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Financial Crisis in Rural Areas

Internal study conducted by Chinese officials places local governments and economies in dire strains.

[Summary:  In order to make a fair assessment of China,it is important to look beyond metropolises like Beijingand Shanghai.This article is a research report by the study group led by Xiwen Chen at the Development Research Centerof the State Council. After the investigation of XiangyangCounty of HubeiProvince, Yanling County of HenanProvince and Taihe County of JiangxiProvince, the report comes to the conclusion that governments at the county leveland in rural areas are facing severe financial difficulties. According toestimates, currently the lowest-level governments in villages and towns allover the country have debts of about 300 billion yuan (~ $36 billion).Including debts incurred by the county governments, the total debt is estimatedto be over 500 billion yuan (~ $ 60 billion).]

Since the reform of thefinancial and tax systems in 1994, while there is improvement in the overallfinancial situation, the finances of the counties and the countryside in mostareas run behind their expenses. Quite a lot of counties and towns are facingsevere financial difficulty, and this problem is not just a simple economicone. It has severely affected the smooth operation of the political authoritiesat the grass-roots level, as well as the development of the rural socialservices. It has become a critical factor that affects the political and socialstability of the rural areas.

Four MajorProblems Expose the Severe Financial Crisis in Counties and Rural Areas

Currently the financialpicture of income and expenditure in counties and rural areas has been clouded,causing a lot of difficulties for accurately depicting the financial situationin rural areas. The study group of the DevelopmentResearch Centerof the State Council has analyzed three typical rural counties in central China –Xiangyang County of Hubei Province, Yanling County of Henan Province and TaiheCounty of Jiangxi Province. According to the investigation, there are foursigns of a severe financial crisis:

First, the finances of thecounty and rural areas follow a model of just getting by, managing to paysalaries only. The administrative costs of the best of these three counties,Taihe County of Jiangxi Province, accounts for 71% of the primary expendituresin the year 2000. The public finances of Yanling Countyhave gotten to a point where even if the government takes on nothing, there isno way to guarantee the payment of salaries. Its actual financial capacity is80 million yuan (~ $10 million), but the salary expenditure is 96 million yuan(~ $11 million). The public finances of Xiangyang Countyare in the most difficult situation of the three counties. In the year 2000,the financial capacity of the whole county is only 198 million yuan (~$23.8million), but the salary expenditure is 154.82 million yuan (~ $18.6 million),which accounts for 80% of the total financial capacity.

Meanwhile, the financesfor the villages and towns are in much worse shape than that of the counties.The report takes Dama Town and Mafang Town of Yanling County of Henan Provinceas examples. Besides paying salaries, the actual capital shortfalls are atleast 2.278 million yuan and 3.657 million yuan. "These two towns’finances are past the ‘make-a-living’ stage, but have deteriorated to the pointof ‘begging.’ Moreover, because of the decline of their financial credibility,the situation has become more and more difficult. The public finances of thetowns have come quite close to total collapse."
The second probleminvolves budget shortfalls and increasing unplanned revenue. Since the countygovernment doesn’t have legislative power, an important means to make up forbudget shortfalls is using extra-budgetary channels to collect fees and fundingfor all kinds of administrative services, and this is done on a significantscale. In the year 2000, Xiangyang County listed 550 types of fees foradministrative services, 110 departments were involved, and the fees collectedamounted to 64.1 million yuan (~ $8 million), 90 million at its peak. Theextra-budgetary revenue accounted for 30% of the financial revenue in Xiangyang County,44% in Yanling Countyand 69% in Taihe County. Most of the revenue will go backto the original company after going through the books. This kind of managementof budgetary and extra-budgetary funding has weakened the ability and scope ofcentralized control of public finances.

Third, counties areheavily in debt, and the financial base is facing bigger and bigger risks. Inthe year 2000, XiangyangCounty had a directfinancial debt of 289.25 million yuan (~ $35 million), which accounted for140.3% of the available revenue of the whole county. Year 2001 was a peak yearfor due debt payment, as 158.4 million yuan (~ $19 million) came due. Among thepayments due, the principal and interest of the loans by mutual funds, theWorld Bank and the finance working fund are guaranteed by the CentralGovernment’s tax returns. If they cannot be paid by the due date, they arededucted from the tax return and come directly out of the "make-a-livingmoney." If the financial liability is not paid by the due date, it isdeducted directly from the funding. The county’s tax revenue is only about 26million yuan (~ $3 million) per year, so this county will face much difficultyin getting its finances straightened up. It will be very difficult for them topay for salaries and normal administrative expenses. Also, its towns’ debtshave not been included yet. This county’s 17 towns have an average debt of24.11 million yuan (~ $3  million). The debt of Taihe Countyis at more than 90 million yuan (~ $10.9 million), which accounts for 57% ofthe budgeted revenue. YanlingCounty, including boththe county and its towns, has incurred financial debt of 140 million yuan (~$17 million), most of which is incurred by its towns, which amounts to 120million yuan (~ $14 million).

Finally, the countygovernments are not able to provide the most basic public services for therural areas. Because of the financial difficulty, except for paying salaries,the governments have no funds to do anything else. The funding for ruralcompulsory education comes mainly from taxes, fees and education fundraisingfrom peasants. A report said that currently the county public appropriationscover only about 15% of the medical staff’s salaries in the health departments.There is almost no investment from upper-level public finance to the countyhealth services, which leads to bad facilities and low quality servicesprovided by the rural healthcare organizations. At the same time, medical costshave gone up rapidly. The farmers are overloaded with heavy burdens of medicalpayments, which many of them cannot afford. Not being able to afford healthcareand being driven into poverty by unexpected large medical expense have becomevery prominent problems. Except for fighting for special central governmentfunding, the county governments have made almost no investments in agriculture.
The County andDistrict Level Financial Crisis Affects the Rural Area’s Stability

The county and districtlevel financial crisis has serious consequences for agriculture and ruraleconomic development. They can be summarized into four aspects.

First, the fundamentalgovernment financial crisis has increased the burden on the farmers. Overtaxingis one aspect. Based on the situation of the three counties, it is clear thatagricultural tax is a major source of income at the county level. In the year2000, the four agricultural taxes accounted for 44.5%, 27.6%, and 50.7% of theincome of the county governments of Xiangyang, Taihe, and Wulin, respectively.If we take into account the Butcher Tax, which is classified as an Industry andBusiness Tax, the tax revenue related to agriculture accounts for an evengreater proportion in the county and district government income. In addition,this trend is accelerating. As the financial burden of the county and districtgovernments increases, and because it is harder to keep up growth on theIndustrial and Business Tax, more and more effort has been put into collectingthe Special Agricultural Product Tax to keep up with the ever-increasinginfrastructure costs. The collection of the Special Agricultural Product Tax isrelatively arbitrary, because it is calculated according to the number ofpeople in each family. The problem of over taxation is very serious. Theestimated amount of the Special Agricultural Product Tax in Xiangyang Countyis 8.5 million yuan, however, the annual tax obligation designated to thatcounty is 46 million yuan. This accounts for only 18.5% of the required taxamount.

Second, given the factthat there is no tax legislation, the local governments collect a variety offees to pay for different expenses. The local governments are arbitrarilycollecting money, asking for fees and allocating this income. This isdrastically increasing the burden on farmers outside of normal taxation.

The investigation foundthat the burden on the farmers is directly related the county and districtlevel financial crisis. Out of the 59 families investigated in the threecounties, the average income of a farmer is 2,652 yuan (~ $321), with the taxburden at 291 yuan (~ $35), which accounts for 10.9% of the income. The taxburden on each farmer differs greatly for different counties. It is 292 yuan (~$35) in Wulin Countyin Henan province, accounting for 6.5% of theaverage income; 163 yuan (~ $19) in TaiheCounty, accounting for 8.3%; and anamount of 415 yuan (~ $50) in XiangyanCounty, accounting for25%. In addition, the lower the income of a family is, the higher the taxburden rate is.

The county and districtlevel governments squeeze the financial resources of the village levelgovernment so much that the village government can hardly provide any socialservices to the farmers. It’s common for the county and district levelgovernments to make up budget shortfalls from funding allocated for publicservice, sometimes even tapping into the villages’ funds. For the threecounties that were investigated, all of them had this problem. When thecounties faced financial hardship, they squeezed out funds from the villages tomake up the budget shortfall.
The Dama district only hada total of 1.51 million yuan (~ $0.18 million) available to them in the year2000, and their most essential expenses amounted to 5.12 million yuan (~ $0.6million), leading to a 3.63 million yuan (~ $0.44 million) shortfall. This gapwas made up by borrowing money from the district management department and thevillages. In the year 2000, money from the above two sources accounted for 50%of the district government’s actual spending. If the agricultural tax is takeninto account, then 80% of the actual spending came from various taxes paid bythe farmers.

The investigation of the12 villages found that the county and district level governments did notprovide them with financial assistance. Money only went out of the villages,which were heavily in debt. Out of the 12 villages, 10 were in debt. Onaverage, each village owed 0.8 million. Overall, 96% of the villages in Xiangyan County and over 80% of the villages inWulin and Taihe were in debt. In TaiheCounty, the farmers wererelatively less burdened, and each village owed 48,000 yuan (~ $5,818). In Wulin County,each village owed 12,400 yuan (about $1,503). In Xiangyang County,the amount was shockingly high, as each village owed 1 million yuan (~ $0.12million). The investigation found that a considerable amount of the debt owedby the villages was due to higher-level government budget shortfalls. In recentyears, more and more families are accumulating unpaid taxes. In Xiangyang County, the villages’ debt caused byfarmers not paying due taxes was 440 million, accounting for 47.8% of the 930million debt owed by the villages across the county.

The investigation foundthat the village organizations provided only very limited services to thefarmers. The expenditure at the village level government was very low. Onaverage, each village only used 93,000 yuan (~ $11,272). The main expense wasthe salaries of the village leaders. On average, each village paid 23,300 yuan(~ $2,824) for the village leaders’ salaries. Because the higher-levelgovernments took away most of the villages’ financial sources, the salaries ofa considerable number of the village leaders could not be reliably paid. Thepayment of village leaders’ salaries was very commonly delayed. The leaders insome villages had not received salaries for three years. The expenses used forthe farmers’ social welfare were considerably limited. Most of the expenseswere used in hosting guests, subscribing to newspapers and magazines, andvarious expenses required by the higher-level government such as trainingsessions. Village leaders expressed that the required expenses from thedepartments at the county and district level were numerous. In this way, thosedepartments further exploited the villages’ scant financial resources. Theinvestigation shows that because of the poor financial situation of thevillages, the village level governments were functioning less and lesseffectively, and a considerable number of village level organizations wereabout to fall apart.

Third, the smoothoperation of fundamental government departments is severely impacted. In orderto ensure the stability of those departments, the salaries must be paid, andthe government departments must run normally. The investigation found that inaddition to being insufficient for the normal functioning of those departments,the small amount of allocated funding for public expenses is putting intojeopardy paying for necessities such as electricity, telephone services, andtransportation. Because the district and county level governments have such lowincome and there are not enough subsidies from higher-level governments, theallocated public expenses have been reduced gradually in recent years in orderto pay salaries. The current investigation concludes that the public financialcrisis faced by the rural areas is not just a simple economic problem. Thecrisis may lead to the paralysis of the rural government and organizations.
Fourth, transferring thefinancial crisis to farmers pits them against the core governmentorganizations. The severe conflict between the two parties has become asignificant factor affecting political and social stability.

The salaries of thegovernment officials come mostly from taxes paid by the farmers. If the burdenon the farmers is reduced, the salaries cannot be guaranteed. If the salariesare guaranteed, then the farmers’ burden cannot be reduced. In such asituation, the government and the farmers are more and more likely to be atodds. The village leaders are elected by the farmers, but the leaders cannotrepresent the interests of the farmers. They spend 60% to 70% of their energycollecting taxes from the farmers and cannot provide any meaningful service.Therefore, there is much tension between the two parties.

Translated from

Chen Xiwen, Deputy Chairman of the Development Research Centerof the State Department.
Han Jun, director of department ofRural areas of the DevelopmentResearch Centerof the state council.