Notes 1 Introduction and Overview 1. Unless otherwise stated, statistics cited in this chapter are from various issues of China Statistical Yearbook. 2. One should note, of course, that despite its outstanding growth performance, China is still a low income country. Its per capita GDP – when converted into US$ using the annual average exchange rate – was US$620 in 1995, and ranked 116th among the 166 countries listed in the World Bank’s World Development Report 1997 (World Bank, 1997). In purchasing power parity terms, which take into account different currencies’ purchasing pow- ers on both tradable and non-tradable goods, China’s per capita GDP was about US$2920 and ranked 82nd among 141 nations. 3. While I agree with some scholars that China’s officially reported statistics in certain areas may be of limited quality, evidence based on measures of physical output and consumption suggests that the possible statistical errors would not significantly alter the general assessment of China’s growth perform- ance between 1978 and 1997. 4. In 1997, per capital disposable income of rural residents was Y2090 (US$252), and that of urban residents was Y5160 (US$622). 5. The officially measured poverty incidence uses a poverty line set by the Chi- nese government. International comparison is made difficult, if not imposs- ible, by the fact that different countries apply different poverty lines. 6. From 1952 to 1977, the annual average growth rate of China’s national income was 5.7 per cent (State Statistical Bureau, 1987). 7. In 1995, government procured grain at the contracted prices was about 20 per cent of total grain production (Rural Development Department of Devel- opment Research Center of the State Council, 1995). 8. Xiao (1993) reached a similar conclusion with an analysis on the relat- ionship between the share of non-state sector activities and productivity growth. 9. From 1989 to 1995, the average annual inflation rate of CEE and FSU coun- tries was 106 per cent, with some countries experiencing an average annual rate of nearly 1000 per cent (World Bank, 1996c). 10. For example, in most of 1980s, SOEs were obliged to sell certain amounts of their products to designated buyers at the official prices but were allowed to sell the above quota portions at the higher, market prices. 11. By the end of 1997, China consisted of 33 provincial level jurisdictions, including 23 provinces, 4 cities directly under the State Council, 5 autonom- ous regions, and Hong Kong Special Administrative Region. 12. Calculated using data from ‘Compilation of Historical Statistics of Chinese Provinces, Autonomous Areas, and Municipalities 1949–1989’ based on pro- vincial yearbooks, and China Statistical Yearbooks (various issues). For some years, the sum of provincial real GDP data differs slightly from the national GDP figure. 174 Notes 175 13. Note that in 1994 China’s total GDP was only around 2.5 per cent of the world’s total GDP. 2Fiscal Reform 1. There were four special levies on profits (Tseng et al., 1994): (1) mandatory contributions to the key energy and transportation projects fund (earmarked for financing public infrastructure projects); (2) mandatory contributions to the state budget regulating fund (to compensate the government for revenue shortfalls resulting from the use of fixed-tax contracts, discretionary tax relief, and deduction of the principal repayments on loans); (3) a construc- tion tax (designed to influence the aggregate level and allocation of invest- ment by levying different tax rates on different forms of investment; this was replaced by the investment direction tax, applying only to SOEs, in 1991); and (4) wage adjustment and bonus tax, which applied to SOE wage and bonus increases in excess of the state-prescribed norm. All enterprises, regardless of ownership or circumstances, were subject to the first three levies. 2. Turnover taxes included the product tax, value-added tax, and business tax. These taxes were not included in the fiscal contract, and were collected regard- less of whether or not the enterprises were profitable. 3. I agree with some scholars that the decline in SOEs’ profitability could be partly explained by the increased competition from non-state owned enter- prises, as evidenced by the fact that profitability declined in both SOEs and non-SOEs. However, the incentive problem inherent in SOEs did explain its poorer performance compared with other enterprises: according to Chen et al. (1996), in 37 out of 40 sectors, the percentages of SOEs operating at a loss were significantly higher than those of collectively owned enterprises in 1993. 4. This reduction did not significantly change the effective income tax rate for SOEs, however. According to one estimate, the effective income tax rate on SOEs (as implemented under the contract system) in 1993 was about 32.5 per cent due to various tax exemptions and reductions (private correspond- ence with staff of the MOF). 5. For a detailed discussion of China’s central–provincial fiscal relations, see Ma (1997a). 6. The central–local fiscal system adopted in 1988 was named The Big (com- prehensive) Fiscal Contract System. The rest of this chapter broadly refers to all variants of the decentralized fiscal system adopted since 1980 as the ‘fiscal contract system’. 7. The method of determining local government revenues since 1994 is as fol- lows. First, a local government would continue to remit/receive the contracted remittance/contracted subsidy to/from the centre as stipulated in the 1993 contract. Secondly, the centre would return the 1993 base figure (defined as the consumption tax-equivalent raised in 1993 plus 75 per cent of VAT- equivalent raised in 1993, adjusted for a number of revenue sharing items in 1993) to the local government. Thirdly, after 1994, the amount returned from the centre to a local government is to increase from the 1993 base fig- ure by 0.3 per cent for each percentage increase in the national total of VAT and consumption tax (this formula was later changed into one relating the returned revenue to the total of a locality’s VAT and consumption tax). For 176 Notes a detailed description of how to calculate local revenues since 1994, see Zhang (1995). 8. In designing the 1994 reform, the centre expected that its share in total budgetary revenue would continue to increase over the next few years, as the centre would retain 70 per cent of any percentage increase in VAT proceeds. 9. With the State Council’s special permission, Shanghai’s basic pension fund is also invested, through Pudong Development Bank, in long-term capital projects. 10. Extra-budgetary revenues are obtained by government units using coercive power but are not included in the formal budget system. They include vari- ous surcharges, revenues from provision of services, service fees charged by government agencies, revenues of schools, income from revenue-sharing with other governments, etc. In theory, extra-budgetary revenues are collected based on regulations promulgated by the central or provincial level governments. Off-budget revenues are collected by government units, particularly town- ship and village level governments, without the authorization from the central or provincial level governments. For a more detailed discussion on extra- budgetary and off-budgetary activities, see Arora and Norregaard (1997). 11. Estimates of Mr Fan Gang, China Academy of Social Science. 12. One can define models of intergovernmental relations in many different ways: a centralized versus a decentralized model (using indicators such as the share of local government revenue and expenditure in total govern- ment revenue and expenditure), a federal versus a unitary model (where the central government has the power to create and/or abolish subnational government units), an autonomous versus an integrated model (whether the local authorities exercise substantial autonomy in local affairs or not). The model classifications used in this chapter differ from the above. The distinctions among my three models are given in Table 2.5 and should not be confused with definitions from other sources. Although the central government has many discretionary powers in defining central–local rela- tions, it is worth mentioning that China’s fiscal system is a highly decen- tralized one when measured by the share of local expenditure in total government expenditure. 13. When discussing the cases of the United States and Canada, ‘local gov- ernments’ refer to governments at levels lower than the states or provinces. On other occasions, ‘local governments’ refer to subnational governments. 3Monetary Reform 1. See Ma (1996b) for detailed discussions on localities’ strategic behaviour in forcing the central bank to grant higher credit ceilings. 2. In an economy with strict foreign exchange controls (stable foreign exchange rate is achieved by restrictions on both current and capital account transac- tions), the central bank’s control over domestic credit is sufficient to achieve its target for money supply. 3. See Chapter 4 for more discussion on commercial bank restructuring. 4. Data for 1980–93 are used and are taken from State Statistical Bureau (1993) and (1994). Government borrowings from the central bank are ‘hard’ deficits in the Chinese definition (see State Statistical Bureau 1994, pp. 213–14). 5. The dollar/yuan exchange rate increased moderately from 1:8.7 by the end of 1993 to 1:8.44 by the end of 1994 and 1:8.30 by the end of 1995. Notes 177 6. According a recent article (People’s Daily, 29 July 1996), the PBC would: (1) concentrate funds to support 300 key enterprises that produce marketable products, make profits, and have the ability to repay loans; (2) increase the amount of export credit to support SOE exports; and (3) support SOE restruc- turing and help SOEs reduce their debt–service ratio. 4 Banking Reform: From Administrative Control to a Regulatory Framework 1.