Local Government in China

Greetings from the China Institute at the Australian National University in Canberra, where Professor Christine Wong, University of Melbourne is speaking on "State of the Local State in China: Challenges for Xi Jinping and Beyond". This is the 75th George E Morrison Lecture.

After more than three decades of rapid growth and extraordinary achievement, China is facing big questions about its development model, which has lately been tarnished by an addiction to investment-led growth, environmental degradation, corruption, financial risks, and rising inequality. Local governments have played a starring role in both the achievements and many of the current problems. This presentation will examine the challenge of managing a modernizing China through the lens of central-local relations to argue that the economy has outgrown the administrative structure, and a fundamental reorganization will be required to realign authorities, resources, and incentives.

This follows recent events I have attended about Internet censorship and energy planning in China, where the role of local government was significant.

Professor Wong, explained China has a five level of government, with central government, provinces, prefectures, counties and townships. There are many people to be governed, but I suggest perhaps that is still too many levels of government (especially now the Internet can be used for government).

Professor Wong,  pointed out that even if the exact level of China's growth can be questions, it has been an impressive period of growth. China may have already overtaken the USA in terms of the size of its economy, or will do so in the next year. Being the world's largest manufacturer, exporter, foreign reserves holder and carbon dioxide emitter, it deserves close study.

Professor Wong pointed out that China has a welfare state with free basic education, health and other services. China also has 68,000 of express-ways and 11,028km of high speed rail. However, I keep waiting for the Professor to say: "But ...".

Professor Wong explained that the county was the most important level of government for service provision. Unlike other countries, were social security is a national responsibility, in China this is done at the local level.Education, medical and pension schemes have many hundreds of millions of beneficiaries. Local government accounted for 90% of infrastructure expenditure in 2007 and for most of the national roads.

Professor Wong told anecdotes of where roads stopped the last few kilometres short of a poor villages, as the lowest level of government can't afford to provide the service and the higher levels will not.

Another problem is that there is no common definition of national citizenship in China. Instead citizens are residents of where they were born.  As a result migrants to the city and their children, cannot receive services, not matter how long they live there. As a result about 16% of the population (and about half the migrants in cities) are missing out on government services, including education.

Professor Wong pointed out that until last year local government was prohibited from borrowing and so there were no statistics on the level of debt (as they were not supposed to be doing it). In 2013 local government debt was estimated to be ¥18 Trillion (and not sustainable).

By 2012 local government expenditure was about 22% of GDP. An area of interest is that expenditure counties is increasing, whereas central expenditure has been decreasing. The problem is that the counties are spending more than they receive in revenue.

Professor Wong explained that each level of government only communicates with those above and below them. So the counties are the only level which can communicate with the central government (including the central treasury). As a result the central government doesn't know what happens to the money it gives the county independently of what the county tells it.

The priority for all levels of Chinese government is economic growth. But Professor Wong explained that local government did not have money for investment. As a result local relied on land for 35% of revenue. Local Investment Corporations (LICs) were set up to borrow money and develop land (as suggested by the World Bank). This makes sense in terms of economic theory, as future users of the infrastructure can then pay for it. In practice the local government acquires land (as government owns the land anyway), borrows money from banks to develop the land and then sells the developed land. This has been very successful to pay for urban infrastructure, but removed financial constraints from government. Professor Wong described this as a Ponzi scheme, with new borrowing being used to pay the interest on old loans. The solution to this being to have the LICs issue bonds, to be purchased by state owned banks, converting the debt to a format which can be managed within the regulated banking system.

China's Third Plenum's financial reforms are centralising expenditure. Professor Wong argued that this was a problem as there was already an imbalance between the level of government which collected the revenue was different to that which spends it.

Professor Wong  pointed out that China has a very small central government, much smaller than Australia and the USA. China has 10 million civil servants, but only about 100,000 are in the central government. As a result these staff are not capable of providing significant oversight without cooperation of other levels of government.

It occured to me that IT could be applied to assist with all levels of Chinese government. This would be a way which local levels of government could continue to administer and deliver services, while having central oversight, without requiring more staff. By monitoring multiple levels of government and also key non-government organisations (such as banks and telecommunications companies), government could detect misapplication of resource through fraudulent reporting. As an example, the central government could get a reasonable measure of the number of residents, students and workers in a city, from financial transactions and cell phone statistics. In 2012 I talked to a visiting Chinese delegation on "Framework for e-Government: Security, Green ICT and Data Management". However, when I asked the professor about this, she pointed out that while Chinese school students have swipe cards to sign in each day at school, local authorities had still managed to rig have this system report daily teaching at schools which had been torn down years ago.

It would be interest to see a similar analysis for Australia. The Australian system has continual arguments over central distribution of revenue. Also an unhealthy relationship between land development and government is not unknown in Australia (as for example with NSW ICAC inquiries).