While the world is still angst-ridden with the fragile recovery from the global
financial crisis, there seems no end to auspicious tidings coming out of China.
Riding on the back of robust exports, which grew by 33.2% in the first half of
the year, China's economy is expected to expand by up to 10% in 2010.
The Agricultural Bank of China could raise US$22.1 billion in the world's
biggest initial public offering. Yet some apparently positive news might carry
a big sting.
Consider the State Administration of Taxation's announcement this month that
the central government is due to collect 8 trillion yuan (US$1.8 trillion) of
revenue this year, or five times that of 2003. This opulence would appear to
insulate China from the
scourge of snowballing public debt, which is bedeviling Greece, Spain,
Portugal, and to some extent, Japan and the United States.
Beijing's fast-growing treasury, however, has been described even by the
official media as a double-edged sword. Firstly, this has provided conclusive
evidence about the severe lack of "distributive justice": that the bulk of
wealth generated by 32 years of reform has gone to the central government and
big enterprise groups, not to the majority of workers and peasants.
Secondly, while the central coffers seem overflowing with cash, more local
administrations than ever are on the brink of bankruptcy. The National Auditing
Office (NAO) noted earlier this month that 18 provinces, 16 major cities and 36
counties had run up debts of 2.79 trillion yuan. (The NAO did not disclose
details about the fiscal health of other regions.)
Even more worrisome are runaway debts incurred by so-called urban development
investment vehicles (UDIVs) or difang fazhan rongziping, which are firms
either run or backed by local governments that take out bank loans typically
backed by land assets. The risk is that in light of the country's currently
bubble-prone real estate market, the revenues from land sales, which are used
to repay these bank loans, are bound to dry up. The state media has estimated
that such debts range from 7 trillion yuan to upward of 10 trillion yuan.
Let us first examine the dearth of distributive and social justice, which is
the root cause of the rash of labor and other unrest this year. Apparently
anticipating the undercurrents of discontent, Premier Wen Jiabao pledged at
this year's National People's Congress (NPC) in March that his cabinet will
strive toward a more equitable share of the economic pie for all Chinese. "Let
equality and justice shine brighter than the sun," he said. "Let the people
live with more dignity."
Yet, the lion's share of national wealth has continued to flow into central
coffers as well as large-scale enterprises. In the first five months of the
year, revenues accruing to the central government grew by 30.8% and profits for
big firms soared by 81.6%, while the income of workers and farmers went up by a
mere 10%. In theory, this increase is well above inflation, which was 3.1% last
May. Yet even the Chinese media admitted that the Consumer Price Index figure
hardly reflected spiraling inflation, especially in the cities. For example,
apartment rentals in urban centers jumped by nearly 20% in the first half of
this year.
A key reason behind the spate of labor incidents that first struck
foreign-owned firms in the spring and then spread all over China is that a new
generation of laborers is no longer willing to tolerate the unjust distribution
of wealth. Salaries for workers as a percentage age of gross domestic product
(GDP) have fallen by 20% in the past 22 years.
In his May Day address this year, President Hu Jintao vowed that Chinese
workers "must be able to work with dignity". Under instructions from the
Chinese Communist Party (CCP) leadership, almost all of the country's provinces
and cities have raised the minimum wage for urban workers. Early this month,
nine provinces and cities, including Beijing, Shenzhen, Henan, Shaanxi, Anhui
and Hainan, lifted their lowest salary scales from 15.8% to 31.7%.
The minimum wage in prosperous cities and provinces such as Beijing, Guangzhou,
Shanghai and Jiangsu has breached the 1,000 yuan mark. While these figures seem
impressive, they can hardly help workers cope with escalating living costs,
especially in coastal cities. Take for instance Guangzhou's minimum wage, which
increased 4.4 times from 250 yuan in 1993 to 1,100 yuan earlier this year.
During the same period, the average salary in the cosmopolitan city rose by six
times. More significantly, while Guangzhou's minimum wage was 50% of the
average paycheck for workers in the early 2000s, the ratio has actually fallen
to 30%.
Chinese scholars warn that Beijing needs to speedily address the "rich
government versus poor citizenry" (guofu minqiong) dichotomy. According
to Jia Kang, a senior researcher at the Ministry of Finance, while the
government's revenue is second only to that of the United States, the per
capita income of Chinese citizens ranks behind that of more than 100 countries,
including numerous Third World nations.
Chinese Academy of Social Science economist Gao Peiyong warned that Beijing
should immediately boost citizens' share of the pie through means including
lowering taxes for wage-earners and boosting cost-of-living subsidies to the
jobless. "The government should significantly expand input in agriculture,
education, technology, social welfare and health," Gao told the Chinese press
at the end of June.
No less problematic is the contradiction between an increasingly well-heeled
central government on the one hand, and impoverished local administrations on
the other. Thanks to the success of the dual-tax system introduced by
ex-premier Zhu Rongji in the mid-1990s, the central government's share of
national revenue has risen to more than 52%.
This is despite the fact that the central treasury has continued to provide
annual transfer payments to poor regions in central and western China. Such
subsidies rose from 238.90 billion yuan in 1994 to 2.86 trillion yuan last
year. Yet, the increasing marketization of the economy has made it relatively
easy for resourceful local cadres to replenish their treasuries. Furthermore,
the easiest way for municipal administrations to raise revenue is to sell
land-use rights to real-estate developers. Local governments' dependence on
land sales - as well as taxation on properties - is deemed a key reason behind
the Wen cabinet's failure to tackle the real-estate bubble through 2009 and
early 2010.
The imminent bursting of the real-estate bubble, however, has exposed the
Achilles' heel of financing grassroots governments. Nowhere is this more
evident than in the irresponsible strategies of the estimated 4,000 UDIVs that
have been set up since 2008.
Aggressive investments initiated by regional cadres to re-energize local
economies were initially portrayed by the media as well-timed efforts to
complement the State Council's 4 trillion yuan stimulus package unveiled in
late 2008. A good number of UDIVs have underwritten public interest (gongyixing)
projects in infrastructure and related sectors. It soon became clear, however,
that the great majority of UDIVs was solely interested in speculative
real-estate deals, many of which began to turn sour this past spring.
According to a mid-year report by the NAO, debts sustained by seven provinces,
10 cities and 14 counties have exceeded their total sources of income; in the
worst case, debts were 364.77% of revenue. Moreover, these 31 local
administrations were forced to raise new loans to cover interests charged on
old ones. Fears about the wholesale collapse of regional governments' finances
have in turn hamstrung Beijing's efforts in rectifying the real-estate and
other overheated sectors.
It is a testimony to the State Council's weak and lax control over the
localities that it waited until last month to roll out a circular on
"strengthening local governments' management of investment vehicles". The
document praised a number of UDIVs for "strengthening infrastructure
construction and for doing positive economic work in the face of the global
financial crisis".
Yet the main thrust of the directive was that banks and financial institutions
must exercise due caution when making loans to these firms. The State Council
urged banks to "implement vetting procedures according to commercial
principles, and to cautiously assess the borrowers' ability and their
[possible] sources for repayment." Banks were told not to lend to borrowers
with no adequate cash flow. This belated instruction implies that many banks
had extended credit lines to UDIVs without having done due diligence - and that
this state of affairs was tolerated by both regional and central departments
for a relatively long time.
What is behind Beijing's failure to ensure that local governments observe a
modicum of financial discipline? On the surface, the top party-and-state
authorities seem to have ironclad control over the appointment, transfer or
dismissal of regional officials. Since the days of ex-president Jiang Zemin,
the CCP Department of Organization has used the "personnel card" to rein in
recalcitrant and overweening "warlords".
Even before he became CCP General Secretary in late 2002, Hu, the head of the
Communist Youth League Faction (CYLF), had begun systematically naming
CYLF-affiliated cadres to senior slots in the localities. The party secretaries
of about half of China's 27 provinces and autonomous regions can be considered
alumnae of the powerful league. Yet factionalism has proven to be no guarantee
of either the administrative ability - or the fiscal prudence - of officials.
Regional cadres' deficient fiscal discipline could in turn exacerbate the
masses' dissatisfaction with party-and-state apparatus. After all, a lot of the
programs geared toward beefing up the social security net and raising the
peasants' standard of living, which Premier Wen has proclaimed with great
fanfare, have to be implemented by grassroots government units.
In addition, debt-ridden local administrations often dig into social-welfare
and education funds to bankroll dubious investments in the real estate and
stock markets - or to cover interests on bank loans. Should this state of
affairs continue, social unrest will worsen as Beijing's grip over regional
warlords becomes more tenuous. The voluminous revenues accruing to central
coffers will only give the CCP leadership a false sense of security - a
dangerous premise going into the nation's deepening contradictions.
Dr Willy Wo-Lap Lam is a senior fellow at The Jamestown Foundation. He
has worked in senior editorial positions in international media including
Asiaweek newsmagazine, South China Morning Post, and the Asia-Pacific
Headquarters of CNN. He is the author of five books on China, including the
recently published Chinese Politics in the Hu Jintao Era: New Leaders,
New Challenges. Lam is an adjunct professor of China studies at Akita
International University, Japan, and at the Chinese University of Hong Kong.
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