted immediately, something Beijing intended to do anyway. The Center had given clear hints to Wuhan of its support [in this issue] and the city seized the opportunity."[30] According to other sources, Hubei's initial acceptance of the policy was urged by the provincial first Party secretary, Guan Guangfu, and the then governor, Huang Zhizhen, close associates of the former PRC president Li Xiannian, a former Wuhan mayor.[31]

The bargaining strategies used here fit Lampton's classifications of "foot-in-the-door" and "a little something for everyone."[32] Theoretically, separate listing would lead to increased economic activity by Wuhan, which in turn would increase the financial returns for city, province, and Center, all of which "had little money."[33]

The decision to grant Wuhan jihua danlie was made in May 1984 and announced to the nation on June 3 in a statement that Wuhan would be a test-point for a variety of urban economic reforms, including provincial-level economic management status, the establishment of trade centers, the invigoration of transportation and the opening up of the Yangtze River, and the creation of horizontal economic ties with other regions in China.[34] Once the decision was made to permit jihua danlie for Wuhan, the city and the province had to work out how to implement the plan before the separation could be formalized by the State Council. During


this period it was clear that separation would lead to a division of powers between city and province, which created a variety of problems to which Hubei objected. The Center, led by Zhou Taihe, had to negotiate a settlement between Hubei and Wuhan so the policy could be implemented beginning with the 1985 plan.[35]

At this juncture, the historically bad relations between Wuhan and Hubei became a critical factor. The major initial problem, determining what Wuhan's proportion of retained capital should be, along with what enterprises under provincial jurisdiction would be sent down (xiafang ) to the city's jurisdiction, had to be negotiated in an atmosphere of mutual mistrust.

Problems In Relations

Standing behind the negotiations over separation was the continuing conflict between Hubei and Wuhan. The rub runs both ways. First, Hubei is fearful of Wuhan independence, given the latter's superior economic base. For many years it had been rumored that Wuhan would become a provincial-level city like Beijing, Shanghai, and Tianjin, and that Hubei would have to move its provincial capital to some other city, such as Huangshi or Shashi. "This rumor started in the Cultural Revolution. There was never anything to it, but it has persisted, so Hubei is afraid of any steps that could lead in this direction. That's why other Hubei cities always got more help from the province than Wuhan did."[36]

The result of this fear was what one city official termed Hubei's "reluctance" to consider Wuhan's development proposals for inclusion in the provincial plan that would itself become part of the national plan. This meant a gradual reduction in the amount of money going to Wuhan through Hubei. In the 1950s Wuhan received sizable investments for construction of such items as Wuhan Iron and Steel and the Yangtze River bridge. By the 1970s it was felt that investment should be made in other areas of the province.[37] Consequently, Wuhan requests for additional large-scale capital-construction projects (which had been made through the provincial planning process), despite benefits to economic development, were not included in Hubei's annual plans. An example of Hubei's reluctance in this regard is the construction of a new airport, which Wuhan proposed in each annual plan for nearly thirty years prior to separation. Citing lack of money, Hubei repeatedly cut the airport out of the city's annual plan.

Second, these bad relations were compounded by Wuhan's attitude as


the central-cities policy was debated and implementation was negotiated. Wuhan adopted an attitude that it was the biggest city in central China and that it could act as a development magnet for the entire region, not just Hubei. "From the beginning Wuhan thought its many functions had been ignored [by Hubei]. It tried to take too many steps too fast, too directly cutting itself off from Hubei. Wuhan thought it was Wuhan of central China and this made Hubei very unhappy. Shenyang took the opposite tactic, calling itself Shenyang of Liaoning. It put Liaoning first, even though it was breaking away from provincial bonds."[38] It was in this contentious atmosphere that the two sides began negotiations over the details of the separation. To help ease Hubei's concerns, Beijing, though pushing the central-cities policy, warned Wuhan that it would remain under Hubei's leadership.

Financial Problems

Before the policy could be implemented, the Center also had to find a way to assuage Hubei's worries about the prospect of losing sizable revenues to Wuhan. Thus the bargaining centered on two basic aspects of the proposed separate listing: assuring Hubei that Wuhan would not become a "province within a province,"[39] and more directly, finding an arrangement that would eliminate Hubei's objections to losing revenue.

Two key sources in the Wuhan city administration described what was at stake. Prior to separation, Wuhan was allowed to keep on average 20 percent of its revenue. Actually, this rate was "returned, not retained," as all revenue was sent to Hubei as the basic governmental accounting unit. Hubei kept 55 percent, (with 5 percent going to other Hubei local governments), sent the Center about 25 percent, and returned 20 percent to Wuhan with clear stipulations in each annual plan as to how the money was to be used.

This was the major sore point in the relations between Wuhan and Hubei. Revenue from the city accounted for about half of Hubei's total income, yet the rate of money returned to Wuhan was far less than the city contributed.

The effects of this treatment by Hubei continue to plague Wuhan, even after separation. During the negotiations leading to separation, the Center calculated the expenses and revenues of Wuhan for the previous five years, 1980 through 1984. It then said Wuhan could keep 19 percent while sending the rest to the Center. Expecting to be given between 30


and 40 percent of its earned revenue, Wuhan objected. The Center finally agreed on a 20 percent retention rate. This was certainly to Hubei's advantage. If Wuhan were able to retain large portions of revenue and thus gain greater independence in key financial resources, the city might prove to be too strong a competitor. However, given the basically incremental nature of decision making at the Center in such instances, Hubei did not need to worry. "The Center has an unwritten rule to decide everything. It bases every decision on the previous few years' experience. The Center doesn't have enough money, so a comparison is a good way. Despite Wuhan's objections, the city was given only what it had been getting from Hubei. That's why Hubei could sit quietly and let the Center handle the problem."[40]

What Hubei did seek was some mechanism that would allow the province not to lose any revenue that had previously come from Wuhan and that would now go directly to the state. The Center agreed to permit the province to count Wuhan's retained portion as part of Hubei's annually planned payments to the Center, meaning that the financial arrangement between all three parties would not really change, except in accounting terms.[41] Separation, then, was something less than complete if one considers the many ways governmental units are interrelated.

This fits with Solinger's findings that the negotiated settlement that paved the way for implementing the central-cities policy saw changes in the accounting procedures but little loss of revenue for Hubei. Based on interviews with Wuhan economists, she found that Hubei got about 100 million yuan per year from the Center, the initial amount the province lost as a result of jihua danlie and decentralization.[42] At the same time, Wuhan gave the Center about 100 million yuan more than Hubei had been doing before the policy was implemented, in large part because of increased economic activity.

Wuhan officials feel cheated by these results, especially after the other cities granted jihua danlie are permitted to retain between 30 and 40 percent of their income. Wuhan had the lowest retention rate of any of the first seven cities (there were fourteen by 1990) given separate listing in the national plan, despite the city's connections at the Center through Li Xiannian. "Wuhan thinks it lost a great deal. It wanted to retain a lot more of its money. The reason it gets the least is because the Center based the amount on the previous five years' experience. This reflects


the low status Wuhan was given by Hubei. The reason for this is the relationship between Wuhan and Hubei. It was very bad for a long long time."[43]

Despite the financial agreement, the Center announced that Wuhan was retaining 28 percent, with 72 percent going to the Center,[44] a point that was not appreciated by the city officials I interviewed. Three city-government sources said Wuhan's retention rate was 20 percent for 1985 through 1987. In 1988 it was decreased to 16.4 percent as part of tax system reform. This lower figure was determined by the Center as part of an incentive to increase production. It has nothing to do with separation, except that Wuhan started the tax reform from a lower retention-rate base.[45] This low retention rate is the key problem in Wuhan's development strategy. "We have a basic capital supply and demand problem. Local financing is very difficult. We have great need for money but a shortage of funds. This is an important reason why Wuhan is what it is."[46]

Despite the financial shell game and Wuhan's relatively low retention rate, the city benefited under jihua danlie because it could determine how to spend its money rather than getting approval from Hubei.[47] For example, Wuhan is now planning construction of a new airport in Tianhe, on the western outskirts of the city. In addition, Wuhan also gained the right to approve foreign investment and import projects up to U.S. $5 million, the same authority as Hubei. Further, city export revenues that had accrued to Hubei foreign trade corporations or were controlled by Hubei's foreign trade apparatus are now controlled by Wuhan's foreign trade organization. In 1984 total provincial revenues from exports was 1.46 billion yuan, of which 17.53 percent, or 256,320,000 yuan, came from Wuhan enterprises. In 1985, the first year that revenue went to Wuhan, the city's export income had increased by 16 percent, to 299,230,000 yuan, which accounted for 14.81 percent of total provincial export revenue.[48] Wuhan officials put the 1985 figure slightly higher, at 333,130,000 yuan.[49]



Once the financial arrangements had been negotiated, the Center on 13 October 1984 officially announced that Wuhan would be granted jihua danlie beginning with the 1985 plan. The central documents state that "in all aspects of planning, finance, banking, taxation, prices , industrial and commercial administration, labor and wages, electric power, materials distribution, foreign trade and foreign economic relations, post and communications, environmental protection, medical administration and inspection, tourism, and so forth, Wuhan enjoys provincial-level status in economic management power (xiangyou sheng yiji jingji guanli quanxian) " (emphasis added).[50] This seems comprehensive. City officials took it at face value and proceeded to exercise provincial-level rights in all these areas, no doubt taking, as was mentioned above, "too many steps too fast." They interpreted the above statement to give Wuhan rights in economics and administration. Hubei officials, however, read this much differently. To them, Wuhan's rights are limited to economic management (jingji guanli quanxian ) and do not include critical items of administration, such as distribution, pricing, and personnel.

The problem for both parties is the lack of any definition of where economics ends and administration begins in a planned economy. Hubei, therefore, has been able to block several Wuhan initiatives in policy areas that directly pertain to the city's economic development. As one economist with close ties to the city said, "In some areas Hubei continues to hold power. They simply refuse to give it up. The line where economics ends and administration begins is very, very thin. There is no definition and I don't know how long it will take before we can get one."[51]

According to a business source with close ties to Hubei and Wuhan, the central documents were purposely left vague. Without the resources to adequately enforce its will on lower levels, the Center is left with little choice but to set general guidelines and let the implementing parties involved bargain-out any disputes between them. "This vague writing is done purposely. They [the Center] are not stupid. They know it will cause problems. But what else can they do?"[52]

Given the already poor relations between the two governments, this differing interpretation has set the stage for a continuing series of prob-


lems between them that require bargaining. Knowing this, both sides have established "leadership groups" to handle problems as they arise. When problems are too critical or solutions too difficult to obtain, the mayor and the governor become active participants in negotiating a bargain that would settle the issue.[53]

The problems caused by the new relationship between Hubei and Wuhan can be found in almost every sector, but brief discussions involving distribution, price setting and food subsidies, and personnel provide clear examples of the bargaining necessary when policies such as jihua danlie are adopted in the absence of the appropriate political and legal means to determine definitions of authority.


Critical to any planned economy is the need for adequate distribution of the inputs necessary for production. According to Wuhan's interpretation of the central documents granting jihua danlie , the city is to be given provincial-level rights in materials distribution. Though directly related to management of the economy, Hubei officials view this activity as proper governmental administration. The province has exercised its authority in this sphere, more often as a means to "get back at" upstart city officials.

As economic reforms have instilled some market forces into the allocation picture, Hubei has been able to use its distribution capacity as a bargaining tool with Wuhan. For example, Solinger found that Hubei was withholding cotton from Wuhan textile mills, thereby threatening their production.[54] Of course, market forces open up opportunities for Wuhan as well. When textile prices are high, Hubei has refused to allocate cotton to city mills, threatening production and forcing the city to buy from more expensive suppliers outside the province. But when textile prices are falling and Hubei wants to get rid of cotton quicker, Wuhan has refused and continued to buy elsewhere.[55] Despite this game playing, it is estimated that "nearly one third of Wuhan's textile productive capacity is idle because of the lack of cotton."[56]

Commodity speculation was encouraged by decentralization of the distribution system. By September 1988, with economic retrenchment under way, Hubei ordered ten measures designed to "rectify the eco-


nomic order" for the entire province, including Wuhan. Among these was the demand that provincial quotas for the procurement of grain, oil, and cotton be met and that speculation be stopped. Distribution was to be recentralized to the provincial level.[57]


The central documents granting jihua danlie clearly state that prices are included in the areas now under Wuhan's competence. Yet Hubei has flatly refused to give the city any real authority in price management. "Hubei still sets the prices and subsidies for food. This is a sensitive problem and the mayor has to negotiate this directly with the governor."[58] For example, provincial and municipal authorities, fearful of "disorderly price increases," announced that basic monthly food subsidies would go up from 10 yuan per Wuhan resident to 13.50 yuan on April 1, 1988.[59] The city had sought to limit the subsidy's increase because inflation, combined with increasing population, makes it increasingly difficult to pay for them. Up until 1988 Wuhan was paying about 1 billion yuan per year for food subsidies. The province, fearful of adverse public reaction to inflationary pressures being felt for the first time in China in two generations, forced the city to accept a higher subsidy than it wanted. The city objected to what it sees as "direct interference" in its new authority, but it had little choice.[60]

By late October strong efforts to control inflation were being pushed by provincial authorities. With pressure from Hubei's first Party secretary, Guan Guangfu, Wuhan city Party secretary, Zheng Yunfei, publicly agreed to follow Hubei's price control index, abrogating city-approved price increases that were made after September 1. Further, the city agreed to forgo any price increases through spring 1989 and expansion of the scope and range of commodities with floating prices, and refused to allow any temporary price increases. Wuhan, at Hubei's insistence, agreed that no authority over prices would be delegated below the provincial level until some undetermined time in 1989.[61]

Wuhan's acquiescence to Hubei in these matters, in contrast to the 1984 effort to bargain with the province, indicates it lost the backing of


the Center on this issue. Indeed, it was the Center that pushed lower levels to, first, deal with public complaints about inflation and, when this failed, to bring it under control by means of the economic retrenchment. By early 1990 that program was clearly in place in Wuhan, where commercial activity was considerably less than that of mid-1988.


The rising costs of basic food subsidies has become a nagging problem for Wuhan. A severe cash shortage for reconstruction of badly needed transportation and communications facilities, factory equipment, and other basic city services is straining Wuhan's capacity to govern. The rising population, coupled with an annual inflation rate of at least 8 percent (in 1987), has meant that an increasing amount of city money has gone into what one disgruntled economist called "keeping the peace." In one year, from 1985 to 1986, the city's population rose by 116,000 to a total 6,199,600. To long-term visitors, the pressure this increasing population is putting on Wuhan's infrastructure is obvious.[62]

Facing increasing costs in food subsidies because of this and a provincial government unwilling to allow Wuhan to forgo raising the per capita subsidies in the midst of inflation, the city sought relief where it could. In autumn 1987 a municipal regulation was circulated through various city departments stating that, beginning on January 1, 1988, any unit bringing a new worker into the city would have to pay twelve thousand yuan. Though city planners hoped to make exceptions for certain skilled labor, the rules for which might take six months to formulate, the nascent Wuhan labor market came to a halt weeks before the January deadline. My business source said, "Even though the rules are still to be issued, many units are no longer accepting new employees because they fear they might have to pay."[63]


Based on information from three city sources, this policy's brief history clearly reflects the tension between Hubei and Wuhan. The city did not act alone but sought and obtained permission from a provincial vicegovernor to implement the program. When the policy documents circulated around city departments, however, Hubei changed its mind. An official with the Wuhan administration put the issue into terms that reflect both the differing opinions as to the extent of the city's authority and Hubei's fears of Wuhan's independence: "Wuhan wanted to limit population growth, which we see as an economic problem. Wuhan would screen who was coming in and determine who would be exempted. A regulation was prepared for this procedure. Hubei said no. If Wuhan implemented the policy, Hubei might have trouble moving its people in and out of the capital city."[64]


There is no doubt that the central-cities policy has permitted the growth of interurban economic networks. Solinger outlined the economic institutional framework built up in the Yangtze River Valley, centered at Wuhan, between 1984 and 1988.[65] This framework, if granted appropriate authority, could help transform the economy of central China from an administrative hierarchy into a regional economic network. The framework includes the creation of a wholesale marketing network; the creation of the Yangtze River Joint Transportation Company by thirteen cities along the river in 1984; establishment of sixty-four networks in commerce, materials supply, transport, and finance, plus the Wuhan Economic Cooperation Region by seventeen cities in Hubei, Hunan, and Jiangxi provinces; and creation of five capital markets to serve the region. Despite the creation of these various networks, the question was whether they would be permitted to act in their own economic interests or whether they would continue to be controlled by government agencies at the local, provincial, or central levels.

Since 1985, when jihua danlie was implemented, relations between Wuhan and Hubei have worsened. A stalemate ensued until China's overall economic situation worsened in the second half of 1988 and, as part of a national retrenchment program and Wuhan's loss of central backing in its efforts to negotiate with Hubei, the province was able to impose its will on Wuhan economic activity once again. Prior to the retrenchment program, however, Hubei continued to exercise authority in areas where Wuhan thinks it should have authority. Provincial and


municipal leaders were locked in debate, largely in scholarly journals, about the efficacy of jihua danlie . The debate involved those who oppose separation and those who think it has not gone far enough. Although the scholars do not say for whom they are speaking, those opposed to jihua danlie are voicing Hubei's opinion while the other side voices that of city officials.[66]

Opponents base their argument on three basic factors. First, the goal of urban economic reform was to diversify into a market economy with limited planning. Separation strengthens planning by elevating another governmental actor to an active role in the planning process. Second, jihua danlie does decentralize enterprises from the province to the city, but in the absence of management system reform "nothing has changed except the grandmother."[67] And third, the only real result has been the creation of "new contradictions" between Wuhan and Hubei, making a bad situation worse.

In my work as trade representative for the state of Ohio, based in Wuhan, I was continually mindful of the growing competition between Hubei and Wuhan. For example, prior to jihua danlie , Wuhan was always included in trade shows and other Hubei efforts to find foreign markets. From 1985 until 1988, however, Wuhan representatives were conspicuously absent from Hubei-sponsored trade promotion events. In 1988 the two began an annual, jointly sponsored trade exhibition in an effort to show greater cooperation. The competition between Hubei and Wuhan foreign trade corporations, trading companies and officials, however, became all the more obvious at these events.

Further, with jihua danlie came a division of the Bank of China, Hankou branch (the provincial branch), to exclude the Bank of China, Jianghan branch, representing Wuhan city. The Hankou branch moved to new, fully automated quarters, leaving the Jianghan branch to the old bank building. Also, the Hankou branch would not permit the Jianghan branch to cash personal checks, written in U.S. dollars, above $134, or about 500 yuan in foreign exchange certificates, even with a credit card as collateral. The Hankou branch, meanwhile, gladly cashed personal checks up to $750 if a credit card was used. This was done to limit Wuhan's ability to earn foreign exchange.

In 1988 interviews in Wuhan, Solinger also found that, in an effort to boost provincial income and to cut Wuhan's, Hubei "forbade lesser cities in the province which are still under its immediate control to order goods—such as shoes or tape recorders—from Wuhan."[68]

Proponents of separation do not dispute the poor showing jihua danlie


has had so far, but lay the blame for this on Hubei's recalcitrance and not on the policy itself. To them, separation must include granting wider powers to the cities if the policy is to succeed. "It is clear Wuhan has not been given enough power. Society is a complex system of laws, administration and economy. ... Presently administration is above law and economy. Administrative separation has not been given to Wuhan, only economic planning. Problems exist when there is a mix. It is hard to say which is which when both are present to Hubei claims the rights."[69]

The bargaining required to find a modus vivendi and to implement policies has become tougher. The result is a vicious circle of poor policy planning or backdoor deals that only heighten mutual mistrust. "When problems arise, everyone adopts a gentlemanly attitude and sits at the table. But when their interests are involved, the result is either no solution or under-the-table bargains and the creation of new contradictions that arise from them."[70]

My sources say it is more and more apparent that a successful negotiation will be difficult. Consequently, Wuhan has begun to ask the Center to mediate, a fact some Wuhan officials admit further alienates Hubei. Despite the Center's interest in pushing jihua danlie , it is apparent that Hubei continues to exercise authority and expects Wuhan to accept this fact. At a conference of Party and government leaders in August 1987, the provincial Party secretary, Guan Guangfu, pointedly told Wuhan it would not be permitted to go it alone: "By giving full play to Wuhan's multiple functions, the city should work in full cooperation with the whole province toward overall development. [But] ... successfully developing Wuhan needs joint efforts by the province and the city."[71] Nine months after this admonition, however, Wuhan had yet to give up ideas of a more complete separation. My sources with the city agreed that reaching an accommodation under the original separation plan was hopeless.[72]

By spring 1988 Wuhan's various research organizations had developed five alternatives to the original separation scheme that could be presented to the Center at an appropriate and opportune time.[73] The first would make an effort to better define the limits of separation by making Wuhan a practice case for more local authority in administrative and legislative activities in addition to economics. Wuhan would still be attached to Hubei but would have more authority that would be better defined. The second plan would make large portions of the city a Special


Economic Zone, similar to Shenzhen. This idea has been studied at length, with a section of Hankou along the north side of the Yangtze River in the city's northeast earmarked for it.

The third plan, which gives Hubei anxiety, is to make Wuhan a provincial-level city, like Beijing, Shanghai, or Tianjin. Both the second and third plans include the fourth idea, setting aside a Special Administrative Zone within Wuhan for the provincial government, allowing it to operate under its own authority without having to move the provincial capital. Finally, there is discussion about making Wuhan a test case for an entirely market-oriented economy with no planning and little government administration of economic activity.

Though these alternatives are being prepared by Wuhan's planners, my sources had no answer as to how these plans could ever be implemented, given Hubei's unwillingness to grant jihua danlie as stipulated and the Center's lack of enforcement powers. The proposals reveal, however, what Downs might call the "excessive territorial sensitivity" of Hubei and Wuhan, which make change more difficult because it leads to irrational policy choices.[74] Such sensitivity makes conflict between territorial actors likely. The bureaus involved, therefore, seek to minimize this conflict either by narrowing the scope of proposed actions or by ignoring their competitors and going for broke. Both reactions, which Downs calls the shrinking violet and superman syndromes, respectively, are irrational.

It is highly unlikely the Center would approve any of the final three plans, while Wuhan's financial problems eliminate the creation of a special economic zone in the near term. Given this, these options are irrational by attempting too much—that is, Wuhan planners are engaging in the superman syndrome. The first plan is more realistic, but, given China's administrative system, its lack of institutionalization and law in determining how power might be shared and how disputes are settled, it too is irrational.


China's clampdown on the prodemocracy movement on 4 June 1989 and the repression of participants afterward makes it quite clear that the political system has changed little in the ten-year reform period of Deng Xiaoping's regime. The regime's violent reaction to the movement could not be foreseen, especially because it involves the loss of international credibility so carefully nurtured by China. But there was clear evidence that the reforms aimed at separating Party from government and admin-


istration from business were superficial: little had changed in the authority relations between various levels of government, especially below the province.[75]

Part of this evidence lies in the lengthy stalemate between Hubei and Wuhan over the limits of jihua danlie . Wuhan could not muster the strength, even with central backing, to convince the province to give up key economic decision-making power. The parameters of bargaining were set by Hubei. Ultimately, Hubei's ability to impose its will on Wuhan's economy in late 1988 doomed jihua danlie to failure. Reimposition of provincial authority came in the wake of inflationary pressure, as was discussed above, and after a January 1989 drop in industrial production in Wuhan and a number of other Hubei cities. Viewing Hubei's overall industrial production increase of 2.4 percent for January 1989 as fifth from the bottom nationwide (the national average was 2.8 percent), the vice-governor, Xu Penghang, noted that production in Wuhan, Huangshi, Shashi, Jingmen, and other areas actually declined. In a mid-February speech, he demanded that "all levels" and "all localities" arrange production in line with "lists ... drawn up by the state and the provincial authorities."[76]

The implication here is obvious; the central-cities policy, as implemented in Hubei and Wuhan, failed. The policy's success, as Li Chonghuai wrote, depended on successful implementation of management reforms designed to cut tiao-kuai lines of authority. But management reforms have not been implemented. Changing the power relations configured by tiao-kuai lines of authority over economic activity requires reform of the political system, not just the economic system, something the events of June 4 have shown is not acceptable to the Deng regime.

Efforts to cut tiao-kuai through economic system reform alone, for example, by creating yewu lines of authority exercised by industrial corporations, has failed in this task. As in the case of the Bengbu City Chemical Industry Corporation, enterprise managers see yewu lines of authority in terms of tiao-kuai lingdao guanxi . The number of lines "tying enterprises hand and foot" have increased rather than decreased.

Efforts to decentralize authority, giving it to provinces in the late 1970s and early 1980s, to key cities in the mid-1980s, and, in some


functional areas, to smaller cities in the late 1980s,[77] have reduced somewhat the power of tiao-tiao lines of authority but, by giving provinces and some cities greater financial resources and authority over such items as materials distribution and personnel, have increased the power and number of kuai-kuai lines of authority. "At the moment, kuai-kuai is tighter than tiao-tiao. Tiao-tiao interference is still great. But the real problem is kuai-kuai interference. At this level, the provincial level, there is no real understanding of what needs to be done for economic development, or at least no real willingness to do it."[78]

The results of jihua danlie , then, at least in Wuhan, have been tension as Wuhan attempted to compete with Hubei for kuai-kuai authority. A business source said that "Wuhan's tiao-tiao is the Center, its kuai-kuai is Hubei. Now [after separation] Wuhan is trying to break its kuai-kuai from Hubei and Hubei is very upset with this. There is a severe lack of cooperation between them. This is compounded by the confusion of the reform period."[79]

The tiao-kuai lines of authority that constitute China's structural organization are, theoretically, supposed to cooperate in a system of dual rule that never really did work.[80] In the absence of cooperation between the two, the Chinese Communist Party is to act as the mediating, unifying force, with leadership coming from the Center.

But how can officials who disagree while wearing their administrative hats suddenly find the willingness to cooperate when they put on their Party hats? They cannot, so tiao-kuai competition exists within the Party as well, a mirror image of what is more easily seen in the government. And, while Wuhan and Hubei vie for kuai-kuai power, their respective Party committees are likewise engaged. This can be seen in the differing points of view expressed by Hubei's provincial Party secretary, Guan Guangfu, and Wuhan's Party secretary, Zheng Yunfei. The latter is also a member of Hubei's provincial Party Committee.

A business source, also a Party member, said, "In reality, Wuhan and Hubei cannot cooperate at both the administrative and the Party level. The split has created a kuai-kuai competition within the Party. There always was tiao-tiao competition between the Center and local Party branches."[81]


Economically speaking, the central-cities policy is an effort to decentralize decision-making power closer to the point of production in order to maximize efficiency and flexibility and to push growth. Politically speaking, it is an effort to decentralize power to a key city that has become a competitor with its provincial government. The competition is a predictable result, given that there is no strong consensus about the policy's goals.

Herein lies China's Catch-22, put into terms of the Law of Countervailing Goal Pressures used by Downs: economic development requires innovation, which, especially in a planned economy, "creates a strain toward greater goal diversity in every organization." But Hubei's fear of losing power to Wuhan is based on its "need for control and coordination, [which] creates a strain toward greater goal consensus." Thus goal consensus "is a vital part of any true decentralization of authority."[82]

But the functional aspects of the central-cities policy encourages heterogeneous goals between the two territorial actors. The policy, with jihua danlie , is broad in scope. It has multiple, highly complex, and vaguely defined functions, which must operate simultaneously. There is considerable conflict about these functions as they relate to relative power between Hubei and Wuhan. All this presages conflict between the actors involved. Despite Wuhan's continuing efforts to wrest greater authority from Hubei, its kuai-kuai leader, in the absence of specific policy changes granting the city greater power, there has been no real decentralization of authority to the municipal level.[83]

When territorial actors compete for power in such an atmosphere of mistrust, under vague guidelines, and with no legal system that might mediate disputes, the result will be continual delay in making timely decisions because required policy action by those in authority, who are caught in the web of tiao-kuai hierarchies, needs to be bargained.


Local Bargaining Relationships and Urban Industrial Finance

Andrew G. Walder

I wish to thank Kenneth Lieberthal, David M. Lampton, Barry Naughton, Michel Oksenberg, and Ezra Vogel for their detailed comments on the original version of this chapter.

The term "bargaining" is used frequently to characterize bureaucratic behavior in socialist states. Political scientists have characterized policymaking and implementation as protracted processes of bargaining and accommodation among leaders of organizations.[1] Analysts of planned economies have come to see them as "infinitely flexible bargaining systems," in which production plans, material supply, prices, taxation, and credit are subject to protracted bargaining and renegotiation.[2] For the political scientist "bargaining" is an emblematic style of politics, said to be responsible for ambiguity and delays in decision making and for intractable problems of policy implementation. For the economist bargaining is a cause of soft enterprise-budget constraints, which in turn are said to explain the perennial inefficiency of traditional central planning and the protracted difficulties of industrial reform in Hungary, China, and elsewhere.

While these studies aptly characterize a style of bureaucratic decision


making and its consequences, there is a structural dimension to bargaining that has not received careful attention. With notable exceptions, political scientists have focused on the activity and strategy of bargaining, and economists on the consequences of bargaining, while neglecting the patterned relationships within which bargaining activities take place.[3] The bargaining that we see is a symptom, not a cause, of preexisting institutional structures. As Ellen Comisso observed, "Focusing on the bargaining process alone ignores the fact that the arenas within which bargaining occurs are strictly limited and the issues up for bureaucratic negotiation are tightly restricted. Further, the bargaining partners themselves (e.g., enterprises and ministries) do not determine these limits and restrictions; rather, the political leaders outside them do."[4] Bargaining is also constrained by peculiar kinds of resource dependencies and resource flows. It is accompanied by identifiable norms and is justified (or rationalized) by deducible values. The relationships in which bargaining activity is embedded are a neglected but vitally important subject. Here we focus, not on bargaining activity per se, but on bargaining relationships .

Nowhere are these relationships more evident, or more vital politically and economically, than in the government's fiscal and budgetary processes. In Chinese cities revenues come almost exclusively from taxes on enterprise profits. The proceeds are divided with the provincial or the central government, according to a negotiated formula. With its share, the city funds its social services, public works, and infrastructure development. Through its planning commissions and bureaus, the city government also redirects part of its revenues back into industry as credit and investment funds. Just as the retained share of its total annual revenues is renegotiated separately for every city, the city itself negotiates the proportionate annual flow of revenues between it and each enterprise.[5] These negotiations are especially important when the government approves a factory's investment project. Several local organizations are


involved continuously in these negotiations. Each of them plays a different role, and each has a different interest in the proceedings, but they must all work out a viable compromise on each case.[6]

In the summers of 1984, 1985, and 1986 I investigated these relationships in a study of industrial planning and financial reforms in Chinese cities.[7] I interviewed officials and executives from a total of sixty-one government agencies and industrial enterprises (see the appendix to this chapter) about production planning, supply and sales, and the present subject, taxation and finance. These interviews underpin the analysis I offer here.

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.


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.


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


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


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


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


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


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


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


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.

Municipal Budgetary And Fiscal Processes

The most distinctive feature of China's local budgetary and fiscal process is how closely, and routinely, investment and taxation decisions are interwined. What economists have called the "soft budget constraint" does not mean simply that enterprises can expect to be bailed out if they run into financial difficulty. It means that the decision to invest in industry is paired with a decision about changes in the division of revenues between enterprise and government, such that conditions for repayment will be created. Each decision about an investment loan is accompanied by a decision about the flow of revenues.

China's tax-for-profit reform (li gai shui ) and its budgetary reform (caizheng baogan ) have reinforced the tendency of local government to monitor closely the division of revenues between enterprise and government. The revenue share for the central or provincial budget, for local roads, hospitals, housing, and much of the funds for expansion of local industry (and thereby the further expansion of the local revenue base), all must come from locally collected taxes.

Since these reforms took effect in the early 1980s, local actors have had much more latitude in initiating industrial projects and have allocated greatly increased proportions of national investment.[24] Through the new tax system they have also become involved for the first time in continuous negotiation over the revenue flows between the city and industrial enterprises. This involves the development and evaluation of project proposals (xiangmu jianyi shu ) and feasibility studies (kexingxing baogao ); it requires successive rounds of meetings and approvals on each proposal; and it requires local actors to put together the funding from central, provincial, or local budgets, or from bank loans, to augment the funds provided by the enterprise.

In this short period of time a regular pattern of behavior and accompanying attitudes have already become evident. There is a marked tendency to appropriate and redistribute enterprise revenues when they are deemed inordinately high, to build consensus and thereby parcel responsibility among all local actors for specific investment decisions, and to reduce the risk of failed ventures beforehand by granting favorable terms to important projects. This behavior is accompanied by a clear set


of local attitudes toward the business environment and managerial responsibility, about welfare and employment, local development needs, and the legitimacy of claims to enterprise profit.

The Redistribution of Local Resources

Ironically, the same arguments that reformers use to argue for thorough price reform and greater enterprise autonomy are also used by local officials as the justification for their intervention in enterprise activities. Reformers argue that in today's half-reformed economy, unreformed prices do not yet send the proper signals to enterprises, and a number of objective conditions beyond the control of managers—transportation links, energy supply, state pricing decisions, existing state of capital stock—make the link between efficiency and profit tenuous and threaten to exacerbate existing distortions and imbalances. In the terminology of reform, these "objective conditions" (keguan tiaojian ), beyond the control of enterprise managers, make it impossible for such "subjective factors" (zhuguan yinsu ) as good management or hard work to be measured by factory profits. Local officials are highly conscious of this, and they take it as their right, indeed their duty, to protect enterprises under them from the consequences of unequal "objective conditions," ensure the balanced and stable growth of the local economy, and protect the welfare of local citizens.

The first consequence of this situation is a practice popularly referred to as "whipping the fast oxen" (bianda kuai niu )—in effect, tailoring effective taxation rates to rates of profit. As one factory director stated to me in a matter-of-fact fashion, "If our profits increase in future years, there will be supplementary taxes to adjust for changed performance."[25] This is often said, both in China and abroad, to reflect the desire of local officials to restrict enterprise autonomy and maintain their power. But even if local officials fully supported enterprise autonomy (and I encountered some very critical and outspoken advocates in various bureaus and banks), they would be compelled by circumstances to behave in this fashion.

Every city government will have a set of enterprises, typically producing raw or intermediate materials, whose products are in short supply and badly needed by other local enterprises, but whose price niche ensures that their profitability will be very low. These enterprises, typically producing steel or fabricated metal products, nonferrous metals, industrial chemicals, or simple components for engines or electrical equipment, will at best make profits that are quite small compared with their capitalization, and will frequently operate near the break-even point or below. They will be unable to cover more than a fraction of their badly


needed investments for plant renovation and expansion. Yet these are precisely the industries that need to develop most rapidly.[26]

At the same time, every local government will have a set of enterprises that are highly profitable and that succeed, not because their products are generally in short supply, but because the quality or specifications of their products are such that they find steady markets. These enterprises typically fabricate finished consumer or producer's goods; various kinds of machinery, electrical equipment, or consumer electronics are common examples. Their profit rates are much higher than those of older, inefficient plants and those producing raw or semifinished materials. Yet these high profits are arguably due to state pricing policies, which keep materials' prices relatively low and finished products' relatively high.

Unless it is to allow current bottleneck industries to stagnate, the city government has no choice but to favor the disadvantaged enterprises across a broad range of financial measures and administrative practices. The first measure it takes is to ration investment by setting its own priorities in local construction and renovation programs (guihua ), allocating investment projects to those enterprises the city wishes to develop fastest, regardless of prevailing profit rates.[27] Every city and every industrial bureau has five-year investment plans that allocate investment quotas down to each enterprise. Every construction or renovation project must be approved by the industrial bureau, the planning commission, or higher authorities, depending on its size, and put into this plan, even if it is relatively small and funded entirely by the enterprise. Enterprises with the financial wherewithal to substantially fund investment projects are allowed to do so, but only up to the limits established in the plan. Those who have been allocated a place in the plan, but who cannot substantially cover their needed investment, will receive tax cuts or subsidized loans to allow them to complete the construction or renovation plans decided upon by their leading organs.

Effective taxation rates are tailored to the profit rates of each enterprise. The adjustment tax (tiaojie shui ), designed to compensate for unequal competition due to price niches, different capital endowments,


and other "objective factors," was instituted with the shift to enterprise taxation and is the best known of these leveling mechanisms.[28] But in practice it was found that this tax was too small and too inflexible to allow local officials to guide industry effectively (tax regulations specified that this tax rate remain unchanged for a certain number of years).[29] In fact, on paper the entire tax structure looks quite inflexible, since localities, as it was explained repeatedly to me, do not have the power to change centrally determined rates of taxation.

Localities do, however, have a free hand in deciding how much of a factory's profits shall be exempted from taxation during any given year, and for most products they also have the right to exempt any amount of sales revenues from taxes on products. The only limit on these tax breaks, other than central regulations forbidding sales tax breaks on such products as alcohol and tobacco, is the finance bureau's calculation of the effect they will have on local revenues.

Tax breaks are routinely considered in three kinds of situations. In the first, enterprises that have habitually operated at a loss, yet which continue to turn out badly needed materials or components for other local industries, will receive tax breaks to allow them to continue to operate. On occasion, such enterprises will receive even larger concessions to subsidize large investments if local officials deem it necessary to turn the situation around. In the second situation, a plant that normally operates with a profit may, because of "objective conditions," find itself in financial difficulties. The objective conditions may be any number of things: shortages of raw materials, energy blackouts, price rises for raw materials. A temporary tax break will be negotiated to permit the firm, which is in trouble through circumstances beyond its control, to keep operating. The third situation is when a sizable renovation or construction project is undertaken. Because nominal tax rates are so high, very few can afford to repay investment loans within the customary time period. Every such project has a variable tax subsidy in its "loan repayment contract" (huankuan hetong ).

Although we have no data on the prevalence or magnitude of such tax


breaks, one gains the impression from interviews—particularly in the detailed knowledge that people at all levels have of the subsidies and the conditions under which they may be secured—that favorable tax treatment is common. This means that the upper limit on taxation is the nominal tax rate, with widespread reductions in the effective tax rate through exemptions of varying magnitudes. The actual rate of profit retention appears to average between 20 and 25 percent.[30]

There is another important redistributive mechanism known as "the concentration of funds" (jizhong zijin , or jizi ). These are administrative levies, usually by industrial bureaus but sometimes by planning commissions, on the retained profits of enterprises. One bureau official explained, "This is like an additional adjustment tax. We take more from those with more money, and less from those with less. All sixteen industrial corporations (bureaus) in Beijing do this."[31] The administrative agency simply takes away part of the factory's retained profits. At the industrial bureaus that described the practice to me, these levies ranged from 7 to 15 percent.[32] The bureau deposits the funds in a local bank or an investment and trust corporation and loans or grants them to needy enterprises under its supervision at preferential rates. In other cases, in a practice called "apportionment" (tanpai ) in one city, the city government simply places a levy on the profits of a particularly large and profitable firm in its jurisdiction.[33] These practices were controversial in 1986, and since the press at that time carried articles critical of them, enterprise officials openly complained to me about such "arbitrary practices."[34]


Sharing Risk

One important consequence of the city government's mission to compensate for "objective conditions" is the provision of a kind of insurance against the risk of industrial undertakings. This is an ironic consequence of the new stress on having enterprises repay investment loans. The bank examines every feasibility study and loan application for the firm's ability to repay out of increased profits. Not uncommonly, an application will be flagged by the bank as having too much risk (fengxian ) and as unacceptable, without awarding the firm favorable conditions.

At this point, industrial decision-makers are faced with a conflict between two principles, which they refer to as "economic efficiency" (jingji xiaolu ) and "social utility" (shehui xiaolu or shehui xuyao ). The prevailing attitude among those I interviewed is that the former is a rather narrow, blind, and calculating criterion, whereas the latter takes into account the greater public good. By the time a project application is rejected or flagged by a bank as unprofitable, it has already been approved by the industrial bureau involved, placed in the plan, and if it is large, already approved by the planning commission. In other words, the planning apparatus of the city has already pronounced upon its social utility.[35] There follows a protracted negotiation among industrial bureau, bank, tax bureau, finance bureau, and planning commission. The usual result is a set of "favorable conditions" (youhui taiojian ) that will allow the venture to succeed.

The finance and tax bureaus have four mechanisms that, in combination, allow them to fashion "favorable conditions" of widely varying attractiveness. The first is to reduce or eliminate the interest rate on the loan. The financial system simply pays the interest directly to the bank, and the enterprise repays only the principal. This is an "interest free loan" (wuxi daikuan ) or a "subsidized interest loan" (tiexi daikuan ). The second mechanism allows the enterprise to deduct its annual debt repayment from the profit subject to taxation. But it is common practice on construction loans financed by budgetary funds ("special project loans," texiang daikuan ) to allow up to a 100 percent income tax deduction on the debt repayment, or as the Chinese put it, to repay loans before taxes (shuiqian huankuan ).[36] Since the various taxes on enterprises usually add up to a nominal tax rate of 70 to 85 percent, this can be a large subsidy,


equal to the percentage the factory is allowed to repay before taxes times the tax rate.[37]

The third mechanism is to allow the enterprise an exception from the principle that it repay a loan out of new profits generated by the investment project. Enterprises whose projects are judged to be economically unprofitable but socially necessary will be granted the right to repay their loans out of their "old" profit, in addition to the new. The fourth mechanism, usually used only in projects with urgent social justification but poor financial prospects, is simply to treat loan repayments as taxes (shitong shangjiao renwu ).[38] In this case, loan repayments are simply counted toward the factory's tax obligation, releasing them from their normal tax obligations until the loan is repaid. With so many mechanisms at their disposal, local officials can tailor tax breaks of any size. They can, and do, fine-tune loan and tax packages to create in advance the conditions for repayment.[39] One might reasonably ask, given this ability to fine-tune financial conditions, whether there is any criterion financial bureaus use to determine how much preferential treatment to give a firm, and if so, what.

The only clear standard that I was able to discover was evident in all the cities I visited: the factory's bonus and welfare funds shall not be allowed to fall below the level of the year reforms began (1983 or 1984). Even if, in extreme cases, the factory must use all of its reserve funds to repay loans or cover losses, wages and benefits must not be allowed to fall.[40] This standard was usually justified by the argument that "objective conditions" necessitate tax breaks in the first place, so the work force should not suffer from circumstances beyond their control. Others stated the point more baldly and said that workers' incomes should not be allowed to suffer in the course of reforms.

These practices reduce significantly the element of risk in enterprise operations. Enterprises can depend on leading organs and other agencies to devise an investment package designed to secure success. If the enterprise still runs into difficulties repaying because the feasibility study


was too optimistic, or because of objective conditions, a firm can apply for a "hardship tax break" (kunnan jianmian ). The plea of "objective conditions" is ruled out in only three cases: if labor costs go up; if materials use rises; or if sales go down because of poor quality of product. The loan repayment contract is viewed as legitimately open to renegotiation. After confirming this, one enterprise manager said, "Usually this is no problem if you are a well-run factory and aren't a chronic money loser."[41]

If poor financial performance can be traced to "subjective factors," this is a blight on the manager's record. But tax breaks are still given, usually for one year but sometimes longer, to help turn the situation around: "Whether it is due to bad management or not, we still reduce taxes if we want to save the enterprises in a certain line of production. We are after all a socialist country, and we don't want enterprises to go bankrupt."[42] If the problems persist, local authorities may eventually decide, if the plant is important, to give the firm a large renovation project to increase its technical productivity and start with a clean slate.

The Shared Responsibility of Collective Decisions

Just as much of the risk of investment projects is absorbed by local industrial circles, so is the responsibility for investment decisions. Since government agencies have taken it upon themselves to intervene actively and compensate for "objective conditions," they take up much of the responsibility for investment decisions.

An enterprise's initial project proposal (xiangmu jianyi shu ) is submitted to its industrial bureau, but after that point various government agencies become involved. The industrial bureau commissions a feasibility study and may order revisions. Depending on its size, the project will then be taken to the planning commission, or to higher levels of government, for approval and to arrange a funding package. Finance bureaus and banks will examine the project proposal and arrange funding; when a tax break is required, the tax bureau must also be consulted. The loan repayment contract represents prolonged discussions by these agencies. Symbolically, it must be affixed with the seals of the enterprise itself, its industrial bureau, the finance bureau, bank, and tax bureau.[43]


In effect, the investment is not the enterprise's decision: it is a collective one of all of the local agencies that have discussed and approved it. "The responsibility is unclear, however, who it is that gives final approval, or who it is that has the right of final denial. If any one of these organs turns you down, you can't get it. So the responsibility is unclear. No one is entirely responsible."[44] In controversial cases, the decision follows from a long process of consensus building, which may in the end be settled by the planning commission or the mayor's office. The manager's plans have been scrutinized and approved by the entire local industrial circle. If something goes wrong that cannot be attributed directly to the manager's subsequent actions, all of the departments involved share responsibility for the initial decision to go ahead. This is one important reason, in addition to the more obvious economic ones, why local industrial circles are prone to save firms in financial difficulties. Not only can "objective conditions" be blamed, but they are themselves implicated, since they set the financial conditions under which firms operate.

Redistributive Politics: Bargains And Strategies

Bargaining closely follows the design of local fiscal and planning processes. Since these processes are essentially ones of revenue redistribution, bargaining is designed to affect marginal changes in redistributive decisions. Managers have an identifiable set of strategies, but their effectiveness is limited by the enterprise's bargaining position—something that cannot be changed by the manager.

Bargaining Positions

The enterprise that enjoys the best bargaining position is the one on which the city depends substantially for the supply of scarce inputs for local industry. Steel foundries and rolling and stamping mills, for example, enjoy an excellent bargaining position if they are not located in a major steel center, and if the city has a substantial heavy-manufacturing base. Here the city will be highly dependent upon the firm for the completion of local production plans, and the factory's arguments for favorable treatment and complaints about "objective conditions" carry considerable weight.[45] When profit rates are low because of a firm's price niche, as for steel mills, such pleas are even harder to resist. In one of the cities I studied, one large metal-fabricating plant, with only a fraction of


its annual production, could supply all the needs of local industry. When the local bureau of material supply needed an urgent shipment of its product for a local enterprise, that firm could use its assistance as leverage in financial negotiations with the city.

Size, however, is not an unalloyed advantage. In another city, a large metal-fabricating plant, relatively profitable and the largest of its kind in the country, turned out a product urgently needed throughout the nation. However, local demand for that firm's products was not high: the city had a small industrial base. In fact, this firm was so large that its taxes contributed 25 percent of the city's annual budget. Its size and profitability, however, were too tempting for the city: not only did the firm pay a high adjustment tax, it was also required to turn over 40 percent of its retained profits. The city justified this by arguing that support costs for such a large plant were a great burden for the relatively poor city. Whether this was true, I could not tell, but the manager of the firm complained at length.[46]

These cases illustrate the vagaries of size and dependence as an advantage for the firm. If the firm is large, is relatively unprofitable, and is a crucial supplier for local industry, it will consistently obtain the most favorable of financial conditions. If, however, it is large, is relatively profitable, and supplies national rather than local industry, it can be preyed upon as a cash cow for the local budget. The only recourse a firm in this situation will have is to appeal to the relevant ministry, and perhaps even to the state planning commission, to bring pressures upon local officials. I suspect that in this last example the matter could only be resolved if pressure from central agencies was accompanied by a concession in the revenue-sharing agreement between the finance ministry and the city.[47]

National priorities also appear to affect bargaining positions of enterprises, although to what degree I cannot measure. While objective conditions are often difficult to separate from subjective ones, the price niches of most sectors are relatively well known. Reform plans at the national level specify certain sectors as suffering from distorted prices, and others as having an unfair advantage. If you plead "objective conditions" to gain favorable treatment, your task is made easier if you are in a sector that does suffer from the price system. If you are not in such a position, you may be in a sector—such as most machine-building industries—that is experiencing rising materials costs but steady product prices. Central policy mandates that these firms "absorb" (xiaohua ) new costs through


increased efficiency. Officials will be less immediately attentive to pleas from these firms, unless there are additional objective conditions that affect them.

Whether they are profitable or not, some sectors are designated in each city as "key points" for local development. Sometimes these are determined by long-standing local needs; in other cases, they may represent a response to the priorities of the national five-year plan. It was evident in some cities that certain sectors—especially electronics and the computer industry—were receiving preferential treatment as a matter of both local and national policy, relatively independently of their profitability. As new growing sectors, they were being given favorable conditions for rapid growth.

On the other hand, unneeded industries perennially operating in the red will be gradually phased out. In Beijing in 1986 such a sector comprised the small, antiquated, and unprofitable chemical-fertilizer plants that could not sell their poor-quality products. The city had for several years been phasing out this sector. Heavy-industry plants in the city center were receiving the same treatment that year because the city had a beautification plan that sought to relocate polluting firms in the suburbs.

Bargaining Strategies

When an enterprise manager seeks to improve his firm's position, his bargaining strategies are constrained by the objective bargaining position of the firm. An effective bargainer might be able to compensate somewhat for such disavantages, or might be able to capitalize on a firm's inherent advantages better than a poor bargainer. But the general odds of success are limited by one's objective position.

Nonetheless, every manager appears to follow a standard set of strategies. The first is not to let obvious indicators of poor management appear. Make sure that labor-productivity figures do not drop, or that costs of production do not rise. Keep the labor force happy by making sure that their bonus income does not fall, and show them that you are making sincere efforts to build housing and improve other factory benefits. If necessary, let the word out that you are bending state regulations to help out the workers.[48]

As insurance against the possibility that, despite your best efforts, indicators of "subjective factors" will appear, begin to lay the groundwork for the plea of objective conditions. If there are any delays in the deliveries of materials or components, or if there are any other problems that constitute an objective condition that might explain lower productivity or higher costs, be sure to complain early and repeatedly to your


industrial bureau, the materials-management bureau, and even the economic commission, to make sure that it registers firmly that you are besieged by myriad urgent problems beyond your control. If it turns out that your costs stay down and your labor productivity goes up after all, you may convince your superiors of your skill.

Another strategy is an adaptation of traditional "hoarding" behavior: make sure that you do not do so well that you overfulfill your tax quota by a substantial amount. That will provoke an upward revision of your quota in the next period, making your life more difficult. Moreover, under the principle of "whipping the fast oxen," city authorities will be less amenable to your pleas for tax breaks or subsidized credit. Managers commonly work operating surpluses back into costs by engaging in small-scale renovation and construction, purchase materials, and "prepare for next year's production."[49] Managers commonly admit to this practice and do not view it as illegitimate, and industrial bureaus fully understand that this is going on and acquiesce in it. Tax and finance bureaus view this as a violation of state regulations, but do not have the capacity to monitor the bookkeeping techniques managers use to pad costs. It is also not clear whether, as representatives of local interests, they have a clear motivation to do so.[50] One tax official explained, "State enterprises are usually guilty of tax evasion. They generally hide funds, enter too many items into costs. We mainly use propaganda to control it, make sure everyone knows the regulations. We can only do spot checks of factory accounts, and rely on reports from the masses."[51]

Managers can also use the state plan to bargain for favorable financial treatment. Getting into mandatory state plans or "guidance plans" (really


mandatory plans imposed by local authorities) can be a real advantage.[52] If in the October planning work conference the planning commission wants you to increase your output of a certain product, or to produce a different one, a manager can use this request to bargain for a subsidized loan or a break on sales taxes for new products. One of the explicit rules of the game is that enterprise-government relations are in a state of moving equilibrium, or as one manager put it, "The standard is not what everyone else gets; its what you got last year. ... If you must accept a higher target, try to get something in return. Ask for approval of a renovation project using imported equipment, and a loan in foreign exchange. Then the (industrial) bureau runs to the economic commission to argue for the loan."[53] If a request or a demand from the government upsets that equilibrium in one area, it is only fair that in compensation, negotiations proceed in other areas to allow the enterprise to meet that request.

Finally, if city authorities find that "subjective factors" have caused declining performance, try to turn defeat into victory. Are profits down because you cannot sell your poor-quality products? Argue that the root of the problem is poor and antiquated capital equipment; what you really need is a large loan to import advanced Western technology and build a modern new workshop capable of producing the best quality items. Are your costs of production rising in the absence of higher costs for raw materials? Argue that the problem is dilapidated equipment that continually breaks down, requiring expensive repairs and causing delays; what you really need is a large renovation loan to replace your outdated machinery. Managers in this position, if unwilling to accept defeat, can use their situation as an opportunity to display managerial talent. Aggressive advocacy of a project proposal to turn the situation around will often meet a receptive response from local officials, who are also interested in turning a liability into an asset.

No matter how skillfully managers bargain for favorable treatment, successful bargaining further undercuts managerial autonomy. For the notion that drives these bargaining strategies is that of "objective conditions"—a term that justifies the city's responsibility to intervene extensively in enterprise affairs and to redistribute resources among them. No matter how much managers complain that they retain too little profit and have insufficient business autonomy, as soon as they run into difficulty or seek investment they turn to their superiors as supplicants


seeking relief from objective conditions. In China's budgetary and fiscal processes, bargaining strategies reinforce the dependence of enterprises on their superiors.

Conclusion: Bargaining In Perspective

If we view bargaining as a symptom of an institutional setting, it appears less consequential than if we focused exclusively on bargaining strategy and activity. For the rules of the game are given by a new system of revenue sharing that has given localities enhanced fiscal powers and a heightened incentive to regulate carefully the financial flows between the city budget and each enterprise. They are given by a system of unreformed prices and unequal capital endowments for which managers have no responsibility. They are also given, finally, by the city's quite legitimate task of managing local development, protecting fiscal stability, and safeguarding the income and employment of local citizens.

From this perspective, it makes little sense to account for soft budget constraints, or interminable delays in policy implementation, by invoking the phenomenon of bargaining. For bargaining is but a symptom of institutional realities that are themselves responsible for delays and soft budgets. The state's budgetary process and mechanisms for revenue generation are not premised on firm rules about property, responsibility, or entitlement. There are as yet no clear standards about what is legitimately the central government's or the city's or the enterprise's share of industrial profits. There are only customary practices and situational standards, which must be revised case by case. It is only out of the bargaining process that a "fair" determination of these matters can be reached.

The same is true of fiscal responsibility. Just as there are at best situational standards regarding shares of factory revenues, local industrial circles rarely assign final responsibility for investment decisions. Many agencies and officials are involved, and the responsibility is shared collectively. As a group they strive to create conditions that reduce risk, but they do not always succeed. Sometimes this failure can be laid to the manager's actions, but often it cannot. No matter how much managers may want autonomy in other areas of their jobs, in striving for these favorable conditions they willingly surrender their autonomy to city planners in return for insurance against financial risk and responsibility.

It is commonly said that China's industrial system, formerly a centralized bureaucracy, is becoming one in which autonomous firms face market situations. This is at best a half-truth, misleading because enterprises are not yet financially independent entities. They are more accurately seen, not as independent business entities, but as quasi-auton-


omous divisions within a corporate structure.[54] China's local industrial systems are becoming decentralized bureaucracies with expanded elements of market calculation. But they are still relatively coherent corporate structures. How these socialist corporations and socialist markets differ from their counterparts in market economies is beyond the scope of this chapter. Yet it is surely in the comparative study of corporate settings that we shall find answers to the most perplexing questions about China's industrial economy.

Appendix: Classified List Of Interviews

Government Commissions

1. Beijing Economic Commission

2. Beijing Planning Commission

3. Chongqing Planning Commission

4. Dalian Economic Commission

5. Shenyang Planning and Economic Commission

6. Tianjin Economic Commission

7. Tianjin Planning Commission

Functional Bureaus

1. Beijing Taxation Bureau

2. Beijing Materials Management Bureau

3. Beijing Finance Bureau

4. Chongqing Finance Bureau

5. Chongqing Taxation Bureau

6. Shanghai Taxation Bureau

7. Shenyang Finance Bureau

8. Shenyang Taxation Bureau

9. Shenyang Price Bureau

10. Shenyang Materials Management Bureau

11. Sichuan Province Finance Bureau

12. Tianjin Material Supply Bureau

13. Tianjin Taxation Bureau

14. Tianjin Finance Bureau


1. Beijing Branch, Construction Bank

2. Chongqing Branch, People's Bank

3. Chongqing Branch, Industrial-Commercial Bank

4. Tianjin Branch, Construction Bank

5. Tianjin Branch, Industrial-Commercial Bank

6. Shenyang Branch, Construction Bank


Industrial Bureaus (Corporations) and Companies

1. Beijing Machine Building Corporation

2. Beijing Computer Corporation

3. Beijing Woolen Knitwear Company

4. (Beijing) Capital Iron and Steel Corporation

5. Chongqing Machine Building Bureau

6. Dalian Metallurgy Corporation

7. Dalian Machine Building Corporation

8. Shenyang Machine Building Bureau

9. Shenyang Second Light Industrial Bureau

10. Shenyang Auto Industry Company

11. Shenyang Materials Trading Center


1. Beijing Electric Motor

2. Beijing Internal Combustion Engine

3. Beijing No. 2 Chemical

4. Beijing No. 2 Textile

5. (Beijing) Yili Foodstuffs

6. (Beijing) Guanghua Wood Products

7. Beijing No. 3 Semiconductor

8. Chengdu Seamless Tubing

9. Chengdu Internal Combustion Engine Parts

10. Chengdu Scientific Instruments

11. (Chongqing) Jialing Machinery

12. Chongqing Woolen Textiles

13. Dalian Steel Rolling Mill

14. Dalian Heavy Machinery

15. Shanghai No. 7 Radio

16. Shanghai Machine Tools

17. Shanghai No. X Clothing (pseud.)

18. Shenyang Cable

19. Shenyang Signal

20. (Shenyang) Dongbei Pharmaceuticals

21. Shenyang Transformer (1985 and 1986)

22. Shenyang Metal Furniture

23. Zhejiang Machine Building (pseud.)


Urbanizing Rural China: Bureaucratic Authority and Local Autonomy

David Zweig

As with all major shifts in rural policy since 1949, the current Chinese reforms have altered the distribution of power, authority, and resources at the county and subcounty levels. Peasants have been freed from the dependent relations that bound them to their village leaders (Oi 1985); this change allows them greater leeway to determine their crops and their avocation. Some can now migrate into other rural or urban settlements. A booming rural industrial sector, legitimized by the central government in 1984, is generating new resources, strengthening the power of lower-level officials, who control and tax these new enterprises, vis-à-vis their administrative superiors.[1] And resurgent markets and market towns revitalize both the "natural economy" and the interregional trade that crosses administrative boundaries, further weakening the influence of administrators who previously had tightly controlled all rural marketing.

But the weakening of bureaucratic power through rural reforms does not hold true for all reform policies, as the bureaucracy continues to limit the effect of many reforms on the distribution of resources and authority in the rural areas. One such policy is rural urbanization. Since


the early 1980s the state has called for increased urbanization, with the bulk of growth to occur in small cities, rural towns, and villages. Yet the process of rural urbanization shows that authority remains ensconced within the bureaucracy and distributed among the various levels within it, making bureaucratic authority, not the market, the best predictor of the outcome of decisions and the distribution of resources. County and town officials still possess important mechanisms of command and control over resources, production, migration, and economic opportunities. Although market forces are expanding, new pockets of local autonomy are developing, and county officials often must negotiate with subordinates, old patterns of authority have not decreased or changed as much as one might have predicted, given the sweeping nature of the reforms.

Rural Urbanization As An Issue Area

Like blind men studying the elephant, which aspect of the rural reforms one addresses determines one's perspective on the reforms' impact on the distribution of authority. A village-level focus may show a major transformation, as a new generation of rich peasants takes control from former production-team leaders (White 1987). The privatization of wholesale and long-distance trading would show a dramatic drop in state controls, depending on the location (Watson 1988). But studying "rural urbanization" demonstrates that a decreasing scope for the national plan need not lead to a total shift to a market economy.

This issue area is constrained for several reasons. First, unlike marketing reforms that cross administrative boundaries, these expanding settlements overlap with the existing administrative hierarchy, so prereform authority patterns persist within the reforming rural bureaucracy and community. Second, these settlements and towns remain the locus of Party and government committees and political authority at the county and subcounty levels. Towns are the site of income-enhancing opportunities, the end point of migration, and their governments own much of the expanding industrial base, allowing bureaucrats there to influence strongly the flow of people and resources.

Furthermore, the central government left responsibility for the rural urbanization process to county and county-town governments. (See the appendix to this chapter.) But limited resources for urban infrastructure lets the county influence resource allocations and maintain relations of dependency over lower levels in the hierarchy. This phenomenon mirrors that outlined in Chapter 11 in this volume.

To demonstrate how the rural bureaucracy influences the rural urbanization process I examine prereform rural settlements and administrative hierarchy and then describe administrative changes that have oc-


curred under the reforms. Then I discuss how county officials control developments in the county. Through planning, imposing development labels, and "nesting" administrative offices and enterprises within the physical boundaries of the county-towns and townships, the county has maintained significant control over localities within its domain. A study of the struggle among the county, county-towns, and townships over funds for town development will help clarify this relationship. I also show how county-town and township officials control access to the towns. In conclusion I draw some generalizations about the relationship between resources, hierarchy, and political authority as they relate to rural urbanization.

The Prereform Structure Of Authority And Settlements

In 1949 the Chinese Communist Party (CCP) inherited the Guomintang's local administrative hierarchy. Unlike the Qing dynasty, the Guomintang had established the district (qu ) between the county (xian ) and the administrative villages (xiang ) or towns. The qu was a supervisory agent by which the xian government managed the xiang , which, with a fairly well developed governmental structure, constituted the most basic level of government administration (Barnett 1965, 318–38). Large xiang, whose location made them major marketing centers, were classified as market towns, or zhen .[2]

In their ceaseless efforts to control both the economy and the political administration, the CCP extended subcounty controls. With the qu as the administrative level for organizing land-reform teams, their number doubled by 1955 and became full-scale governments between the xian and the xiang . But as collectivization increased the size of each agricultural producer cooperative, the xiang expanded to ensure continued coherence between economic and administrative organizations. As the xiang grew they began to approximate the size of the qu , so in December 1955 the disbanding of the qu left the xiang as the major administrative level below the xian (Schurmann 1968, 453). Continuing state efforts throughout the 1950s and 1960s to control private marketing killed the market town (jizhen ) as a commercial force and seat of autonomous authority.[3]


When the 1958 Great Leap Forward amalgamated the agricultural cooperatives and the xiang government and placed the headquarters of the new People's Communes in former jizhen or xiang government centers,[4] the former bifurcation of the commercial system and administrative control was ended, leaving the commune seat as a powerful node in the rural bureaucratic hierarchy, which combined economic, political, and social control.[5]

The Great Leap's failure transferred ownership and control over land and most resources to the village or subvillage production team, leaving communes and brigades with weak economic bases. County-controlled market towns, which were not commune seats—by 1978 there were only 1,100 in all of China—disappeared from view, tiny islands afloat in a collectivized countryside with which they had little contact. With commune towns serving supervisory roles for county interests (Butler 1978)—county organizations, such as the Agricultural Bank, Supply and Marketing Co-ops, and the Grain Bureau, had commune-level branches that controlled production and investment decisions, migration, financial exchanges, and labor mobilization—infrastructure in commune seats did not expand, as most investment went into production.[6]

One common trend throughout this period saw county, commune, and even brigade officials expropriate bank funds, grain supplies, and peasant labor to establish rural enterprises, expand administrative capabilities, and build a semiautonomous political-economic base (Nee 1983, 236; Zweig 1989a). On the eve of reform the commune system defined not only a spatial distribution of rural settlements, smaller villages, and fields, but also a governmental and Party hierarchy from the county to the commune, through the brigade to the village, with each unit's location and rank or status within that hierarchy determining the economic


resources under its political control, its relations to other organizations, and its economic and political power.

Administrative Structures And Changes Since 1983

Since the early 1950s the People's Republic of China (PRC) has maintained a sharp dichotomy, almost a "Second Great Wall," between urban and rural: for individuals it was their household registration; for settlements it was whether they were "designated towns" (jianzhi zhen ).[7] For both, the critical question was whether the state would share with a larger population the benefits urbanites were receiving.[8] Thus the PRC has established a hierarchy of urban and rural towns that reinforces these differences and structures the distribution of these benefits.

There are four categories of small towns in China: county seats (xian zhengfu suozaidi ), county-towns (xianshu zhen ), township seats (xiang zhengfu suozaidi ), and rural market towns (nongcun jizhen ). Their characteristics are outlined in the appendix to this chapter. As part of the urban hierarchy of settlements, county seats and county-towns are "designated towns" in that their status within the urban hierarchy has been approved by the appropriate provincial authorities according to the guidelines of the State Council (Ma and Cui 1987: 376). Both are under the direct control of the county government. County seats, sites of the county government, are most directly controlled by that government, but before 1984 over 370 of the 2,074 county seats were not designated towns.[9] County-towns include market towns and former commune headquarters—now sites of township governments—whose population and employment structure meet the necessary criteria to become towns. These guidelines have varied over the years and today they vary regionally also.[10] Since 1984 the state has


raised the status of rural towns to brake the flow of peasants into larger cities, so the number of designated towns has expanded from 2,781 (1983) to 7,956 (1985) and by 1987 to 10,280 (ZGTJNJ 1988, 23). As part of the urban hierarchy, designated towns are eligible for more benefits than their poorer cousins, the township seat and small market town.

Township seats and market towns, which are under administrative control of the township government, are at the top of the rural hierarchy and are treated as part of the rural areas. Although their population is increasing as well, they receive little state assistance and must extract funds from their own industries and the surrounding countryside to expand their urban infrastructure.

But being "designated" has both advantages and disadvantages. Designation increases a county-town's authority vis-à-vis the county government, the township around it, and the county-town's "ability and authority to manage well enterprises and units established at the town over whose affairs they must have administrative authority and responsibility" (Zhang Yuelin 1986, 98). They can levy more taxes than undesignated towns.[11] Also, the county helps former commune headquarters that are designated as county-towns before it helps those that remain township government seats. As a result, some township officials seek ways, such as padding the number of "urban" residents, to shift into the urban hierarchy. Township leaders in Jiangpu county, Jiangsu province, argued successfully that because the residence permits of agricultural workers on the nearby state farm, who ate state-supplied grain, were kept in their town's police station, the town's "urban" population sufficed to qualify it as a county-town. Since then the county has helped build new roads, a drinking-water system, and a new school.

Yet after towns become part of the urban hierarchy, county penetration can increase. The current policy to expand the county's economic role could place more bureaucrats in the county-towns (T. White 1988, 29–31). Officials in a Guangdong township resisted designation because acquiring county-town status would subject their industries to demands from the state industrial sector and stricter tax supervision (Siu 1988). Also, after a town becomes designated, the county can determine its


"developmental nature" (fazhan de xingzhi ) and make the town's economic plan.[12]

Other administrative changes have had only limited effect. Replacing the commune administration with the township government only affected the size of the area they administered.[13] Efforts to separate township Party, government, and economic structures had little impact on the real distribution of power; Party control still dominates. If these township seats do not meet the criteria of county-towns, they remain part of the rural hierarchy with the same control over the countryside that they exercised when they were the commune headquarters. Former brigades have become administrative villages (xingzheng cun ), but they are still run by the Party branch, not the village management committee. Only their size may have changed.[14]

Authority And Hierarchy Under Rural Urbanization

We now turn to an analysis of how the distribution of power within the local bureaucratic hierarchy affects rural urbanization. While numerous indicators demonstrate the distribution of authority within the rural political economy, I focus only on those related to the growth, development, and control of rural urbanization. Reform policies, by their very nature, create possibilities for reallocating resources. Thus the extent to which those resources are reallocated—compared with following the old pattern—will be a good measure of the degree to which the rural reforms have affected the distribution of power within the Chinese bureaucracy and the extent to which that bureaucracy can still affect society at large.[15]


The Special Case of Jiangsu Province

Writing about local changes in China is complicated by the vast regional discrepancies that have emerged. Although these were not insignificant under Mao, today less pressure for uniform policy implementation allows each locality's natural or historical characteristics to affect policy implementation. Therefore one must be cognizant of the uniqueness of Jiangsu province and the focal points of this discussion, Jiangpu county, outside Nanjing, where I did most of my interviewing, and southern Jiangsu (Sunan), where I also did some interviewing, but which is the primary locale referred to in many of the secondary sources used for this chapter. Jiangpu county, as a suburban county (shiqu ), may be more tightly controlled than counties in China that are not directly under a city administration.[16] However, Nanjing has contributed little to its economic development, leaving it with only average per capita income for the nation as a whole. Jiangpu's county-towns and townships are poorer than Sunan's, and rural industries, though important, are less developed. Therefore Jiangpu reflects national trends more than Sunan. However, unlike those in Guangdong and Fujian provinces, private businesses in Jiangpu were quite restricted. As of 1986 there were few private entrepreneurs in the county-towns and townships, although in 1987–88 their numbers increased. Also, there has been little migration to this area from outside the county.

Conditions in Sunan, particularly in counties in Suzhou and Wuxi municipalities, do not reflect national trends. Sunan is more industrialized and urbanized, with a tradition of small towns. For example, Wujiang county, outside Suzhou, where I carried out some interviews in summer 1988, has seven county-towns that have historically been of significant size. As county-towns they had only two vegetable brigades under their authority. Since 1983, however, six of them have been combined with neighboring townships, thus increasing their control over the surrounding countryside. The extent to which this has occurred in other parts of China is unclear; moreover, it is unlikely that there were more than a thousand towns like these Wujiang towns in all of China in the early 1980s.

Towns in Sunan also have powerful industrial bases, and these local government-owned factories inhibit private industrial activity. Wujiang county's Supply and Marketing Co-op simply "swallows" private industrial firms before they become serious competitors.[17] Also, although rural migration is a major factor in parts of rural China (Vogel 1989, 404–


5; Siu 1988), Wujiang and Wuxi factories employ outsiders mainly as construction workers. The townships treat the factories as community resources that should benefit local residents. Only one town in Wujiang county hires outside laborers. Another experimented with moving peasants into town; six hundred peasants moved in, but the policy was not introduced elsewhere in the county.

As owners of most enterprises in this area, Sunan township and county-town governments have more leverage with both peasants and the county government than governments elsewhere in China. Private enterprises may resist government demands for investment funds, but county-town governments can draw funds from factories they own far more easily. Also, county-towns in Wuxi county are wealthy, so the new "financial responsibility system" (caizheng baogan )—a new form of tax farming where each level of government has a fixed tax quota to pass up to the next level of government—makes them more independent, for with so many factories they still have enough funds for urban development.[18] On the other hand, towns in poorer areas in Jiangsu province, such as those in Jiangpu county, which rely on county assistance for urban development, remain vulnerable to county control. To this extent, Jiangpu is more representative of trends elsewhere in China, although the limited development of the private sector and the tighter constraints on migration there strengthen the town's authority vis-à-vis the peasants.

Indicators of the Persistence of County Control

As a formal level of government, the county has numerous measures for influencing local urbanization. It controls the taxation process, including the income tax for rural industries, a new value-added tax, as well as construction and commercial taxes available for infrastructural development; and since it can impose its own taxes, it can negotiate tax breaks in return for various concessions. Through its branch offices that are "nested" in the towns and townships—including the tax office, grain station, supply and marketing co-op, post office, market management committee, local police station, local branch of the Agricultural Bank of China or credit co-op, and middle school (Barnett 1965, 352–57)—it can directly and indirectly influence local development. Similarly, counties own factories, mines, forests, and other productive enterprises located within the spatial domain of county-towns or townships. Because of the


shortage of funds for town development and the major role taxes and profits from productive units play in local development, control over these enterprises gives the county significant leverage when dealing with town and township officials. Also, county investments in town development helps them control outcomes in their own favor. Other mechanisms include labeling designated towns, drawing up development plans, controlling land usage, making loans, and particularly in the case of the county seat, exercising direct administrative control.

Planning and Bureaucratic Control

Rural urbanization policy authorizes county governments to compose development plans for all county-towns, thereby increasing the county's control. In the case of the county seat, county governmental control is very tight. The plan for Zhujiang town, the seat of Jiangpu county, was composed by the county's Urban Planning Office, which reported that the town cannot evade the plan.[19] While officials from the county seat had to approve certain aspects of town construction, they had no decision-making authority: "We want total control of the town, but the county does not want to give it to us, so there is a conflict" (Jiangpu 1986). Mistrust of town planners and the large number of county governmental units in the county seat means that the county must ensure good conditions for its employees. Therefore town development is orchestrated to benefit the county, not the town, even though the county seat may benefit from better funding and urban planning.

Planning for the county seat of Wujiang county is "directly" under control of a fifteen-person County Urban Construction Leadership Small Group (Xian cheng jianshe lingdao xiaozu ), whose sole task is to develop the county seat.[20] With fourteen members drawn from leaders of various county bureaus,[21] only one person represents the county-seat government.

A critical planning question concerns land use. Under China's Land Law of April 1987 the amount of land that can shift out of agriculture is fixed at the provincial level, with quotas passed down to counties and towns. Wujiang county can appropriate 144 mou each year,[22] whose distri-


bution is determined by the county Land Management Bureau. Thus large projects using more than 3 mou of land need county authorization, further limiting county-town autonomy. County-towns have officials responsible to the county Urban Development Bureau who monitor land use and housing construction in the town and in the surrounding countryside as well. All peasants must now get permits from the town government before building new homes, even in distant villages.

But the extent of county control is unclear. If representatives of the Urban Development Bureau are indigenous to the locality, they will be enmeshed in local politics and will have difficulty denying their colleagues a chance to move onto land near the town.[23] Since towns can expropriate three mou of land without county approval, cadres can take land piece by piece for their homes, so long as the local official responsible for monitoring land usage is party to the scheme. In Tangquan town, between 1985 and 1987, all high-ranking township government officials, and many of their relatives and friends, moved into villages surrounding the town under the pretext of "town development." Inhabitants in these villages were furious, since each new home shrunk the allotment of land from which peasants made their living, but they could only send letters and photos to the provincial, city, and county governments. In response, county officials asked town officials to investigate. Thus, although the county may control large projects, town officials can ignore some county directives and expropriate land on the basis of small-town development.

Labeling County Towns

The county controls the "developmental label" a county-town receives; this in turn affects its position in the county's overall development strategy, its own budget priorities, and the type of outside assistance it receives.[24] While labels are not part of the formal planning scheme, Fei Xiaotong saw this classification process as "conducive to deciding the direction of future development of small towns" (Fei 1986, 26).

The five county-towns in Jiangpu county were labeled industrial, port, political, cultural, and tourist towns and received a development plan based on these designations. While county officials in the Urban Planning Bureau claim that the "basic direction" of development comes from the towns, the county looks at the issue from both the county's overall perspective and the needs of Nanjing city, whose Urban Planning Office has the ultimate decision-making authority. Tangquan town, a Nanjing test point for small-town planning since 1984, which had been earmarked for tourism (they had a beautiful reservoir), medicinal devel-


opment (because of their hot spring), and tree nurseries, could not get county permission to develop potentially polluting factories.[25]

But local perceptions do not mesh with the county's view.[26] Some Tangquan officials felt that their label restricted their entrepreneurial efforts; they could only seek funds for hotels, while other towns were developing industry. The county's assistance had been limited, and its plan undermined their development. The higher authorities want to bring in foreign tourism, but local officials feel that their lack of funds, equipment, and a decent road from the county seat make plans to bring in foreign tourists unrealistic.

Their plan is empty talk. We can't do it. We have our own plan which fits our reality. We put that plan forward, but the upper levels didn't agree. We want to proceed from the real situation, but they want to do it in a big way, to build a big hotel near the State Tree Farm. We have a contradiction with them, but they want to earn foreign currency. So the province, city, and county all helped draw the plan but it didn't work. There hasn't been any development.

Given that no foreign company appears willing to invest in this project, the local view appears justified. Moreover, the county planning commission is reconsidering its plan. Nevertheless, concern that the hospital and the public school were in the same building, making it easy to pass on diseases, led the county to donate over 300,000 yuan for a new school.

The degree of control incorporated in planning and labeling varies across counties. In Wujiang county, outside Suzhou, the wealth generated by township enterprises gave county-towns more autonomy (Wujiang 1987). However, in Jiangpu county, where the county-towns' weak industrial bases strengthen the county's role in the local political economy, labeling and planning were effective forces for county control, especially over county-towns needing development assistance. So long as towns depend on state budgets for construction funds and do not develop their own resources by promoting rural industries, they remain hostage to the decisions of the county government.

Nesting and Bureaucratic Authority

A widespread network of offices and enterprises owned and operated by the county government, but "nested" within the county-towns or township seats, increases the county's influence. These subbureaus or enterprises—


such as mines, forests, factories, or shops—support county-government interests when they conflict with those of the town. County-owned enterprises resist the county-towns' request for "contributions" to development funds in ways factories owned by county-towns cannot. In the cases to follow, local development efforts were undermined by the nested county bureaucracy.

In Tongli town, a county-town in Wujiang county, the county grain bureau wanted to construct two residential buildings for its staff in an area not designated as residential in the town's plan. After several months of wrangling, the town had to concede to county administrators, and the housing construction was allowed (Fei 1986, 338). Similarly, a running-water and drainage pipeline, built by Dongliu town, Dongzhi county, Anhui province, "crossed the doorway of the dormitory for the county's transportation station workers; the workers did not agree, so there was no choice but to halt the project" (Bai, Song, and Tang 1987, 57). We do not know the content of the negotiations process, but in both cases the issue was not one of political equality or negotiations among equals; rather, decisions were made in favor of the more powerful county administration.

County domination harmed development in the pre-1984 county-towns, which have been the clearest losers in the hierarchy of towns. Factories in those towns were often owned by the county government; yet, while they used local facilities and resources, the county invested little in the towns. Jobs in them were allocated by the County Labor Bureau, so county-town youths did not necessarily receive first access. County businesses such as supply and marketing co-ops in these towns were nominally led by both the county-government departments and the county-town administrators, but "they accept only the leadership of departments and ignore town leadership"; thus in 1986 county-towns that are not county seats experience the sharpest conflicts within the current administrative system (Fei 1986, 85). As county employees these nested county administrators respond to the hierarchical system (tiao-tiao ) rather than local (kuai-kuai ) leaders.

In Jiangpu county these county-towns developed poorly before 1979 (Jiangpu 1982, 139). Of the proportion of people living in all towns in the county, the proportion living in the county-towns, compared with the county seat and commune or market towns, decreased from 24.9 to 10.5 percent from 1953 to 1979, while the increase in these towns' actual population over twenty-six years was almost minimal (table 12.1). Unlike commune towns, which became the sites for commune or township enterprises, as well as of centers of political administration, these county-towns developed little industry and few administrative jobs, hence their limited population growth. Data from other parts of Jiangsu from 1984


TABLE 12.1. Urban Population Growth by Town Type, Jiangpu County, Jiangsu Province, 1953 and 1979






Rate of Increase

County seat






County-run towns






Market towns












SOURCE : "A County Directly Under the Administration of Nanjing City—A Preliminary Investigation of Small Town Construction and Development in Jiangpu County," Economic Geography , no. 2 (1982):139.

show why these towns declined. Within the older county-towns, the indigenous government owns the smallest percentage of enterprises (in output value terms) at 12.91 percent, almost 8 percent less than governments from surrounding townships and 33 percent less than the county government (see table 12.2). With little outside investment, such county-town governments have a weak tax base and little income for investment, making the county's authority dominant.

To resolve the nesting problem, county-run factories outside the county seat are expected to shift to the control of county-town governments (Zhao and Zhang 1986, 324). And nested officials in some towns and townships are to come under greater horizontal administrative (kuaikuai ) control, as county-town governments are empowered to hire, fire, transfer, reward, and penalize them (ZGNCJJ 1987a). But the nesting problem will persist. First, directors of these nested organizations will remain outside county-town and township control. Second, not only are county factories in some locations not shifting to county-town control, but some county officials are taking over lucrative former township factories after these newly designated towns come under their control.[27] Finally, because county seats have many county-government offices within them, county-government control over town development is imperative. County-level organizations in the county seat will not obey the county-seat government, which has no authority over them. Only a development committee of the county government has the authority to compel these county organizations to contribute to development projects in the county seat.

County officials have long been the most powerful institutional actors directing local development. And although market forces are decreasing the county's control over some aspects of the rural political economy,


TABLE 12.2. Ownership Composition of Industrial Enterprises in 190 Small Towns in Jiangsu Province, 1984 (by Industrial Output)


Location of Industrial Enterprises (%)

Level of Ownership

County Seats


Township Seats

County government








County-town government




Township government








Subvillage entity
















SOURCE: The Research Group on Small Towns in Jiangsu Province, "The Objectives and the Experience of Small Town Construction in Jiangsu Province," Shehuixue yanjiu (Research in Sociology), 1986, no. 4, p. 16.

NOTE : Percentages may not add up because of rounding.

patterns of authority established through forty years of economic planning continue to play a major role. In fact, as townships become county-towns, the county's formal right to dictate their development pattern increases. No doubt wealthy towns are more independent, and their ability to invest in their own future may expand under the "finance responsibility system." But for county-towns seeking to improve their urban infrastructure, county controls embodied in the labeling, nesting, and planning processes remain significant factors in their day-to-day existence.

Control Of Resources For Town Development

Small-town growth is critical for successful rural modernization (Rondinelli 1984). The almost 100 million rural laborers liberated by the rural reforms need to find work outside large urban centers. The commercialization of agriculture also increased the need for marketing centers (Tang and Ye 1986, 340).[28] Expanding rural enterprises need public services and infrastructural development, such as electricity, water, housing, and entertainment facilities. Thus the decision to expand rural towns has created a public-policy environment within which county and subcounty governments can allocate funds for expanding urban infra-


Fig. 12.1.
Sources of Funding for Town Construction


structure and industry. Figure 12.1 shows the sources of that investment. But does the county, the county-town, or the township seat control the new funds? Does the county use its influence over funds to its own benefit? What does the allocation of funds tell us about the distribution of authority in the countryside?

County-towns now receive development assistance from the county. In two county-towns in Jiangpu county the county helped build roads, drinking-water pipes, a new school, a new market, and a new housing project. Similar investments are occurring all over Jiangsu province (Tang and Ye 1986, 341). Some of these funds, such as those for schools or hospitals, originate from government ministries, such as education and public health, whose investments in the rural areas improve town life.

Yet funds for town construction are limited. A vice-minister of construction in Beijing stressed that "people's towns should be built by the people themselves."[29] Others have referred to "using the town to develop the town" (yi zhen yang zhen ) (Tang and Ye 1986, 343). But although local taxes and state budget assistance allow simply for "subsistence" governmental work (Byrd and Gelb 1988), the search for funding has


been decentralized, making the struggle over local taxes and funding a meaningful reflection of the distribution of authority in the countryside.

Taxes and Small-town Development

The county receives a variety of taxes, which it can use for rural urbanization. Although these taxes change constantly, in 1987 they included public-facility fees (gong yong shiye fei ), peasant income taxes, and local real estate or land use taxes. The income tax, paid by all rural enterprises, could take as much as 55 percent of their industrial income. Five percent of these funds are earmarked for urban construction. Recent findings show that a sales tax (or value-added tax applied to all goods produced in rural enterprises) supplies county governments with much of their funds (Walder 1989). However, it is not known for certain how this tax affects factories owned by county-towns or townships.

Still, because these funds are usually distributed to county authorities for investment in town construction, the county can invest the great majority of these funds in the county seat, not in county-towns. Although central and provincial governments stipulated that local industrial and commercial surtaxes, public utilities surtaxes, and real estate surtaxes should be used for small-town construction, "the funds they provide are too small to be of any help" (Fei 1986, 83–84). In Suzhou municipality, the sum from these three sources amounted to two million yuan, which was divided among eighteen county-towns. "But the greater part of the sum is spent on construction in county seats, while other towns get only a few tens of thousand yuan each. Many leaders of county-towns say their share is not enough even for repairing unsafe buildings in the town" (Fei 1986, 83–84). In other cases the county government keeps most of the funds for its own administrative costs. Factories in Qingyang town, a county seat, paid the county 13 million yuan in 1984 taxes, but between 1981 and 1984 county appropriations totaled only 380,000 yuan, less than 100,000 yuan a year. Although the county was expected to give the town the "three types of appropriations (san xiang bokuan ), for many years this has been empty talk" (Zhao and Zhang 1986, 325). Moreover, because the county wanted its taxes first, some of the town's projects could not get off the ground. In one instance, county officials refused to let two enterprises—which, as beneficiaries of a town-run bridge-building project, had to contribute to it—draw their 10,000 yuan contribution out of their pretax profits. State taxes had to be paid first, even though their after-tax profits were insufficient for completing the project. After three years of wrangling, the money had still not been appropriated nor had the bridge been completed (Zhao and Zhang 1986, 325). The county is extremely judicious in distributing this most popular of tax breaks.


Similarly, all enterprises owned by the county-seat government in Wujiang county pay the county government an urban-construction protection fee (chengshi jianshi weihu fei ) which is 7 percent of their pretax income. Before 1987 the county reinvested only 70 percent of these funds in the county seat, using the remaining 30 percent in other towns or projects. Thus the county used taxes and urban development to redistribute funds within the county. However, since 1987, when the county began a major project to expand the county seat, the county stopped investing in the building up of the other towns. Even in Jiangpu county, where the county government supplied the county seat with funds for administering the town—in 1985 the county gave 120,000 yuan and in 1986 it gave 260,000 yuan—much of this money came from taxes imposed on the county seat's own factories.

Yet the new "finance responsibility system," which is intended to make county-towns and townships collect taxes more aggressively and be fiscally more responsible and autonomous (ZGNCJJ 1987b), may increase county-town independence, particularly for wealthy towns that can meet their quotas. But in the case of Tangquan town, Jiangpu county officials appear to be holding onto 5 percent more funds than they should be. In summer 1988 a Tangquan official complained to a county cadre that the county had only returned 10 and not 15 percent of the expected funds. Even when the county official reminded him that the county had helped build the drinking-water system, the county-town manager argued that development assistance was separate from a policy that gave county-towns more funds for their own use. As we can see, the county was willing to invest in the town, but it tried to keep surplus funds in its own hands and thereby determine the locus of investment, rather than give the funds directly to the town. This way it could insure that most funds went to develop the county seat, where its bureaucrats live and work. Clearly the system of financial responsibility should put more taxes directly in the county-town governments' hands and help them invest in their own urban infrastructure. Yet one can feel confident that the county will use its authority to keep in its own hands as much as possible of the surplus taxes collected by the town.

Profits from Rural Industry and Small-town Development

Since township and village enterprises (TVEs) are the major source of new capital in the rural areas,[30] rural governments constantly try to control their fiscal activities (Oi 1987).[31] Poorly defined collective prop-


erty rights facilitate government interference. Although township governments, reestablished in 1984, were to separate economic and political power, they still control TVEs under their jurisdiction, making them both levels of government administration responsible for a community's development and owners of community-run enterprises (Song and Du 1990).

A major debate ensues on how much after-tax profits of TVEs should go to county-town and township governments for urban development and how much should be left in the factory. Under a 2:2:5:1 system, 20 percent of after-tax profits of TVEs goes to town development, with another 20 percent supplementing agriculture (yi gong bu nong ) (Tang and Ye 1986, 345).[32] A potentially inflated figure posits that 20–30 percent of the profits of locally controlled rural enterprises are going to develop educational and health services in small towns (Jin 1987, 34). Jiangpu county officials in the Rural Industry Bureau argued in 1986 that while 10 percent of the profits of TVEs went directly to the government that owned them, 30 percent went to these governments' industrial company (gongye gongsi ) for investment in agriculture, for building new factories, or for saving bankrupt ones. Forty percent of the funds are turned over to the local government (Jiangpu 1986).[33] According to Yok-shiu Lee's data, the percentage of after-tax profits of TVEs going to "collective welfare"—monies for rural highways, schools, theaters, and market-town infrastructure—tripled from 1978 to 1984, rising from 5.9 percent to 15.7 percent (see table 12.3).

Before 1985, when county-towns in Wujiang county did not control the surrounding rural areas, county-town leaders had difficulty in attaching the profits of township-owned enterprises that existed within their geographic domain, even though they had previously used these funds for repairing streets, roads, and bridges. Unlike the county government's superior status vis-à-vis the county seat, the legal status of county-towns


TABLE 12.3. Percentage Distribution of After-Tax Profits of Township and Village Enterprises, 1978–1984









Reinvest in TVEs








Assist agriculture








Purchase farm machinery








Farmland infrastructure








Aid to poor teams








Distribute to team membersa






Collective welfareb
















SOURCES: 1978–1979: ZGNYNJ 1980, 366.

1980–1981: ZGNCTJNJ 1985, 190.

1982: ZGNYNJ 1983, 83.

1983: ZGNYNJ 1984, 124.

1984: ZGNYNJ 1985, 181–82.

NOTE: This table was complied by Yok-shiu Lee and appeared in a draft chapter of his dissertation, Department of Urban Studies and Planning, MIT.

aTeam members here refer to those who have remained in farming jobs and not to the peasant workers.

b Collective welfare includes rural highways, schools, theaters, and market town infrastructure.

and township governments was formally the same, so leaders of township-owned enterprises simply refused funding requests from the county-town, accusing county-town officials of "levying contributions at random" (Fei 1986, 84). In fact, poorer towns in northern Jiangsu that took too much money from TVE profits for town development undermined industrial development (Tang and Ye 1986, 339–47). But the 1985 merger of county-towns and townships in Wujiang county has probably helped county-town officials raid factory profits for development projects. As a result, profits from TVEs are a critical source of funding for infrastructural development in county-towns and township seats, although the precise level of after-tax profits allocated for this investment remains unclear.

Banking and Small-town Development

While banking flexibility increased in some localities in the 1980s,[34] Jiangsu banks remained strongly influenced by county officials and were unlikely to invest in projects not approved by the county government.


Banks also became more responsible for their own profits and losses and became more independent of township or county-town officials than they had been of prereform commune officials, who took funds without authorization. So, without county guarantees or government prodding, they are unlikely to invest in such nonproductive projects as expanding urban infrastructure. Not surprisingly, banks are far more interested in investing in rural industries than in urban construction.[35]

In 1988, whether a settlement was a county seat, a county-town, or a township center affected its access to funds by determining the bank it could approach. Township governments and newly designated county-towns were to rely primarily on Agricultural Bank funds, but if the project called for capital construction, they could approach the Construction Bank for help. If the Agricultural Bank was short of funds, they could go elsewhere too, even though funds were constrained by the county's overall plan. But the county government had much more influence with the Construction Bank, which funds all large construction projects, than county-towns have, so county projects were more likely to find funding than were those of other towns.[36] In Jiangsu province, then, in the battle for bank loans, the county was likely to come out on top. County-towns that needed large funds for development projects must have their own funding or rely on the county to promote their case with the bank.

Migration Policy and Access to Towns

Town growth creates new opportunities, making access to town a scarce and valuable resource. As a result, some officials charge fees for access to town or for work permits, while others try to limit migration. In towns, peasants increase their wealth and improve their quality of life and their status. For many, work in town is more lucrative than work in the countryside. According to data from Yueyang district, Hunan province, the incomes of thirty specialized households still in their villages averaged 415 yuan per capita and 811 yuan per laborer, while incomes of specialized households who had moved to the town averaged 592 yuan per capita and 1,224 yuan per laborer (He and Zhang 1985, 31–35).

Since rural-urban migration is a contentious issue, social and legal limitations exist on peasant access to towns. Important social groups pressure


cadres to restrict peasant migration.[37] State laws allow cadres to redirect rural migrants away from the county seat and into lower-status market towns and county-towns (GWYGB 1984b, 919). Migrants must have (1) a permanent place to live in the town; (2) management skills or longtime jobs in a town enterprise or unit; (3) a license from the local Industrial and Commercial Bureau; (4) a sublease on their contracted farmland to another peasant (so land is not abandoned); and (5) an independent source of food.[38] To ensure that migrants meet these criteria, local officials in larger towns lacking public security offices (paichusuo ) were to set up "registration offices" (huqi dengji bangongshi ) (GWYGB 1984, 920) to control population flows. After migrants get to town, Industrial and Commercial Bureau officials still control the permits needed for access to marketing opportunities.[39] And in smaller towns illegal migrants probably find even fewer opportunities for illegal businesses or places to hide.

Many peasants who applied for permission to move were turned down. In Taishan county, Guangdong province, over a four-month period in late 1984, 15,000 peasants applied for permission to move to the county seat; 9,000 (60 percent) were not allowed to move (Lee 1985). In the first half of 1985, out of 4,000 prospective migrants to Longgang town, Jiangsu, only 515 (13 percent) were permitted to move (Lee 1988b). When 580 households applied to leave their villages in Changsanqiao county, Sichuan province, 369 (64 percent) failed to get permits (ZGNYNJ 1985, 101). In the town Helen Siu studied, only rural residents with immediate family members in town could register, and only as zili liang hu (households who supply their own grain).[40] In Jiangpu, as of May 1986, only 268 peasants had moved into Zhujiang town and none had changed their residence status, receiving only "residence permits"


(chang zhu hukou ).[41] Thus county-town officials still maintain serious controls over migration into town, although restraints on migration are breaking down year by year.[42]

Yet peasant migration can make county-town governments less dependent on county financial assistance. Migrants are a major funding source for new housing and buildings, particularly where rural industry is less developed. In Yueyang district, Hunan province, migrants built 62.2 percent of the floor space for new housing and shops (He and Zhang 1985, 34). In Chenggu county, Shaanxi province, peasants in 1984 contributed 5.02 million yuan toward town construction (People's Daily , 30 April 1985). And in Anhui province, average investment by each migrant household in the towns ranged from 4,700 to 15,500 yuan in 1984 (Almanac of Anhui's Economy 1985, 269–70; An Jian 1986, 25). They also pay taxes and fees for licenses, market management, land use, and construction (Tang and Ye 1986, 346).

Moreover, cadres can charge peasants fees or "rents" for access to income-increasing opportunities in these towns. Township and county-town governments charge aspiring factory workers an entrance fee, ranging from 1,000 to 7,500 yuan, calling them "workers bringing capital to factories" (gongren dai zi ru chang ). Tangquan's government, hungry for funds for industry but unable to secure bank loans, pressured peasants and village leaders to give the factory a loan. Although some villagers resisted, brigade officials persuaded them to agree (Jiangpu 1986).

A main reason for small-town development is to channel rural laborers away from big cities. But small towns have limited resources and economic opportunities, so local officials often restrict access to these towns. In the parts of Jiangsu province covered by this study, they continue to control the number of peasants moving to town. The resulting floating population in cities such as Shanghai has passed one million, making it uncertain if the small-town strategy will alleviate demands for rural-urban migration.

Conclusion: The Politics Of Rural Urbanization

Freedom at the lowest levels of rural society has expanded as both state and collective cadres have withdrawn from the daily management of


village life. But at the middle reaches of the rural hierarchy, the relationship between the county government and expanding rural settlements demonstrates the continuing role of bureaucratic authority as a determinant of resource allocations. Although one might assume that increased rural urbanization would weaken the county's control over the local political economy, I suggest that the distribution of authority has not changed as dramatically as one might have expected. County officials, through their bureaucratic positions, still control resources that either flow into these towns or are created within them. No doubt, modernization's demands for bureaucratic specialization has fragmented power within the county leadership. But findings here appear to confirm the control image offered by Lieberthal and Oksenberg and the argument that "vertical" (tiao-tiao ) authority remains more powerful than "horizontal" (kuai-kuai ) ties even under the reforms (Lieberthal and Oksenberg 1988).

Two factors affect the relationship between hierarchy and power. First, disparities in resource bases can increase or decrease the impact of hierarchy. If resource distribution is highly asymmetrical, relations between bureaucratic superiors and inferiors are even more likely to be based on a command model, leaving the inferior actor in the interaction with only obedient or supplicant behavior as his major options (unless he threatens bankruptcy, which his superior cannot accept). In the current policy environment, where expanding a town's social and economic infrastructure becomes a town official's major responsibility, officials in poorer towns could become more dependent on county officials for development assistance. And although counties also have political obligations to help towns grow, making county officials reliant on cooperation from town managers, planning, labeling, and investments have kept the county firmly in control of the development process. Even efforts to strengthen county-town and township financial bases may increase county-town officials' dependence on the county, particularly for poor towns. Under the "finance responsibility system," counties can lend funds to strengthen county-town and township governments, which the recipients must repay through judicious tax collection. While surpluses will benefit the county-town —especially wealthy county-towns with strong tax bases—shortages will be cumulative, making tax-poor county-towns, like state-owned firms, highly dependent on county government support. And even for wealthier county-towns, the county's control over the planning process allows them to set the county-town's development agenda. By financing only a part of the projects and pressuring the county-town to fund the remainder, the county may determine how the county-town invests its own funds. Such "conditional grants" are a powerful mechanism by which administrators can indirectly control lower-level governments.


The nesting process compounds the impact of hierarchy on the distribution of authority by giving county governments a core of allies who have directly penetrated these towns and who participate in county-town and township-seat government and Party meetings. County-affiliated firms and bureaus make profits and collect taxes and fees in the towns, which revert to the county government, all the while contributing little directly to the town's growth. And while new policies try to expand a town's control over county-level factories and offices within its physical domain, these units' county-level status may keep them beyond the town's political reach. As we have seen with the county seat, the new impetus for rural urbanization ensures even tighter control by the county government and undermines any devolution of authority over these nested units to the county-seat governments.

On the other hand, towns with strong industrial bases can undo some of the power disparity inherent in hierarchy. County-town and township governments that can draw on the profits of their own rural enterprises to strengthen their economic base are better able to negotiate with county officials. As in Wujiang county, unifying county-towns with neighboring townships, particularly if the latter have strong industrial bases, should weaken the county's influence. How different relations must be between county and town officials in poor counties—such as Shangrao county, Jiangxi province, where the county finances all township-level administration—and wealthy counties, such as Wuxi, where county-towns fund themselves and have a surplus that the county can tax. Though county-towns or townships in Wuxi are hierarchically subordinate to the county government, their wealth should make them stronger adversaries in the negotiations process.

Power relations among peasants and bureaucrats are affected in a similar way. Farmers who plant their land and market only small surpluses remain relatively free of state intrusions. Unlike lower-level bureaucrats who have no "exit" option, these peasants can withdraw in the face of abusive or unjust cadre demands. Clearly, independence is relative, since many resources needed for farming—such as seeds, fertilizer, pesticides, and land—remain locally controlled, making farmers dependent on local cadres (Oi 1987). But the asymmetry of power expands dramatically as common peasants, seeking access to new sources of wealth developing in and around the town, become subject to bureaucratic authority vested in town officials. As gatekeepers to the boundaries of income-enhancing opportunities—such as small shops, factories, or factory jobs—cadres are extremely powerful vis-à-vis China's common man. They can take peasant land to build their own homes, and there is little peasants can do. No doubt, wealthier peasants or those with strong family alliances possess resources to confront cadre authority. But atom-


ized individuals, stripped of their collective protection, remain in a highly vulnerable and inferior status in their confrontation with formidable bureaucratic forces.[43]

As of 1988, central control over local investment and development had decreased. Yet this devolution of central authority has not weakened bureaucratic control at the local level; in some ways it may have increased it. While forces unleashed by the commercialization of the rural economy—particularly the production and marketing of agricultural produce—no longer are monopolized by local officials, the county's control over development assistance and investment for expanding urban infrastructure at the county-town and township levels has ensured a continuing—in some locations an expanding—role for the local bureaucracy.

No doubt, rural urbanization is in its incipient stage, and the final distribution of authority derived from this process remains unclear. Efforts to reform both the financial relations between the county and the county-towns or townships and the authority relations between county-level nested units and the towns where they reside may weaken the county's authority. New resources, developing at all levels of rural society, create opportunities for redistributing authority. The prudent scholar must recognize that leaders in the emerging county-towns and townships, like their forebears in the communes, will use their political and economic authority over the countryside and their towns' critical point at the nexus between the rural and the urban economy to expand their financial and political resources. Yet a careful reading of past and current trends—tightening local finances in 1989 under the current retrenchment probably increased the county's influence—suggests that county officials through a multiplicity of channels will significantly influence the pattern of growth in the county-towns and townships and will remain the dominant force in the rural political economy in much of rural China.

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