Singapore Press Holdings Ltd

Published in Lianhe Zaobao

September 29, 2006

China Needs Decentralised Revenue

Wu Muluan ( Fuzhou)

As a vast country, China’s revenue arrangement, especially revenue distribution between central and local governments, has always been under discussion. In the past, 30% of China’s revenue belonged to the central government and the rest to local government. However, the allocation scheme was reversed in 1994 due to a new central and local tax-sharing system.

So far, 12 years have past since the 1994 amendment. During the past decade, the combination of a financially powerful central government and weak local governments has introduced a lot of negative impacts, such as failures in the restructuring of public utility services and a “high fever” in the real-estate industry.

Agriculture tax was abolished in January 1st, 2006. Before that, the addition of all kinds of fees together with this tax, almost led to calamities. Besides different kinds of fees and an agriculture tax, there are still taxes imposed upon special agricultural and husbandry activities. There used to be many kinds of tax incentives and offsets, but since 1994 agriculture tax has been heavier due to the lack of public expenditure at country and village level. Many anonymous fees were charged, which brought about conflicts between government and farmers.

A well-known example is that Li Cang’ping wrote a frank letter to Premier Zhu--Party Committee Secretary of Jianli County Qipan Village in Hubei Province--on the farmers’ plight, calling for the relief of burden on farmers.

Unprecedented prosperity in the Real-estate market

After agriculture taxes and fees were stopped, financial income from below provincial level began to be diverted to the citizens. Therefore, some people depicted this situation as government, banks and real-estate companies driving harvest machines, “reaping” city residents’ grass. However, there seemed to be no alternative after the villages’ grass had been totally “reaped”.

The tax-sharing system since 1994 has also resulted in a small “gap” — the land transfer fee belongs to local government, leading to an overly active real-estate market. Investigations done by the ‘Council Developing Research Center’ show that, land transfer fees make up over 60% of local financial extra-budgetary income at present. Under this system, local government takes land away from farmers at an extremely low price, such as a few tens of thousands of Yuan per acre. Through auction, this land price is raised dozens even hundreds of times. On one hand, the local financial situation improves; on the other hand, corruption happens from time to time.

Taxes and fees relevant to real-estate businesses have also become a part of local financial income. Therefore, two years of macro-control can’t put down the “fire” in the real-estate market. A city along the coast declared in one local housing trade fair that the city government will be moved to the eastern part of the city. The housing price around the prospective new government center doubled in the days that followed. Ironically, this news is now proven to be just a proposal. People complained a lot about this, but the government and the real-estate companies made a fortune from this rumour.

In the 1990s, the Chinese government explicitly announced the direction of this revolution, which is, realizing the ‘Socialist Market Economy System’. This direction is definitely right, but deviates greatly in practice due to weak local finances. Many public utility services have been turned into market-oriented services or are now run by local people. During these revolutions, many public-financing responsibilities were diverted to society. Among which, the medical and education fields are the most obvious.

Over marketing of public utility services has gone into the tap water and gas areas. In the author’s opinion, most local governments now simply sell city water supply utilities and get the transfer money. The rising prices hereafter are totally paid for by citizens and there isn’t any consideration of them, thus bringing about broad complaints.

 “Go to Beijing for Money”

Local governors in the U.S. could choose not to go to Washington DC but Chinese governors could not. Both money and power are centralized in Beijing. They have to go to Beijing no matter what for either one of them. Thus, in recent years, almost all provinces (including cities) gradually set up offices in Beijing. The main duty of these offices has been asking for money from the central government. In tax distribution, the federal government takes most and at the same time a transfer payment is done. However, the rules governing transfer payments are not clear so that policy is subjective and policymakers are very powerful. Hence, “going to Beijing for money” becomes popular.

Some scholars believe that revolutionising the relationship between central and local governments is a must. The key question is how? Any restructuring of the relationship between central and local governments has to consolidate federal authority while also continuing to rely on local government’s renovation for further development.

China adopted so-called ‘Fiscal Federalism’ before 1994, but the direct result of weak central finance was financial deficits. Central government employees’ salary was brought from a provincial government even once.

Zhu later recalled: “To implement the tax-sharing system, protests from local government are so strong that I have to talk, discuss and compromise with one province after another. Finally it is done and I’ve lost 2.5 kg in weight.”

Zhu is titled as “Economic Czar” and the positive effect is: Central government’s financial power has been enhanced, thus enabling the central government to do many things on the waiting list or that should be done. At the same time, local financial power is handed over while governance is left to local government, which breaks the balance of finance and governance between central and local governments.

Simply put, the situation is, the one who gets most of the money does the least and the one who gets the least money does most of the governance. The people are then made to remedy the latter one’s lack of money and a vicious circle is therefore formed.

Someone who experienced the revolution told me, people who believed in central government finance gradually became the mainstream force from 1990. For those who carried out the revolution of the tax-sharing system, worrying about central financial deficit is just an excuse. What they most care about is a centralized economic system and therefore to implement various great aspirations, but the direct result of this is the restriction of local innovation and infringement upon the rights of customers.

China Senior Journalist