Understanding China through its Local Politics

Agenda Papers 2013Graeme Smith is a Postdoctoral Fellow in the China Studies Centre, University of Sydney and a Visiting Fellow in the State, Society and Governance in Melanesia Program at The Australian National University. His research has explored the demand for organic produce in Chinese urban centres, the political economy of agricultural service delivery, the role of rural cadres in China’s development, and the persistence of informal land markets in rural China. He also studies Chinese engagement with Asia and the Pacific, with ongoing projects in Papua New Guinea, New Caledonia and Myanmar. Dr Smith also holds a PhD in environmental chemistry, has written several guidebooks to China, and is the 2011 winner of the Gordon White Prize for the best article published in China Quarterly, one of the leading Chinese Studies journals, and the winner of the 2012 prize for the best article published in the Journal of Pacific History. He is the co-editor of the current issues of Pacific Affairs and Asian Studies Review, which explore Chinese outbound investment and the politics of resources.

LAST MONTH, I was fortunate enough to spend time in a place I’ll call ‘Benghai’, celebrating the ninth anniversary of my love-hate relationship with the rural county that has become the core of my academic career. Even before the three-hour bus trip from the provincial capital came to its traditional Jackie Chan-inspired crescendo, a few of the truisms about Benghai were under assault. Previously, Beijing and Hefei had left me bewildered by their shock assault urbanisation projects, their waves of identikit apartment blocks, but there was always sleepy Benghai to return to. There would be the odd political scandal, a handful of speculative real estate investments, and endless rounds of optimistic infrastructure projects to support the ‘eco-industrial park’ on the edge of town. But the players, and the game, had a comforting familiarity about them. No more. Benghai was on the move.

Returning to my old office, it was clear something was amiss. Gone was the grizzled caretaker, listlessly following his mop around the ground floor, in between screenings of the high-volume Peking Opera epics, whose distorted sounds would echo through the four-storey building. The office, once the envy of all work units in Benghai, kind gift from a European country, a form of apology for pulling out of China early, as there was a war to be fought in Afghanistan. In his stead was a bank of impossibly cheerful uniformed women in their early twenties. Their smiles could signify only one thing: real estate.

Climbing the stairs to my old office, 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, from which emerged 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 was 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.

Across the valley, 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, and partly to secure promotion for future party secretaries. Not by raising GDP, which many researchers see as the secret sauce driving economic growth in rural China. Rather, it would fix the fengshui. The old county government had a mountain to the south, and no water at its doorstep, the reverse of the classical formula for geomantic success. How could the county party secretary housed in such an unpropitious structure secure a promotion to the provincial government?

On the back of the fiscal stimulus package of 2009, a
man-made lake had emerged, and one by one, government bureaus were emerging from what was 
once prime farmland. Already, patterns of status 
could be discerned. The most impressive edifices
 belonged to government agencies with the capacity 
to charge for their services, 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, Hefei, grain by grain, 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. Despite generous hiring procedures, it was thought unlikely they would have enough staff for each office. The humble Records Bureau, which stood in its shadow, had several staff members in each office.

On the other side of the lake, which sprouted neon blooms of an evening, another real estate development was underway, with prices breaking through the RMB4000 per square metre barrier, a recent phenomenon in Benghai. A modest two-bedroom flat in an obscure corner of Anhui would set me back $150,000, if I kept the renovations ‘basic’.

Yet there were indications that Benghai was moving up the economic food chain. The developer of this venture, which would also boast a five-star hotel, was a local businessman, making this the first local property development of any scale. The developer 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. Previously, many of my colleagues had joked that the county government was being run from Zhejiang, such was the number of property developments originating in that province.

The sting in the tail of that joke was the outgoing party secretary. Despite undeniable improvements to the fengshui of the county government, he had missed out on promotion, and been shunted into what amounted to retirement. At the time of writing, he was under investigation, not for taking payments for positions, or even accepting the appreciation of property developers from the eastern seaboard, but for substantial investments in a Zhejiang market. His former patron in the provincial government had made good in Beijing, and was not returning calls.

Yet as all of these stories unfolded, it was hard not to notice that the informal, private economy of Benghai seemed to be faring well. While I travelled to as many corners of Benghai as my trusty moped (maximum speed, 40 km/h) would take me, my inbox was being filled with ruminations from old China hands, foretelling disaster as the economy slowed, with structural issues unaddressed. Yet both the local state and local business in this quintessentially ‘middle China’ county were thriving (grain farmers, many of whom were in debt on the back of low rice prices, were a different matter). Informal solutions were being found to problems that the central state was unable, or unwilling, to address.

Notions of ‘predatory’ and ‘developmental’ states are too 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 was quietly engaged in enabling local enterprises to get things done, often for their own benefit, either through the revenue from taxes leveled on service industries or from their own indirect involvement in business.

Just before travelling to Benghai, a neat summary of the motivations of local officials was published by Stephen Green of Standard Chartered Bank.

The article attempts to address the impossible conundrum of how local government in China continues to function, despite debt, corruption and chronic underfunding by the central government. Green argues that: ‘The performance assessment system is skewed towards incentivising fixed asset investment – few officials get rewarded for local service sector growth.’

While there is no doubt that the formal assessment system does encourage overinvestment by local governments in easily showcased infrastructure projects – be they expressways, town squares, or airports – my time in Benghai suggests officials are rewarded in different ways for growing the service sector, or more accurately, their service sector. At the county and township level, local service businesses are intimately intertwined with local government. They are staffed and run by the relatives and friends of local officials who (with the exception of the county party secretary and a handful of others) will spend their careers working within the boundaries of their home county. As Green points out, services should be more mobile than manufacturers. But in practice the service sector is kept off limits to out-of-towners, and the local government struggles to keep footloose manufacturing businesses by offering cheap land, complementary infrastructure, and tax holidays.

How to explain this paradox? Officials in Benghai continue to strive to attract manufacturers, not because they discriminate against service companies, but rather because the spillover benefits that manufacturers deliver to the service companies that are owned by the friends and relatives of local officials. The formal assessment system does reward officials who hit revenue targets, and service businesses help them to achieve this in two main ways: business tax (which, unlike the VAT and enterprise income tax from manufacturers, is not shared with the central government), and 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 the two types of land could
readily be observed. In contrast to the 15-storey residential block rising behind my old office, parts of
the Benghai ‘eco-industrial park’ were unintentionally living up to their name. The sprawling scale and
untended nature of the manufacturers’ allotments
were turning them into biodiversity hotspots, particularly for amphibians. Yet the absence of shuttered factory doors, and the thriving service economy that surrounded it, suggested that China’s odd version of rural capitalism wasn’t quite ready to croak its last.