12 China’s Collective and Private Enterprises: Growth and Its Financing

Timothy Lane, D. Folkerts-Landau, and Gerard Caprio
Published Date:
June 1994
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Shahid Yusuf1


China’s experience with economic growth since the start of reforms in 1979 can be divided into two periods. During the first, which extended through 1984, growth was driven by agriculture. Thereafter, much of the impetus has come from nonstate industry, primarily located in rural areas, and, to a lesser extent, from large, state-owned enterprises. As nonstate industry now accounts for over 52 percent of industrial output and has expanded at an annual average rate of 19 percent for the past six years, it is the principal determinant of economic performance. In the first quarter of 1993, the collective and private sector was responsible for 75 percent of China’s growth.

Both agriculture and rural industry owe their dynamism to the transfer of administrative and fiscal powers to subnational governments; the redefining of ownership rights to property; and the increased availability of financing through multiple channels. The focus of this paper will be on rural collective industry, especially the private and joint venture segments.2

Simply put, China’s nonstate economy has grown with unusual rapidity, mostly because factor inputs, chiefly the volume of investment, have been extremely large. Why investment has reached such a scale and its increasingly flexible allocation across subsectors is the outcome of several intertwined factors. The Government’s success in reviving commune and brigade industry in the 1970s was the first step. It restored a tradition of small-scale rural industry suppressed since the early 1950s.3 As decentralization began transferring fiscal resources and policymaking powers to the counties in the early 1980s, local governments exploited the potential of rural enterprises to fill numerous industrial niches in light consumer goods, building materials, machinery, and agricultural inputs. They did this by investing directly in production enterprises and by building supporting infrastructure. In this fashion, the most fortunate, strategically located coastal provinces were able to enter a virtuous spiral. Investment in rural enterprises enriched the community, broadened the tax base, and served to generate fiscal resources for a further round of investments. Over time, as individual wealth increased, there was a “crowding in” of capital, accumulated by households, into rural industry and services.

Public investment and fiscal incentives helped initiate the virtuous spiral, but it has derived much of its force from entrepreneurial energy and individual effort released by a new perspective on institutions governing property rights. Private ownership of small businesses was legally recognized in 1981 and has spread steadily since. More important, collective and cooperative ownership has changed in character, with the local community retaining residual property rights, but de facto ownership now residing with managers and/or workers. Shared ownership gives local authorities claims on collective resources. It also means that business risks are, in part, shouldered by local governments. This has encouraged entrepreneurship in what is a fluid and uncertain business environment. It has also facilitated the mobilizing of finance for industry.

Initially, a high proportion of the capital needed by the collective sector was drawn from budgetary funds, retained earnings, or, in private enterprises, from the savings of the extended family and friends. However, the growth of the nonstate sector has powerfully stimulated financial development, with the result that banks and other intermediaries, formal as well as informal, have enlarged their share of funding for the nonstate sector. In this instance, government policy has been largely reactive. It has not done much building ahead of demand. Current trends suggest that financial markets could overshadow other sources of capital within a decade. Hence, the interaction between collective and private enterprises on the one hand and financial intermediaries on the other will have a strong bearing on the speed of future growth. Its stability will be decided by government macropolicy.

Whereas fiscal and financial channels, along with other resources, fund the bulk of investment, in recent years foreign direct investment—a large proportion of it in equity joint ventures—has emerged as a major source of capital, chiefly for the export-oriented manufacturing sector. Growth of the “other” component of the non-state sector rivals that of private enterprises, and its share, already sizable in the southeastern coastal provinces, is likely to become substantial in all the open coastal areas during the 1990s.

One striking feature of the nonstate sector’s development has been its speed. A second and even more arresting feature is the dispersed and spontaneous nature of the entire process. The principal contribution of the Central Government has been to allow many hundreds of flowers to bloom rather than attempting a close and direct management of transition. It has whittled away at physical, institutional, and ideological controls, thereby releasing energy botded up for decades. The state’s achievements have been twofold. First, its success in calibrating the release of energy has held the pace of change to socially acceptable limits. Second, by realizing the futility of micromanaging such a complex affair, the state has wisely provided only the broadest of guidelines, allowing those closer to the action maximum leeway in adding content and specificity to policy. This paper will have attained its goal if it not only describes what happened but also imparts a sense of the relatively spontaneous way it happened.

The paper starts with a brief description of the composition of the nonstate sector and of emerging trends in structure and financing and then examines the contribution of administrative and fiscal decentralization, both in providing policy stimulus as well as financing for collective enterprises. It analyzes institutional changes related to ownership, which have spurred entrepreneurship and facilitated financing, and reviews the factors contributing to the nature and direction of financial development, as well as the manner in which this has influenced sources of capital for the nonstate sector. It then assesses the significance of foreign direct investment for nonstate sector growth and sketches the concerns demanding policy action by central and local authorities.

The Nonstate Sector: Composition and Trends

By the early decades of the twentieth century, China was well on its way to acquiring modern industrial capability4 and a supporting entrepreneurial tradition, anchored to kinship networks that are the building blocks of Chinese society.5 Because industry needed financial services, indigenous banks, which had long supported commercial activity, began lending for working capital and, to a lesser degree, for fixed investment. In the large coastal cities, their operations were buttressed by foreign banks that became deeply involved in trade but also made loans to the larger business houses.6

Following the establishment of a communist government in 1949, traditions of private entrepreneurship and indigenous banking, along with the budding institutions of property ownership, were gradually suppressed. Ownership was concentrated in the hands of the state and of communities; a centralized, monobanking system took control of all financial transactions, and industrial entrepreneurship became a bureaucratic function carried out by planning agencies and industrial bureaus. What little rural industry existed withered7 as the agricultural economy was parceled into communes that imposed administrative discipline and brought farm production within the ambit of planning.

The rising cost of tightly regulating economic activity in terms of forgone employment opportunities, distortion of incentives, and inadequate supplies of light manufactures finally prompted an easing of restraints in the early 1970s. With encouragement from the center, rural-based communes and brigade enterprises multiplied. Between 1970 and 1979, they averaged an annual growth rate of 25 percent.8

Rural industrialization received fresh impetus from the gradual return to household farming, which commenced in 1979 and was largely completed in five years.9 The household responsibility system loosened the constraints on ownership and began changing attitudes toward private activities, as well as profit making. In a short time, it both shifted outward the agricultural production function and helped widen the scope for a whole range of nonfarm activities.10 By the mid-1980s, the great agricultural spurt was almost spent, but a series of reform initiatives, by widening the role of markets, giving enterprises more autonomy, and strongly encouraging collective industry, had dramatically changed the tempo of industrial activity. This acceleration, which shows no evidence of slackening in the 1990s, has altered the industrial structure significantly. Most notably, rural industry has emerged as a major player and the relative shares of state and nonstate industry have shifted toward the latter.

In the late 1970s, three-fourths of industrial production was concentrated in urban, state-owned enterprises, with large enterprises claiming a little over half of this production.11 Urban collectives accounted for another 14 percent, and the balance—9 percent—was produced by rural units (see Table 1). By the mid-1980s, the proportions had begun to shift, but the rural share was still under 18 percent. Since then, the distribution of output has changed quite radically. Urban state enterprises in the medium and small categories have lost ground and are now responsible for an estimated 11 percent of industrial output (1992), as against 36 percent in 1978. Large, well-financed state enterprises have gained from economies of scale and the demand for industrial raw materials and capital goods. Their share has remained relatively stable over 15 years and in 1992 was a little under 37 percent.

Table 1.Industrial Output by Size and Ownership Categories1(Percent of total output)
Large-scale sector41.542.342.2
Urban medium/small49.438.829.4
Rural medium/small8.714.619.6
Very small-scale0.43.47.1
Other: medium/small0.81.7
Source: Naughton (1992).

Large-scale other output Is estimated. 1978 Is calculated from constant 1970 price output data; 1985 and 1989 are calculated from current price output.

Source: Naughton (1992).

Large-scale other output Is estimated. 1978 Is calculated from constant 1970 price output data; 1985 and 1989 are calculated from current price output.

The large gains have been registered by collectives, individual (or private) enterprises, and firms in the “other” (mostly joint ventures or foreign owned) category.12 The majority of these are located in rural townships and villages that have gained not just from decentralization (discussed below), but also from the lower cost of labor, negligible social overheads, and flexibility in hiring practices.13 Collective industry grew annually by 20 percent from 1985 to 1991, and enlarged its share by a few points (see Table 2). But individual and “other” sectors expanded by 36 percent and 48 percent, respectively, albeit from small bases. Growth in each of these categories increased yet further in 1991-92, as administrative checks,14 introduced in 1989-90, were dismantled. For instance, collectives averaged a 25 percent rate and “other” enterprises, 55 percent. A rough calculation would put the share of private and other enterprises at about 8 percent each in 1992, or between 15 and 17 percent of industrial output. The actual share of private enterprises might be considerably larger because private firms are at a disadvantage in dealing with officialdom. They are often subjected to additional levies and have every incentive to wear the badge of collective ownership.15 Over the past two years, however, such discrimination has begun easing because of the widening acceptance of market principles and a fuller realization of the demonstration effects on local entrepreneurs and potential foreign investors.

Table 2.Sources of Output (GVIO) Growth In Industry

Industry total1,045,6791,381,2991,889,2512.274,0121,630,549
Percentage Shares
Industry total100.0100.0100.0100.0100.0
Growth Rates
Industry total21.820.513.213.215.1
Source: China Statistical Yearbook, various issues.
Source: China Statistical Yearbook, various issues.

Recent trends, if allowed to persist, point toward an industrial system with three leading sectors: large state enterprises, private firms, and joint ventures or wholly owned foreign companies.16 For the next several years, smaller state-owned enterprises and collectives will still account for a substantial proportion of industrial output. But ongoing enterprise reforms will rapidly diminish the numbers of small state enterprises through mergers, bankruptcy, and a change in ownership status.17 As the legal standing of private firms acquires greater acceptance with time and the judicial validation of newly bestowed rights, many of the smaller collectives—urban and rural—will emerge as private firms leaving a residual of medium and large collectives.18 Barring any sudden reversal in the political mood of the country, in five years the share of industrial output claimed by collectives may have shrunk to less than half of what it is now—or about 15 percent.

There is another reason for believing that state and collective ownership will have a much lower profile. China’s services sector is still relatively small—27 percent of GDP in 1992. From all indications, it should sustain double-digit rates of growth well into the next decade.19 Probably a majority of new entrants will be private firms, and many of the existing collectives will switch to different forms of ownership, nearer the private end of the spectrum.

The sectoral shares of GDP in 1992 were as follows: industry, 53 percent, services, 27 percent, and agriculture, 20 percent. Farming has already been almost completely privatized.20 About 40 percent of industrial production will very likely have been annexed by private and “other” firms within seven years. Furthermore, perhaps as much as two-thirds of services will be in private or joint ventures. Such an accounting suggests that the division between state and private ownership around the turn of the century will be much like Western Europe today. The state might be controlling between 40-50 percent of GNP, and the balance would be held by private owners. Thus, in roughly 21 years, China would have made a largely painless transition from high socialism to a prosperous, mixed economy—not dissimilar, at least in terms of basic ratios, to that of most countries of the Organization for Economic Cooperation and Development.

The far-reaching change in the composition of industry that has occurred, and the trends now apparent, are the outcome principally of decentralization, a gradual recalibration of property rights, and the effective deployment of fiscal and financial resources. How each of these has contributed is discussed below.


Administrative and Financial Aspects

So long as the parameters of economic decision making were determined by planners in Beijing and resource allocation was subject to central control, room for local initiative was limited and lower-level government had little incentive to mobilize additional resources, explore profitable investment opportunities, control costs, or raise productivity. A large proportion of investment funds were channeled through the budget, and the entire process of capital spending was rigidly circumscribed by the planning system. In 1978, budgetary revenues amounted to 31 percent of GNP, and about 40 percent of these (13 percent of GNP) were allocated for capital construction, either directly by the Central Government, or according to guidelines defined by the center (see Table 3).

Table 3.Central and Local Revenues and Expenditures as Percent of GNP
Budgetary expenditures130.9627.1321.5321.6719.8420,39
Total expenditures37.5837.9535.4
Budgetary revenue231.2523.3220.7319.4616.8816.81
Central fixed revenue2.927.216.525.704.91
Central revenue after tax
Local revenue20.3913.5212.9511.1811.89
Local revenue after tax
Extrabudgetary revenue10.4312.4717.8617.9515.57
Sources: China Statistical Yearbook, 1990 (English), Tables T6.13 and T6.14, and update from China Statistical Yearbook, 1991: Ministry of Finance data: and author’s own calculations.

Expenditures refer to administration of expenditures.

Excludes debt issue.

Sources: China Statistical Yearbook, 1990 (English), Tables T6.13 and T6.14, and update from China Statistical Yearbook, 1991: Ministry of Finance data: and author’s own calculations.

Expenditures refer to administration of expenditures.

Excludes debt issue.

The single most important aspect of China’s reforms was the recognition that such a large economy could not be effectively managed or even reformed from Beijing. Hence, the successive rounds of fiscal and administrative decentralization, starting in the late 1970s, were of critical significance.21 In the first place, they have permitted local governments to retain a larger proportion of tax revenue, and, since 1982, have given them the latitude to raise, for their own purposes, extrabudgetary funds from a variety of fees, surcharges, and special contributions.22 These funds rose from negligible levels to over 10 percent in the early 1980s and have remained there since. Second, state and collective enterprises have been allowed to retain a much higher proportion of their earnings, a decision that directly augments local extrabudgetary resources. Third, defense spending was substantially reduced, and many expenditures, such as those for subsidies, infrastructure, and industrial restructuring, were transferred to the provinces. Fourth, along with the reassignment of fiscal responsibilities, the center has allowed subnational governments scope for sanctioning investments up to Y 200 million, for routine policymaking, and, within limits, for experimenting in various areas of reform. Last, Beijing has been especially generous with the coastal provinces, both in the tailoring of fiscal contracts (especially with Guangdong and Fujian),23 but also in allowing them discretion to use tax incentives, credit policy,24 and infrastructure building to stimulate local industry and attract foreign direct investment.

The extent of decentralization can be discerned from a few key indicators. Between 1978 and 1991, the revenue/GNP ratio declined to 17 percent, even though China’s real GNP increased by about 9 percent per annum. With the Central Government collecting 42 percent of revenues and controlling 45 percent of expenditures, in fiscal terms, it is now a smaller player. During this period, extrabudgetary funds, in the provincial domain, reached 10 percent of GNP—almost the same level as provincial tax revenues. A third of these are fiscal extrabudgetary resources at the disposal of subnational governments, and supplementing them are off-budgetary funds obtained through informal channels.

Another, somewhat indirect, indicator is the financing of investment. Investment, as a ratio of GNP, was 32.2 percent in 1980. By 1992, it had risen to almost 39 percent (with fixed capital accounting for about 30 percent) of GNP, but the budgetary financing of capital construction was down to less than 4 percent of GNP from 13 percent in 1978, with the center responsible for three-fourths of this.

From the fiscal perspective, the shift in power is unmistakable. Decentralization, although greatly diminishing the flow of resources through formal budgetary channels, has nonetheless expanded the de facto fiscal envelope controlled by local authorities, significantly augmenting their ability to spend on local projects. This has stimulated resource mobilization, mainly through extrabudgetary and financial channels (see below).25 In addition, local governments now have more incentive to invest heavily in productive assets and infrastructure to promote development, which also enlarges the revenue base.26 In other words, decentralization in the 1980s imparted a corporatist orientation to local governments in China and gave officials command over resources with which to pursue developmental objectives. The better-organized and managed units quickly grasped the opportunity to use resources, traditions, and locational advantages to the fullest.27

The most notable feature of this entire effort is that it has been motivated and directed almost exclusively by the public sector and has drawn a substantial share of the finances from public sources. In true corporatist mode, local government entrepreneurship has been responsible for galvanizing communities and inducing individuals to take up business opportunities. Thus, private entrepreneurs have taken their cues from the public sector and the example set by local officials.28 Many of the economic success stories about communities along the coastal belt are linked to initiatives taken by one or a handful of well-connected, public officials. Through tireless effort and full use of their administrative and party connections, these individuals were able to extract the maximum benefits from the reforms.

Public entrepreneurship has been doubly effective from being amply supplied with capital. Although in the early 1980s a significant volume of funding for investment was obtained from the budget, this declined rapidly, and, in addition to bank credit, much of the financing for capital construction came from the retained earnings of enterprises and extrabudgetary funds accumulated by various levels of government. Because the former accrue mostly to the state and collective enterprises, their disposition, if not controlled by government agencies, will be strongly influenced by government directives. Thus, direct public spending on capital construction, along with investment indirectly induced through state and collective enterprises, has been one of the principal sources of growth. It has created production capacity, and it has developed infrastructure. In the process, it has stimulated capital accumulation by private and cooperative enterprises. Such investment has also served as an inducement for capital from overseas.29

Although it is difficult to establish empirically, decentralization provided local governments with control over fiscal and other resources, as well as the administrative authority to conduct development activities at the community level. In many instances, the local leadership responded to the challenge with entrepreneurial zeal and innovative policies. They also invested heavily in manufacturing and in social overhead capital. The demonstration effect was profoundly influential. It helped stimulate household savings and, from the late 1980s, a surge in private and quasi-private sector development.

Fuzzy Property Rights

Although growth during the 1980s was motivated by local and central governments, its dynamism, and the degree to which it has harnessed the energies of enterprises of all kinds, need further explanation. One possibility is that the Chinese approached the use of property rights in a way that optimally balanced risks and rewards.30 In a market economy where property rights are clearly delineated, there is little ambiguity regarding ownership, the assignment of risks, and the distribution of gains and losses. Within an orderly, well-developed market environment, clarity concerning the rights of private owners sharpens individual incentives. Even though risk can on occasion deter action and interfere with the raising of capital, sophisticated market systems generally evolve insurance techniques for containing these problems.

When markets are undeveloped and there is considerable uncertainty on the direction of government policy, risk can become a difficult hurdle. Among other things, it discourages long-term investment and can increase the cost of financing. China entered the 1980s with two major handicaps: there was great uncertainty about the future course of reforms; and individual property rights—the basis of a market economy—were undefined.31 Fortunately, both of these problems were handled adroitly. First, decentralization increased the flexibility and responsiveness of the economy. It also started an informal process of assigning and redistributing property rights more widely with local governments supplying the initiative. Second, since the vast majority of enterprises were publicly owned, the approach taken was a gradual increase of enterprise autonomy within a loose framework of collective (or state) ownership that is still lacking a formal company law. This allowed much room for variation. What it achieved, during the most difficult stage of transition, was a balancing of three intertwined concerns: supervisory agencies sought to retain control over enterprises to ensure that they adhered to official goals and would service the revenue requirements of local governments. Enterprises sought maximum decision-making autonomy so that they could pursue opportunities as they arose and capture much of the benefits for employees. Both parties sought a viable sharing of risks, and this implicitly served to demarcate ownership rights. The community, represented by local authorities, was protective of its ownership rights over enterprises, but realized that by shouldering all the risks it would in effect be underwriting inefficiency. Managers and workers have little incentive to work hard, or be competitive, if they are sheltered from losses. The enterprise had to weigh the advantages of independence against the risks of operating in a highly fluid environment, in which market information was scarce, financial channels underdeveloped, and where the state would remain the key player for the foreseeable future.

Emerging from all this is a system of fuzzy rights, which leaves the margins between collective, cooperative, and private ownership quite vague. This has brought into being a sharing of risks between enterprises and local government, at least for the broad mass of nonstate enterprises in the rural areas, and has had a profound effect on financing. By retaining vestiges of collective ownership, an enterprise gains some protection from risk of failure, more easily obtains resources from banks, and possibly derives other favors in the form of budgetary grants, subsidized inputs, or sales to government bodies. Such an arrangement has also increased the readiness of households to invest. The price of such sharing is the claim that local authorities can exercise on enterprise income and assets. Because a private entity could not easily ward off official requests, seeking collective status was not just good economics, it also acknowledged sociopolitical reality.

Although much has been made of the importance of private property rights for creating an efficient market economy, China has clearly not suffered by limiting the domain of private property and cultivating a wider, informal system of partial ownership in the rural sector. An individual’s ownership of a collective enterprise is in many instances totally accepted within a county, although the enterprise technically remains a property of the community. In those instances where rural enterprises have distributed shares, mostly among owners and the work force, it is broadly accepted that local governments have a claim on enterprise revenues. Coinsurance by the Government has not exacerbated moral hazard problems because township social networks that link government and business impose joint liability and facilitate both agreement of performance criteria and their enforcement.

As markets mature, and the need for risk sharing diminshes, more collectives will cross the line into private ownership. But for many years ahead, fuzzy property rights are likely to remain a feature of the economy, reflecting an ideological predisposition, a stage of fiscal development, the poorly articulated state of markets, and a contingent response to the difficulties of raising capital in uncertain conditions and with weak financial markets.

Financing Nonstate Industry

As indicated above, a substantial part of investment funding comes either from retained earnings of enterprises or is provided through a variety of fiscal channels. Although appropriate for a centrally planned economy in which banks had a peripheral role, it is bound to change radically as markets develop, the nonstate sector grows, and the continuing growth of savings results in a deepening of the financial system. Until fairly recently, financial development tended to lag behind industrial change, but it seems now that the spontaneous appearance of new financial institutions may be powerfully reinforcing the forces of expansion, particularly in the nonstate sector.32

After a slow start in the mid-1980s, the refinement of the financial system has picked up speed. In addition to the four specialized banks and the two national comprehensive banks, there is now a vast network of rural and urban cooperatives, as well as several hundred nonbank financial intermediaries—trust and investment companies (TICs), finance companies, leasing companies, and security corporations.33 Since 1990, these have been joined by stock exchanges in Shanghai and Shenzhen, and stock markets flourish in scores of cities.34 Low inflation throughout the 1980s and moderate interest rates, which on average have provided savers with zero or positive real returns, have continually stimulated resource mobilization.35

However, unlike Japan or Taiwan Province of China, the Government has not made a deliberate effort to create a financial infrastructure that serves the needs of rural industry.36 Instead, the incentives released by industrialization have induced existing institutions to expand and reorient their activities. They have also drawn new intermediaries into the fray. The institutions of immediate relevance are, first and foremost, the Agricultural Bank of China (ABC), whose branches extend down to the township level. Affiliated to the ABC and operating at the township level and below are more than 60,000 rural credit cooperatives (RCCs) and 3,500 urban credit cooperatives (UCCs). The former are collectively owned by farmers and are the main providers of credit to farmers and to the rural industry. From small beginnings in Zhejiang,37 Jiangsu, and Fujian, locally owned informal banks have appeared, restoring a tradition that had flourished earlier in the century. Increasing, but still relatively small, amounts of credit are flowing to the nonstate sector by way of TICs and finance companies set up by the specialized banks to tap more lucrative markets in which they often cannot lend directly.38

Finally, after years of an unswerving commitment to vertical integration, many of the large state enterprises in the coastal cities, for example, Shanghai and Hangzhou, are subcontracting on a growing scale for reasons of flexibility and lower cost. This trend, which is sure to gather momentum as experience accumulates on both sides, is beneficial to rural enterprises in at least four ways: it enlarges their markets; the large state-owned enterprises provide secondhand equipment; they are a source of technology and skills; and, because they enjoy much easier access to credit from the specialized banks, they can provide subcontractors with some amount of working capital.

Although distressingly sparse, the data—especially with respect to working capital—are examined below in more detail, to define the part played by finance in the growth of collective and private enterprises.

Rural Banking Institutions

Rural household savings were insignificant in the late 1970s but have since risen very strongly in line with overall growth in household accumulation, which reached 19 percent of GNP in 1991; see Tables 4 and 5. Much of these savings take the form of deposits in the ABC and the credit cooperatives. Enterprise deposits have also increased sharply. Between 1979 and 1991, ABC’s total deposits rose twelvefold. Whereas enterprise deposits have the bigger share—58 percent—they have also climbed the fastest—by an incredible 75 times. The experience of the rural credit cooperatives is similar. Total deposits have grown tenfold, with savings deposits accounting for the largest share—85 percent—and for the biggest increase, 24-fold.

Table 4.Savings(Percent of GNP)
Gross national savings139.638.837.839.540.4
State budget (current account
Enterprises and other218.218.519.018.419.9
Of which:
Financial savings9.59.910.012.913.2
Source: People’s Bank of China.

Estimated as gross domestic Investment plus the balance on external account.

Calculated as a residual; mainly state-owned and collectively owned enterprises and extrabudgetary operations of local government.

Does not take into account borrowing by households, which is negligible, and purchases of securities issued by nongovernment entities.

Source: People’s Bank of China.

Estimated as gross domestic Investment plus the balance on external account.

Calculated as a residual; mainly state-owned and collectively owned enterprises and extrabudgetary operations of local government.

Does not take into account borrowing by households, which is negligible, and purchases of securities issued by nongovernment entities.

Table 5.Household Bank Savings Deposits(Billion yuan)
Total household deposits21.0628.1039.95162.26380.15911.03
Urban household
Increase over previous
year (percent)30.7939.4436.2128.6130.78
Rural household
Increase over previous
year (percent)40.7549.2328.9213.5825.94
Total household deposits/
GNP (percent)5.877.058.9418.9627.1245.88
Sources: Statistical Yearbook of China, 1992; Qlan Ylngyl (1993).

Deposits held by households in the state banking system.

Deposits held by households in rural credit cooperatives only.

Sources: Statistical Yearbook of China, 1992; Qlan Ylngyl (1993).

Deposits held by households in the state banking system.

Deposits held by households in rural credit cooperatives only.

During the first half of the 1980s, the expansion of the deposit base was not matched by lending to rural industry.39 In fact, the evidence from financial and other sources points to a transfer of resources from the rural to the urban sector.40 Since then, the tempo of lending by the ABC and RCCs for rural industry has quickened, although it may not yet have fully utilized the lending potential of these institutions and has made minimal inroads into the lending of other banks and on financial entities.

Table 6 shows that the loan/deposit ratio for the RCCs in 1991, while it has risen threefold since 1989, was 67 percent, with approximately 56 percent of loans being to township and village enterprises. An examination of total bank lending in 1989 shows that the nonstate sector, including agriculture, absorbed about 20 percent of all bank lending, and a third of this was to rural industry (Table 7). Thus, at a time when rural industry was producing close to a fourth of industrial output, it was absorbing 8 percent of bank lending for fixed investment as well as working capital.

Table 6.Rural Credit Cooperative Activities(Billion yuan)
Total deposits21.5927.2372.49139.98214.49270.93
Loans to households1.091.6019.4237.2451.8263.14
Loans to TVEs1.423.1116.4445.6176.07100.73
Loans to collective
Total loans/total deposits
Sources: Statistical Yearbook of China, 1992;Qlan Ylngyl (1993).
Sources: Statistical Yearbook of China, 1992;Qlan Ylngyl (1993).
Table 7.Bank Lending to Nonstate Sector as Proportion of Total Outstanding Bank Loans(Percent)
Urban collectives4.955.115.475.585.15
Urban individuals0.
Total nonstate loans17.6018.9420.1620.5319.97
Sources: Almanac of China’s Finance and Banking, 1990; Qlan Ylngyl (1993).
Sources: Almanac of China’s Finance and Banking, 1990; Qlan Ylngyl (1993).

A glance at Tables 8, 9, and 10 on fixed investment and its financing can help sharpen the picture somewhat. Two things are striking. The first is the relatively small share of investment by collective and other enterprises relative to state firms. The ratio is less than 30 percent, even though the shares in production were fairly close. Second, at the aggregate level, domestic and foreign loans were a minor part relative to self-raised funds and others. Although the volume of domestic loans rose by 80 percent between 1987 and 1991, the ratios have changed little. However, rural township and village enterprises are more dependent on bank loans than state or the larger collective enterprises (Tables 10 and 11), though the average is a third of total financing. This brings us back to extrabudgetary resources and the importance of other informal channels for raising funds. The nonstate sector and, in particular, rural industry obtains a small proportion of total loans, which are still funneled disproportionately to the state sector. And to a degree perhaps not fully appreciated, well over half of all fixed investment is still being financed by other means.

Table 8.Investment by Sector and Source of Financing(Billion yuan)
Gross domestic investment448.7557.4618.3641.4730.8
Fixed investment1390.7469.9442.1464.2547.3758.2
By ownership
State units229.8276.3253.6273.3338.2510.6
Collective units56.771.257.052.962.9123.3
Construction by
By source of finance
State budget347.140.933.738.236.5
Domestic loans56.165.452.664.993.6
Foreign loans15.723.924.820.427.6
Self-raised funds and
Stockbuilding and work in
Source: State Statistical Bureau.

Investment in plant and equipment plus equipment renewal and technical transformation.

Not separately identified by ownership (investment by enterprises not covered by the plan).

These data are not comparable with the budgetary data for investment because of differences In recording method and coverage.

Includes stock of materials, goods in process of production, and finished goods.

Source: State Statistical Bureau.

Investment in plant and equipment plus equipment renewal and technical transformation.

Not separately identified by ownership (investment by enterprises not covered by the plan).

These data are not comparable with the budgetary data for investment because of differences In recording method and coverage.

Includes stock of materials, goods in process of production, and finished goods.

Table 9.Total Fixed Investment by Source
(Billion yuan)
External capital9.1517.5425.9027.4227.8331.63
(Percentage share)
External capital3.604.825.766.636.255.75
Source: China Statistical Yearbook, 1992 (in Chinese), p. 145.
Source: China Statistical Yearbook, 1992 (in Chinese), p. 145.
Table 10.Rural Fixed Investment by Source, 1990(Percentage share)





Henan100 009.0433.4711.3930.224.06
Source; China TVE yearbook, 1991 (in Chinese), pp. 188–91.

TVE support fund and fund from supervisory agencies.

Borrowing from other units/individuals/external sources.

Retained profits and pooled funds.

Source; China TVE yearbook, 1991 (in Chinese), pp. 188–91.

TVE support fund and fund from supervisory agencies.

Borrowing from other units/individuals/external sources.

Retained profits and pooled funds.

Table 11.TVE Capital by Source
Own ResourcesBorrowed Resources


State support fundDevelopment fundLoans from bank and rural creditBudget revolving fundProcurement payable
State support allocationWelfare fundOther borrowingTaxes payable
Local budget allocationBonuses fundOther
Town and local investment fundEnterprise fund
Investment by other units/ individualsEducation fund Major maintenance fund Labor insurance fund
Source: China TVE Management Encyclopedia (Beijing: Agriculture Publishing House, November 1987), p. 294.
Source: China TVE Management Encyclopedia (Beijing: Agriculture Publishing House, November 1987), p. 294.

Working capital brings out another dimension of financing. Although information is incomplete, Tables 12 and 13 reveal some interesting details. First, of total loans to industry, those for working capital are roughly three times as large as those for fixed investment. Second, working capital loans to collective and individual enterprises range between 10 and 12 percent, the lion’s share being absorbed by state firms. This is consistent with the above picture on the financing of fixed investment. However, Tables 12 and 13, when juxtaposed with Table 10, also suggest that collectives and TVEs are far more dependent on bank borrowing for working capital than for fixed capital. ABC’s lending for working capital is three times as much as for fixed capital. For the RCCs, the ratio is approximately four to one in favor of working capital. This is consistent with evidence from other countries, in which banks and other nonfinancial institutions prefer to make less risky, short-term loans for working capital, as against loans for fixed capital. This dependence on loans for working capital was brought out by the sharp contraction in rural industry growth caused by deflationary credit policies in late 1989.

Table 12.Distribution of Loans1
(Billion yuan, end of period)
Total loans1,1421.3471.6541,9812,243
Working capital425518639741632
Industrial enterprises3310387489575639
Construction organizations4960677284
Collective enterprises and
Fixed Investment139157198274324
(Percentage change from previous year)
Total loans16.518.022.819.821.4
Working capital13.021.923.416.017.9
Fixed investment24,013,226.238.533.1
(As percentage of total loans)
Working capital37.238.438.637.437.1
Fixed investment12.111.712.013.914.4
Source: People’s Bank of China.

Includes gross renminbi lending to enterprises and individuals by the People’s Bank, the specialized and universal banks, and RCCs.

Includes loans to construction enterprises. Excludes loans to rural industrial enterprises, which are included under loans for agriculture.

Includes other loans of the People’s Bank and of the universal and specialized banks.

Includes credit for agricultural procurement.

Includes loons to rural Industrial enterprises.

Source: People’s Bank of China.

Includes gross renminbi lending to enterprises and individuals by the People’s Bank, the specialized and universal banks, and RCCs.

Includes loans to construction enterprises. Excludes loans to rural industrial enterprises, which are included under loans for agriculture.

Includes other loans of the People’s Bank and of the universal and specialized banks.

Includes credit for agricultural procurement.

Includes loons to rural Industrial enterprises.

Table 13.Structure of Funds(Percent)
Agricultural Bank of China
Total assets100.0100.0100.0100.0
Total loans87.471,384.879.7
Loans for working capital66.154.270.664.8
Loans to Industry0.
State Industry working capital1.42.4
Collective Industry working capital0.
Collective Industry fixed assets0.4
Loans to commerce59.546.458.049.8
Loans to township enterprises6.
Working capital2.
Fixed assets3.
Rural Credit Cooperatives
Total assets100.0100.0100.0100.0
Total loans17.923.741.847,1
Loans to township enterprises5.38.417.223,4
Working capital3.66.514.119.8
Fixed assets1.
Loans to farm households4.14.920.317.3
Other loans2.0

Other Sources of Financing

Since rural enterprises do not derive much of their fixed capital financing from banks or financial markets, they have to rely on other sources. There are four main avenues: extrabudgetary resources and retained funds of enterprises; the savings and contributions of family and kinfolk; informal banks; and direct foreign investment. The first was discussed above and its significance underscored. Its salience derives from the approach to decentralization, which retained the basic framework of administrative control at the subnational level, maintained earlier modes of financing, and delayed the development of a financial sector oriented toward industry.

The persuasiveness of the second avenue, of which there is frequent anecdotal mention and modest validation through surveys, is related to social structures. Chinese society has highly articulated kinship ties within a well-defined hierarchical framework. At the core is the family, which inculcates and perpetuates disciplined role compliance and a profound sense of reciprocal obligation.41 Such a social architecture facilitates social networking and cooperation. By emphasizing trust, these social networks minimize transaction costs and serve as an institutional alternative to contract law. Trust promotes the mobility of resources within a social network and keeps down the price. In other words, because social rules ensure that commitments are adhered to, the exchange and pooling of capital is eased. Further, because there is a sense that kinfolk will benefit from the success of the individual, either directly or indirectly, interest charges are low or nonexistent.42

As a consequence, the mobilization of capital for small-scale rural enterprises, from family and relatives, whether within or outside China, has worked to a degree unmatched in other countries.43 In the more agricultural communities, interfamilial lending can be for nonproductive activities, but, in the more industrialized rural counties, the social marketplace is an important source of capital that usefully supplements other resources.

A remembered tradition and the existence of stable social networks are also behind the reappearance and spread of informal banking. This was initially observed in the thriving county of Wenzhou (Zhejiang province), but has since taken root in Fujian and other coastal provinces, filling niches left untouched by the public institutions.44 In many respects, informal banking is well suited to servicing rural industrialization at its current level. With markets still relatively immature and lacking in institutional depth, risk is especially troubling, and the search for information takes on a special intensity.45 For financiers, firsthand knowledge of borrowers, their intentions, and their capabilities becomes critical. Such detailed knowledge is the only way of effectively screening risks and functioning profitably in a fluid environment. Because an individual member can only gather comprehensive information on a modest number of clients, the scale of informal banking is limited. It is an activity that does not enjoy economies of scale. But on its chosen level, it can be both efficient and competitive. This is especially so in China’s rural counties, because social mores and kinship ties can be used by lenders for insurance purposes. Fuzzy property rights, which involve a sharing of risks with public bodies, provide additional comfort. Informal banking can count on two useful buffers—the trust engendered by kin-based obligations and risk sharing with the community through fuzzy ownership rights. As official sanction against such financial institutions has weakened, they are becoming a force in at least some of the coastal counties, although their aggregate contributions may be modest.

Direct foreign investment is the remaining major element in the financing picture. Between 1979 and 1991, overseas investors committed $49 billion, initially to developing tourism, commercial real estate, and petroleum resources, but increasingly the focus shifted to manufacturing. In recent years, close to 80 percent of all foreign direct investment was in manufacturing. Most of the capital was in small-scale, export-oriented TVEs in the 11 coastal areas, with as much as 55 percent being in Guangdong and Fujian. On the average (see Table 14), annual disbursements were $2–3 billion in the late 1980s, rising to $4 billion in 1990–91. In 1992, commitments rose to $52 billion, greater than the entire amount committed through the previous year, and $9 billion were spent.46 Disbursements climbed to over $20 billion in 1993.

Table 14.Foreign Direct Investment(Billion dollars)
Annual Disbursements1
Source: China Statistical Yearbook; World Bank staff estimates.

Refers to actual foreign capital inflows, including value of secondhand capital equipment transferred to Chinese factories. However, this is a gross figure and does not exclude Chinese overseas investment.

Source: China Statistical Yearbook; World Bank staff estimates.

Refers to actual foreign capital inflows, including value of secondhand capital equipment transferred to Chinese factories. However, this is a gross figure and does not exclude Chinese overseas investment.

Foreign direct investment has been of distinct importance to the growth of rural industry in the coastal provinces because it has provided manufacturers with capital equipment, usually secondhand, and raw material for processing.47 This accounts for the bulk of the inflow. Some injections of cash also occur—about $1.5 billion in 1992—but these have been between 15 and 25 percent of the disbursed amount.

Foreign direct investment during the 1980s followed a pattern that significantly influenced China’s development. First, as indicated above, it was drawn toward the manufacturing sector, especially toward processing activities with a high export quotient. In this fashion, it has taken advantage of China’s low labor cost, its proximity to Hong Kong, and the incentives given to earn foreign exchange. Second, the average scale of individual investments was about $0.5 million in the late 1980s, rising to $1.5 million in 1992. This reflects the focus of foreign direct investment on export processing. Third, a disproportionate share of foreign investment has been in the special economic zones and in the southeast coastal provinces. In recent years, more of the funds have been flowing to the east48 and northeastern provinces, but Guangdong and Fujian continue to absorb a large part of the total. Fourth, foreign direct investment has been distributed across both the state and the nonstate sectors, but its effect on the nonstate sector, in the southeastern and eastern provinces, has been overwhelming. In Guangdong, Fujian, Zhejiang, and Jiangsu, the share of state industry was under 40 percent in 1991 (Table 15). Undoubtedly, other factors have contributed. For instance, the share of state enterprises has always been low in Zhejiang because of the strength of collective/cooperative tradition, but foreign direct investment has served to alter the composition of industry.

Table 15.Nonstate Industrial Sector, Selected Provinces, 1991(Percentage share of GVIO)
Sources: China Statistical Abstract. 1992, p. 71; 1988, p. 37.

State-owned enterprises.

Urban collectives.

Rural collectives.

Individually owned enterprises.

Sources: China Statistical Abstract. 1992, p. 71; 1988, p. 37.

State-owned enterprises.

Urban collectives.

Rural collectives.

Individually owned enterprises.

The influence of foreign direct investment on capital accumulation and growth has been explored by Kueh (1992). The first relationship is stronger than the second; that is, foreign direct investment has had a marked effect on fixed capital investment in most but not all of the coastal areas, but not all have responded as quickly to the injection of funds. The special economic zones in Guangdong and Fujian have derived the most benefits. Other municipalities, such as Tianjin and Dalian, have absorbed a large volume of foreign direct investment, but, because of either gestation lags or a decline in domestic effort, growth has been slow to respond.

Although they have been aided by geographical location, China’s provincial authorities have played a pivotal role. Once the Central Government had embarked on a policy of decentralization and reform, it was the attitude of the local authorities that determined the economic environment. They decided the parameters of collective, private, and “other” development. Decentralization gave them the opportunity, and fiscal reforms, by enabling them to retain more resources, stimulated an active, entrepreneurial seeking after foreign direct investment. New fiscal arrangements had two other consequences. First, even though it was the center that decided on taxes and set rates, local governments could negotiate tax rebates and special incentives with investors. Individual provinces used these ill-defined powers more or less sparingly, but Fujian and Guangdong, with the most generous tax deals, have been especially aggressive. Banking on long-run gains, they have used tax instruments fully to draw in foreign direct investment.

Second, to make their county or municipality attractive to foreign investors, local governments have used administrative freedom and command over resources to build the necessary infrastructure. Thus, spending on transport, land development, energy, housing, sewerage, and water facilities has been critical to the crowding in of not only domestic investment but also foreign direct investment. Local governments have manipulated a number of levers to finance social overhead capital, including bank financing, grants from the center, and loans from various donors. But the fiscal leeway provided by decentralization enabled them to start the virtuous spiral.

The steep rise in foreign direct investment in 1992–93, if it persists well into the 1990s, will have a sizable impact on industrial financing. It could boost the already very high growth rate of the nonstate sector, and, because foreign direct investment is becoming more evenly distributed along the coast, its effects will be felt by collective and private enterprises in the northeastern parts of the country as well.

Future Implications, Trends, Problems, and Policies

A number of inferences on future trends can be drawn from the above discussion. Certain problems that could become troublesome if not dealt with through policy action are also indicated.

It seems that the impetus provided by fiscal decentralization may now have spent itself. An increase in local financing, through fiscal or quasi-fiscal channels, is unlikely. If anything, it could decline if tax reforms are introduced. More of the nonstate sector’s funding will come from financial intermediaries. Of these, the “informal” banks, credit cooperatives, finance companies, TICs, and security houses may expand fastest, at least over the next five years. Private, cooperative, and collective enterprises will remain small-scale operations, concentrated in rural townships and in the urban peripheries of the cities. Their needs will be more efficiently served by small intermediaries that are well supplied with intelligence on borrowers, their kinfolk, and local politics.

However, the high returns from lending to the nonstate sector will surely draw the specialized banks more directly into the fray. They are already involved through their TICs and finance companies, but, if the share of state industry in industrial output shrinks further and profitability differentials widen, banks are bound to redirect their activities. When that happens, the state sector will not be absorbing two-thirds of all credit, nor will the apparent financial transfer from rural to urban areas persist. A deepening of the financial system, which caters to the needs of nonstate industry, will accelerate the shift away from own resources and those of relatives. Enterprises will come to depend more on funds borrowed from intermediaries, formal or informal. As this trend continues, and China becomes more of a market-centered economy with many foreign-owned firms, a clearer definition of property rights for all firms will become urgent.49

If the apparently successful approach of the 1980s is extrapolated into the 1990s, the Government should limit itself to creating a well-specified institutional framework for financial development and concentrate its energies on regulating the multiplicity of emerging intermediaries. The importance of effective regulation by the central authorities cannot be minimized. Past experience suggests that spontaneous forces can meet most though not all of the industry’s needs. Long-term finance is usually the bottleneck that the market has the greatest difficulty in correcting. It may call for government initiatives. Furthermore, special financial provisions might be necessary to spur rural industrialization in the less economically progressive interior regions of the country.50

Under current circumstances, fuzzy property rights are not a significant impediment and may have an essential role in the transition. But a China in which enterprises function in a market environment, which has a large traded goods sector, absorbs billions of dollars in foreign direct investment each year, and develops a thriving financial sector to support the real economy, will have to delineate property rights and elaborate civil law underpinning economic relations. This will have a critical bearing on the future development of financial markets and instruments.

Although it is difficult to speak confidently of the future on the basis of changes that have become apparent only since mid-1991, China is committed to retaining a large, state-owned, industrial sector, but is also prepared to push the private, collective, and “foreign-invested” enterprises. By the decade’s end, close to two-thirds of industrial output might be produced by nonstate entities.

Whether this comes to pass will be a function of the economic environment. At the minimum, macrostability must be sustained; center-local relations must be such as to ensure a balanced sharing of fiscal resources and administrative responsibilities; and the essential, minimum, legal institutions must be in place to ensure fair treatment of economic units by the state and efficient interaction in the marketplace.

This paper is not the place to delve deep into China’s current macroeconomic and institutional problems, but in each of the above areas there is cause for worry.

Largely because of decentralization, the Central Government’s control over fiscal levers, as well as the management of credit, is fairly weak. This has become painfully apparent in 1992-93. Revenue growth has continued to lag and credit targets have been impossible to enforce as banks responded to profit opportunities and signals from local authorities. These imbalances must be solved principally through the political process, but they will also require administrative changes and the use of new policy instruments. A new round of fiscal reforms was started in 1993. It will need to be implemented vigorously.

As China continues its transition toward a market economy, the mechanisms for sustaining a civic culture, regulating industry, and enforcing individual as well as official accountability are beginning to fray. If not reversed, strains in the society could be generated that could slow and distort the direction of development.

Last, regional imbalances are becoming more pronounced. To a degree, they are unavoidable. But the weakness of the Central Government, especially in the fiscal sphere, interferes with its ability to support the growth of the nonstate economy in the interior provinces. China has dealt with equally troublesome problems in the past and could do so again. Its overall economic condition is strong, and it has attained an enviable economic momentum. From this position of economic strength, it would be possible to take remedial actions that would secure the future of the economy.


Linda M. Koenig

I very much enjoyed reading this paper, which contains a vivid and detailed description of China’s industrial development. The paper correctly emphasizes the spontaneous nature of the growth of the nonstate enterprise sector, which was facilitated by political and financial decentralization and by the ambiguous state of property rights. The paper is somewhat less explicit in describing the financial system, but it does clearly establish that there is an essentially dualistic system in which the four large state banks concentrate resources on the state-owned enterprises and a series of smaller institutions finance the collective and private enterprises.

I would like to concentrate my comments on the deficiencies and risks of the present financial arrangements, to which Mr. Yusuf alludes in the final section of the paper but on which he does not really elaborate.

First of all, there are serious risks of a prudential nature throughout the financial system and particularly as regards the smaller intermediaries that finance the collective and private enterprises, given that the state stands behind the large specialized banks and the enterprises to which they lend. Although provisional regulations govern China’s financial system, there is as yet no banking law and, more important, the regulatory powers of the People’s Bank of China, China’s central bank, are very underdeveloped. Furthermore, there is no prudential supervision as we know it. In this setting one has to worry about informal banks lending on the basis of family or personal ties. The failure of several of these institutions at the same time could have profound ramifications for the collective and private enterprises that, as Mr. Yusuf describes, are now responsible for approximately half of China’s output.

In addition, problems of monetary policy exist that both derive from and contribute to the shape of the financial system. For example, negative real interest rates for deposits and loans in the official system have contributed to the rapid growth of smaller intermediaries, some of which are little more than fronts for the larger banks. In many cases, therefore, collective and private enterprises are paying relatively high rates of interest to offset the low rates paid by state enterprises. Also the risk is created of large flows of deposits between the formal and informal systems as interest rate relationships change.

The collective and private enterprises would be in particular jeopardy if China were to lose control of the inflationary process or alternatively if the authorities were to decide to clamp down strongly on credit in a manner that discriminates against the nonstate sector. In 1988, the People’s Bank simply froze the operations of the credit cooperatives and other smaller intermediaries. If this occurred again, in direct fashion or indirectly by prohibiting specialized banks from lending to nonbanks, the financing of the collectives and private enterprises could be seriously disrupted.

Hence, as far as China has come in its development, one has to conclude that development of the financial sector has lagged far behind that of the real sector. Establishment of an adequate legal system and of prudential supervision is urgently needed. It is likely that the present structure of the financial system with four large nationwide specialized banks will not be tenable for much longer. Finally, the workability of the present system will be affected by macroeconomic conditions.


The author is indebted to Shahid Javed Burki for comments and to Xiaofeng Hua for assistance with the statistics. The views expressed should not be attributed to the World Bank, its Board of Directors, its management, or any of its member countries.

China’s nonstate industry has four principal components: collectively owned enterprises, which currently account tor the largest share; cooperatives; individually (privately) owned enterprises; and others, principally enterprises in which foreign investors have a stake or those that are wholly owned by foreigners.

Views differ on policies toward rural industry. Riskin (1978) discusses the gradual revival of rural industry in the sixties following closures of enterprises after the Great Leap. Communes visited by Burki (1969) in the mid-1960s had a substantial level of nonagricultural production. Development of rural industry in the mid-1970s, particularly its linkage with agricultural activities, is described in American Rural Small-Scale Industry Delegation (1977), especially in Chapters 8 and 9.

However, see footnote 3.

For a discussion of agricultural reform during this stage, see (Perkins and Yusuf 1984).

The importance of the household responsibility system to the growth of agriculture during 1978-84 is quantified by Lin (1992).

Field (1992, p. 589) observes that decentralization and the granting of greater autonomy to enterprises were intended to stimulate state enterprises. But collectives were the ones that derived the larger benefits. Their output rose five times between 1980 and 1990. That of township and village enterprises (TVEs) rose tenfold. Wu (1992) examines the surge in growth during 1985-90 and the large contribution by rural industry. See also Prime (1992, p 31) and Findlay and others (1992).

State and Urge collective enterprises have a work force nearly three-fourths of which still enjoys lifetime tenure and is lavishly provided with allowances and benefits. This so-called iron rice bowl greatly increases overheads.

Ody (1992) describes the use of credit controls to slow growth in 1989-90. These measures were slanted initially toward TVEs and rapidly contained the level of activity. They also increased the rate of exit from the subsector. The experience of 1989-90 suggests that on the margin, credit restraint exercised through formal channels was able to influence TVE activity strongly in the late 1980s. How effective it would be in the mid-1990s, if the number of financial intermediaries increases, is less certain, although the dependence on credit is likely to continue increasing. See also Tarn (1991, p. 521).

In the first two months of 1993, three-fourths of China’s economic growth—which was running at an annualized rate of 14 percent—was provided by collective and private enterprises. These were expanding at the annualized rate of 47 percent and 77 percent, respectively (Zhongguo Xinwen She News Agency, Beijing, March 9, 1993).

Private enterprises are most numerous in Guangdong (30,000), followed by Zhejiang, Liaoning, and Shandong (China Daily, February 23, 1993). Field (1992, p. 599) notes that official projections also assume a more rapid growth of individual and cooperative enterprises than of collectives above the township level.

In Beijing, for instance, nearly 200,000 individuals are engaged in small-scale retail activities, which require relatively little capital to start up (China Daily, April 18, 1993). In the first quarter of 1993, there was a net addition of 2,300 “street businesses.” This is merely the ground level of the services sector. There is increased activity at higher levels and a great deal to come (Drucker, 1993).

The share of state farms was 3 percent of agricultural output in 1991 (China Statistical Yearbook, 1992).

The significance of local community resources and especially fiscal resources in the early 1980s is described in World Bank (1982). On fiscal decentralization and the extra-budgetary funding, see Donnithorne (1989) and World Bank (1993). Also see Yusuf (1993b).

Extrabudgetary revenues encompass surcharges on taxes set by local governments; fees imposed by administrative departments; and retained profits and depredation allowances of state-owned enterprises and collective enterprises.

Until recently, Guangdong’s fiscal contract required the province to transfer to the center a fixed amount of revenues. Any excess was retained by the province.

Decentralization also enabled local officials to increase control over financial channels and use these to support pet ventures (Vogel, 1989, p. 115).

By virtue of their extensive administrative powers, local governments are able to prevail upon enterprises to contribute to community expenses or build projects that benefit the larger community as well.

Watson (1992) talks about the heavy investment by local governments (Shandong province) in fixed capital, following the introduction of tax contracting. He views it as each county creating its own “palace economy.” Vogel (1989) also notes the pressure by local officials on banks to lend to businesses.

Rural enterprises are most prominent in the coastal areas, home to a third of the populace. In western and central China, the per capita output of rural enterprises is less than a fourth (China Trade Report, 1993).

The encouragement provided by village leaders to local enterprises is described by Putteman (1989). Typically, many of the new entrepreneurs are well-connected former cadres.

The uncertain nature of property rights relating to enterprises is noted by Watson (1992, p. 184). The significance of the underlying web of social and kinship linkages in the running of enterprises and the allocation of their earnings is also discussed (pp. 184-86), as is the provision of credit to enterprises at the instigation of the county.

Since the mid-1980s, rural industry has taken the lead in introducing new instruments such as bonds and shares (Tarn, 1991).

Bowles and White (1989). The importance of commercial banks, saving companies, postal savings, and various cooperatives to the development of Taiwan Province of China’s rural sector is discussed in Adams, Chen, and Camberte (1993). The contribution of private and government finance institutions to postwar, small-scale industry growth in Japan is described by Friedman (1988, pp. 166-68).

If 1988, the year of an inflationary spike, is excluded, the average one-year deposit rate between 1979 and 1991 was 6.3 percent, whereas the average retail price inflation was 4.7 percent. The figure for deposit rates is biased somewhat by the high deposit rates introduced in 1989.

See Blecher (1991). The emergence of informal monetary transactions among households and the growth of nongovernmental finance associations as well as credit unions have been noted by many observers.

Feder and others (1989) note that deposits of rural households were larger than loans in their sampled counties. Thus, credit shortages might be more perceived than real.

Sheng (1991) has computed intersectoral transfers through price and non price mechanisms for 1952-88. For the period up to 1986, there was a net outflow from agriculture, primarily because of price policy. Thereafter, the outflow tapered off and might even have been reversed.

Feder and others (1989, pp. 514 and 516) observed that the majority of informal credit transactions were interest-free transactions between relatives. In Jiangsu, they accounted for the bulk of borrowing, but in Jilin, their share was small.

For instance, rotating credit and savings associations are worldwide phenomena. They are simple, flexible, and contain effective mechanisms that regulate membership, eligibility, credit rating, and repayment. As Bauman (1983) observes, “the smallness of the group ensures members’ knowledge of others’ character. Coupled with social control, this is an important barrier against fraud and defaulting.” Geertz (1962) has discussed how kinship ties discourage fraud and evasion. He also stresses the importance of communal responsibilities and support systems in supporting emergent financial activities. These serve as the foundation of a more sophisticated financial system.

Tarn (1991) refers to institutions that have evolved from informal credit associations (hut) and private money shops (qian zhuang).

Stiglitz (1989), On the strategy of small-scale, informal financial intermediaries, see Drake (1980, pp. 130-35).

The projection for commitments in 1993 is in the $70-80 billion range.

Khan (1991) has estimated that, during the first half of 1988, the flow of foreign direct investment amounted to 13 percent of total investment in fixed assets in the 14 “open cities” and 60 percent of gross investment in the five special economic zones. If measured at the swap market exchange rate of $1 = Y 5, the amount would be 17 percent and 82 percent, respectively.

In 1992, Jiangsu province ranked second to Guangdong in the number of projects with foreign funding that were approved, as well as in total commitment of foreign direct investment. This may be indicative of the northward shift of such investment (Journal of Business, March 23, 1993).

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