Local Discussions About China's Financial Challenges Deserve A Listen

There’s good reason to note some of the recent macroeconomic indicators here in China pointing to problems—that despite the reports of stronger-than-expected quarterly growth, decision-makers in Beijing will be hard-pressed to keep the economy humming.

But that’s also been the trope for some time among many observers: China’s leaders face fiscal challenges; debt loads are debilitating; they may not make it—the Impending Collapse scenario that’s never arrived despite all the predictions it’s about to.[1]

Like so many discussions about China, such forecasts from afar are a projection of what analysts think elites here should be concerned about. And that becomes tautological: the pressing need for Beijing is for fiscal reform; they’re not acting to open up financial markets; so any attempts to restructure the economy here are bound to fail. If Beijing decides its energies are best placed elsewhere, that’s interpreted by many outside commentators as confirmation that the leadership here is failing at reform, not understanding the situation the way they need to. The possibility that cadres and bureaucrats might actually know what they’re doing--but are compelled and constrained by all sorts of factors and think that they should be focusing on something else--seems only rarely to occur to observers.

It’s far more useful to note what Chinese officials are focusing on in their localities; how they themselves define the situation and the problems they’re facing and fighting in their own front yard.

In Jiangsu, what’s capturing a good deal of government attention currently is the “street budget” [街道预算]—how local funds are collected, managed, distributed and accounted for. In the words of Lin Keqin [林克勤], the deputy head of the Nanjing Municipal People’s Congress, there’s a need “to improve the legitimacy and rationality [合法性和合理性] of how local funds are being used to solve the difficulties of the people.”

Here’s what Lin is talking about.

In Nanjing, there are 56 agriculture-related townships [涉农街镇] mainly concentrated in 5 outlying districts incorporated by the city in recent years. The reasons for this absorption vary, from coordinating rural planning and environmental protection, to the city appropriating increasingly under-used farmland for development and housing.

And where there’s land in Local China, there’s money.

According to a report presented at a recent meeting here, in 2016, the general income of these incorporated agriculture-related townships alone was 26.06 billion RMB, an increase of 12% from the previous year, and equivalent to the budget of a provincial-level city in Jiangsu.

And where there’s money in China, there’s the potential for misuse.

Every district government has street-level offices that are responsible for public administration and public service work [公共行政管理和社会公共服务工作]—that’s where the bulk of the local population comes in contact with local government. Revenues collected at that level are supposed to be allocated for the needs of local residents.

But they often aren’t.

Why that's the case, the article doesn't say. But local observation completes the chorus. Because these townships are less developed in terms of infrastructure and public services, residents from those new regions tend to journey into Nanjing for employment and health care, believing their prospects to better there. And going to the city has become far easier because of the proliferation of private vehicles and the extension of subway lines far outside the previous inner city boundaries.  

Additionally, parents now consider their children to be urban, and entitled to a better education—which they may well receive given that schools and instructors are now administered by Nanjing and new recruits to the teaching ranks will be rotated out to previously rural areas.

In short, there’s paradoxically less pressure on local officials from below to provide infrastructure and amenities for their constituents.

And there’s little accountability because no one’s really counting.

But where this relatively new local revenue is going does concern provincial-level officials though. They’re not tone deaf.

One concern is that these new monies are not being properly managed, that eventually residents will resent providing funds and not seeing them utilized for local needs. It’s apparent from the aforementioned article that officials themselves aren’t entirely clear about what funds are being collected and spent on what purpose. While there’s good data on the aggregate amount of revenue from these townships, reliable information about specific expenditures is lacking. That's a major part of the problem of "managing the periphery" [末梢管理]--knowing how much you have, and thus how you might spend it.

To remedy that situation, some districts have assigned financial specialists to help monitor their budgets. There have also been official discussions—vigorous debates, actually—about which level of government should have the powers of fiscal supervision, part of a reassessment within Nanjing itself about giving local committees more latitude to disburse funds as they see fit. 

But that's a challenge for Chinese officials now, as it ever has been. How much decentralisation should there be? The more powerful the oversight, the less leeway there should be for local officials to engage in wasteful schemes. At the same time, with leverage resting with the municipal or provincial government, the greater the temptation to plunder funds for major development projects at that level.

There’s no easy path to who should rule over this revenue, as there rarely is anyway with local-central financial relations in China. But officials are being attentive, and holding the important local conversations. They aren't talking about impending collapse and neither should anyone else. Even if these are not the same discussions that dominate foreign news coverage of China’s economy, they are coming from the officials themselves. It behooves all to give a listen.

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[1] Commentators almost never note that their projections are often based upon figures that Chinese officials themselves see as suspect.