Beijing gives local governments more say By Wu Zhong, China Editor
HONG KONG - There are signs that China's central government is giving regional
authorities more power to manage their local economies, while at the same
supervising them more carefully.
The move suggests that Beijing is redefining its relationship with local
government to cope with profound changes resulting from substantial economic
reforms.
Beijing has decentralized its power over land requisition, allowing
provincial governments to handle sales of farmland for construction. Beijing
has also allowed local governments to take bigger shares in revenues from land
sales and coal mining. Furthermore, the central government is now considering
granting local governments the authority to raise funds by issuing bonds.
Such moves would allow local authorities to enjoy greater autonomy and economic
benefits, while ensuring their continued loyalty to the central government.
Issuing bonds
"The central government is considering granting authorization, with restrictive
conditions, for local governments to issue bonds,'' said Financial Minister Jin
Renqing in his address to the meeting of Asia Pacific Economic Cooperation
(APEC) finance ministers on September 11.
Jin's remarks - the first made by a senior central government official in
public on the subject of local governments issuing bonds - immediately drew
criticism. Embezzlement of public funds at the local level is extremely common.
For instance, Shanghai Communist Party chief Chen Liangyu was recently sacked
for allegedly misusing billions of yuan from the city's social security funds.
So if local governments are allowed to raise funds through bond issuance, there
is a high risk of the money disappearing.
But analysts say bond issuance would help ease the financial difficulties
facing local governments, helping to boost economic development, while at the
same time making it less likely that cash-strapped officials will embezzle
other funds.
Days after Jin's comments, the Ministry of Finance rushed to clarify that the
authorization for bond issuance would only be granted to provincial governments
and prefecture-level city governments, not to lower-level governments.
However, China must develop better mechanisms for credit rating, risk
management and supervision before it allows regional governments to issue
bonds, otherwise the central government would likely face growing financial
risks or even crises, said Liu Shangxi, deputy director of the Ministry of
Finance's Research Institute for Fiscal Science.
China also needs to revise its current laws to allow local governments to issue
bonds. According to the current Budget Law (1995), local governments at all
levels are allowed to run deficit budgets but cannot issue bonds.
Another question that needs to be addressed is what would be used as collateral
for local government bond issuance, as this would determine what kinds of bonds
they would be able to issue.
With many problems yet to be resolved, it will likely be some time before
Beijing will clear the way for local governments to issue bonds.
However, if the plan could be successfully implemented, it would ease tensions
between the central and local governments over financial sources, analysts say.
Currently, only the central government can issue bonds, with the funds raised
mainly being used for national projects. As such, local authorities often have
to circumvent Beijing's policies, using illicit funds to support their economic
development initiatives, which is a great source of friction with the central
government.
Land supply rules
In early September, the central government issued new rules governing land
supply to improve its relations with local governments in the area of land
requisition. Under the new rules, the use of farmland for construction purposes
will no longer be approved by the State Council, China's cabinet, for each
project, but must be approved by provincial governments and reported to the
State Council on an annual basis.
Beijing will allow provincial governments to keep the money from land sales but
demand that revenues be included in local budgets so that they can be
scrutinized by higher authorities. This is a big departure from the current
practice, whereby local governments have total freedom to spend the money as
extra-budgetary revenue.
Circumventing Beijing's strict restrictions on land sales, local governments
have found other ways to dispose of land. They simply "lend" or "rent", instead
of "sell", land for construction and development, which they don't need to
report to the central government and can simply pocket.
A survey of 16 cities by the Ministry of Land and Resources last year showed
that nearly 50% of new land under development was acquired illegally. The
figure was as high as 90% in some cities.
Zhang Xinbao, a senior official with the Ministry of Land and Resources, was
quoted by Xinhua News Agency as saying reining in local governments was a major
goal of the new policy, as "local governments are actually behind almost all
the major cases of illegal land use". There are many reasons for this, but the
main one is that land-sale revenues have become a major source of income for
many local governments, Zhang said.
Enhancing supervision
To stop local governments from giving land to investors free of charge or at
very low prices, the central government will impose a minimum price tag on
farmland, which will vary according to what it would be used for. Officials who
sell land at prices lower than the mandated minimum will be prosecuted.
The government will also raise taxes from investors for the use of land. These
tax revenues will be used for the protection and development of new farmland.
The new rules explicitly ban the "rental" of lands from farmers for
construction purposes, which is increasingly used by some local governments and
investors to dodge taxes and eliminate the need to seek government approval.
There are also new policies aimed at protecting the interests of farmers whose
land is sold by local governments. Revenue from land sales must first be used
to pay for the resettlement of farmers and compensation for their crops. And it
makes it clear for the first time that if the sale price of any piece of land
is not enough to cover the cost of resettling farmers, local governments must
pay from their land-sale revenues.
Officials and analysts say the move will increase the cost of land and help
improve the efficiency of land usage. Minister of Land and Resources Su
Wensheng wrote in an article published by Xinhua that land prices were expected
to increase by 50% on average. But he did not expect housing prices to rise
significantly.
Mining revenue
In China, hundreds of coal miners are killed each year, and regional
protectionism has been blamed as a major factor for the fatalities. Even State
Administration of Work Safety Minister Li Yizhong has repeatedly blamed
collusion between businessmen and local officials for the frequent accidents.
But corruption aside, poor safety records can perhaps be attributed to the
central government's financial demands. Under China's constitution, all
underground resources belong to the state, which means that Beijing takes 40%
of all revenues from coal mining, leaving only 60% for local governments. Thus,
local officials claim that Beijing makes it financially difficult for them to
improve mine safety.
Apparently to address the issue, the Ministry of Finance, Ministry of Land and
Resources and the People's Bank of China recently jointly issued a circular to
re-adjust the coal revenue-sharing ratio between the central and local
governments.
According to the circular, from September 1, the central government's share in
local coal mining would drop to 20%, leaving local governments with 80%.
Beijing hopes that with bigger benefits, local governments will shoulder
greater responsibility for coal-mining safety.
But the significance of the change may go beyond that. It is in nature a
restructuring of the relationship between the central and local governments in
the coal mining industry, which may eventually spread to other sectors,
allowing local governments to have a greater say regarding economic affairs.
These new developments are in keeping with other economic reforms aimed at
shifting to a market economy, which is highly decentralized by its very nature.
As local governments gain more benefits, the regionalism trend will lose steam,
though it is unlikely that in such a huge country it can be completely
eradicated.
