Rural China's economic model limps on

East Asia Forum

‘Benghai' was changing. Returning to my old office, my home for ten years of fieldwork in rural China, it was clear something was amiss. Gone was the grizzled caretaker, listlessly following his mop around the ground floor of the four-storey building. In his stead was a bank of impossibly cheerful uniformed women in their early twenties. Their smiles could signify only one thing: real estate.

China's urbanisation drive was there to greet me. The former vista of water buffalos, bamboo, and misted peaks was replaced by a tangle of mud and discarded scaffolding, concealing the shells of several apartment blocks, up to 15 storeys tall. My colleagues, whose building had been sold off by the county government, were soon to be evicted, the office scheduled for demolition before the end of the year. There was consensus that a ten year life was ‘about right' for a building in modern Anhui.

The county government was stealthily going about its relocation, despite sporadic disapproval at the provincial level. This was partly driven by the need to keep the project rolling for the benefit of the ‘shadow state' of friends and relatives who supplied the materiel for the relentless cycle of construction and destruction. Improving the propitiousness of the county government building's fengshui was also believed to help the chances of promotion for future party secretaries to the provincial government.

Already, patterns of status could be discerned. The most impressive edifices belonged to government agencies with the capacity to charge for their services, control resources or personnel, or levy fines. The Sand Management Office, which made a tidy living by shaking down the drivers of the overloaded trucks that carted river sand to build the provincial capital, merited a six-storey building. Just a few kilometres away, the cracked and pitted road to the capital stood as a monument to their failure to do their job. The humble Records Bureau, which stood in its shadow, had several staff members in each room.

On the other side of the lake, there were indications that ‘Benghai' was moving up the economic food chain. Another real estate development was underway, this time run by a local businessman rather than one of the many entrepreneurs from Zhejiang, with prices breaking through the RMB4000 (US$650) per square metre barrier. A modest two-bedroom flat in an obscure corner of Anhui will set you back $150,000, if you keep the renovations ‘basic'. The developer of this venture, which would also boast a five-star hotel, had started out as a contractor, building the roads and irrigation ditches that had proliferated during the early years of the New Socialist Countryside campaign.

As the Chinese economy has slowed, with structural issues unaddressed, old China hands are foretelling economic and possibly even political disaster. Yet in the counties of ‘middle China' the informal, private economy — both the local state and local business — is thriving. Informal solutions are being found to problems that the central state is unable, or unwilling, to address.

Notions of ‘predatory' and ‘developmental' states are simplistic. In practice, the formal local state is both prey and predator of the informal, or shadow state. When a mid-level official complains that his brother, who owns a computer shop, has to hand out tens of thousands of dollars' worth of supermarket cards every year to ensure that contracts from the official's department continue to flow, is there a victim? Moral categorisations make little sense.

Moreover, a large part of the local party apparatus is quietly engaged in enabling local enterprises to get things done, often for their own benefit, either through the revenue from taxes levelled on service industries or from their own indirect involvement in business.

The formal assessment system does encourage overinvestment by local governments in showcase infrastructure projects, but officials are rewarded in a different way for growing their service sector. At the county and township level, local service businesses are intertwined with local government. They are staffed and run by the relatives and friends of local officials who will spend their career working within the boundaries of their home county. In traditional economic thinking, services are more mobile than manufacturers. But in practice, the service sector is off limits to out-of-towners, and the local government struggles to retain footloose manufacturing businesses by offering cheap land, electricity and tax holidays.

Officials in ‘Benghai' county strive to attract manufacturers because of the spillover benefits that manufacturers deliver to service companies, owned by officials' friends and relatives. The formal assessment system rewards officials who hit revenue targets. Service businesses help them to achieve this in two main ways. The first is business tax revenue, which, unlike the VAT and enterprise income tax from manufacturers, is not shared with the central government. The second is conveyancing fees, which flow into the ‘extra-budgetary' revenue stream. As scholars such as Tao Ran and Liu Mingxing have argued, the revenue sacrificed by offering cheap (or free) land to manufacturers can be recovered by restricting the supply of commercial and residential land.

The disparity between cheap industrial land and costly land for real estate development can be readily observed. In contrast to the 15-storey residential block rising behind my old office, parts of the ‘Benghai Eco-Industrial Park' were sprawling and untended biodiversity hotspots, ideal for amphibians. Yet the absence of shuttered factory doors, and the thriving service economy that surrounded it, suggested that China's version of rural capitalism wasn't ready to croak its last.

Dr Graeme Smith is a Research Fellow at the State, Society & Governance in Melanesia Centre at the College of Asia and the Pacific, Australian National University. This is an edited extract of his chapter in ‘A New China-Australia Agenda'. The name of the county referred to in this article has been changed.

This article originally appeared on the East Asia Forum. Republished with permission.