China Policy Institute Discussion Paper 16 CENTRAL­LOCAL RELATIONS IN CHINA: RETROSPECT AND PROSPECT DONG Lisheng © Copyright China Policy Institute March 2007 China House University of Nottingham University Park Nottingham NG7 2RD United Kingdom Tel: +44 (0)115 846 7769 Fax: +44 (0)115 846 7900 Email: [email protected] Website: www.chinapolicyinstitute.com The China Policy Institute was set up to analyse critical policy challenges faced by China in its rapid development. Its goals are to help expand the knowledge and understanding of contemporary China in Britain, Europe and worldwide, to help build a more informed dialogue between China and the UK and Europe, and to contribute to government and business strategies.
Central­Local Relations in China: Retrospect and Prospect Abstract An understanding of the PRC’s general framework of central­local relations requires further analysis beyond that which is detailed in the Constitution. The CCP has established committees and branches from state level down to grassroots in urban areas and rural villages. The basic principle guiding central­local relations has been “unified leadership and level by level management.” The leadership of the CCP Central Committee is not only political but also administrative in nature, while the State Council focuses on economic and social management. The level­by­level management is mainly carried out by the State Council ministries and the provincial governments. This paper traces how such a system was established and how it has evolved. It also analyzes the reforms and initiatives underway or planned, and discusses various directions for future development.
Central­Local Relations in China: Retrospect and Prospect Dong Lisheng*
I. Introduction The “central­local relationship” refers to the relationship between the central and local governments. Since 1949, the PRC has instituted the People’s Congress and the system of multi­party co­operation and political consultation. The National People’s Congress (NPC) is the highest organ of state power. It exercises the power of legislation; produces the executive, judicial and procurator bodies of the state 1 ; makes decisions on important issues in national life; and nominates and elects the leading personnel of the highest state organs. The State Council, namely, the Central People’s Government, is the highest organ of state administration. It implements the laws and resolutions adopted by the NPC and its standing committee; enacts administrative rules and regulations; and directs the work of administrative departments at national, provincial and local levels. China is a unitary state, whose administration is currently based on a four­level system of province (autonomous region and municipality directly administered by the central government); autonomous prefecture and city; county; and town or township. Each level has a people’s congress and government. Diagram 1 shows China’s state power structure based on the Constitution and the Organic Law on the People’s Congresses and Governments at All Levels. This description of the country’s political institutions according to the Constitution, as many studies have done, fails to locate the real source of political power in China. Actually, the Communist Party of China has established committees and branches from the state level down to grassroots level in urban areas and rural villages. At the national level, the major institutions can be viewed as four blocks based around the CCP. First, the Communist Party Central Committee is the political nerve centre. Included alongside this is the Political Bureau, its Standing Committee, and the Party Secretariat as well as the Party Central Committee for Discipline Inspection. Second, the governmental institutions comprise the NPC and its Standing Committee, the President, the State Council and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC). Third, the Central Military Commission commands the armed forces. Fourth, the Party Central Commission of Politics and Law leads and coordinates the Supreme People’s Court and Supreme People’s Procuratorate as well as the Ministry of Public Security, the Ministry of State Security and Ministry of Justice. The CCP’s leadership over other institutions is guaranteed organizationally by the CCP Core Groups within them. For example, in a ministry the minister and vice ministers plus one or two departmental directors form the core group. All major policy and personnel decisions to be made by the ministry are first discussed and decided on by this group. The local levels generally copy the political structure at the center, excluding the military commission. The establishment size and number of staff reduce level by level downwardly. China’s actual political power structure is shown in Table 2.
*
Dr. Dong Lisheng is Fellow at the Institute of European Studies, Chinese Academy of Social Sciences. He is External Research Associate of China Policy Institute. 1 The Supreme People’s Procuratorate and local procuratorates form a separate structure parallel to the court structure. They basically perform the functions of a public prosecutor.
Although the term “center” has many connotations, it refers here, in line with the statement of Deng Xiaoping, to the CCP Central Committee and the State Council. 2 Diagram 1. China’s State Power Structure NPC SC President State Council Court Procuratorate CMC* Province PC SC Government Court Procuratorate Prefecture PC SC Government Court Procuratorate County PC SC Government Court Procuratorate Township PC Presidium Government Notes: CMC stands for the Central Military Commission; the line refers to the lead and led relationship while the dotted line indicates the guide and guided relationship. Source: Pu Xingzhu, ed., Contemporary China’s Political System, 3rd edition, (Shanghai: Shanghai People’s Publishing House, 1992), p. 544. 2 Deng Xiaoping, “The Centre Must Have Authority,” in The Works of Deng Xiaoping, (Beijing: Renmin Publishing House, 1993)
Table 2. China’s Actual Political Power Structure Level Centre Total No. of Institutions 6+1+2 Province 5+2 Prefecture 3+2 Prov. Adm. City 5+2 County 5+2 Town or Township 3 Street 2 Community 2 Comttee Village 2 Party Ctr. Comttee Ctr. Discipline Comttee Prov. Comttee Discipline Comttee Pref. Comttee Discipline Comttee City Comttee Discipline Comttee County Comttee Discipline Comttee Town Comttee Discipline Comttee Street Comttee Party Branch Government Military President NPC State Council CPPCC PC Government CPPCC PC Working Comttee# Adm. Agency* CPPCC Working Comttee # PC Government CPPCC PC Government CPPCC Ctr. Military Comssn PC presidium Government CPPCC Group# Dispatched Office* Judiciary Autonomous Organization Supreme Court & Procuratorate Higher Court & Procuratorate Intermediate Court & Procuratorate Intermediate Court & Procuratorate Primary Court & Procuratorate Tribunal* Tribunal* Party Branch Neighbour­ hood Village Comttee Notes: The institutions marked with sign # perform coordination functions. Those with sign * are dispatched agencies of the higher­level institutions. For example, the Administrative Agency of a prefecture is the dispatched office of the provincial government. At this level, there is no People’s Congress. The highly centralized system which has been established since 1949 inherits 2,000 years of tradition from ancient and pre­modern China and incorporates some elements of the Soviet system. State power penetrates as far as the villages for the first time in the Chinese history. In traditional China, the power of emperors never reached below the county level. The main Soviet influence is the “highly centralized, bureaucratic and hierarchical social system that integrates politics and economy.”3 The basic principle guiding the central­local relationship has been the “unified leadership and level by level management.” The leadership of the CCP Central Committee is not only political but also administrative in nature, while the State Council focuses on economic and social management. The level­by­level management is mainly carried out by the State Council ministries and the provincial governments. Although frequent and large­scale changes have occurred in central­local relations in the past five decades, this basic principle has been maintained. Keeping these features in mind, this paper will now trace how the system was 3 Wang Tiansheng, “What the Eastern Europe Makes Clear to All,” Reading, No. 1, 1997, p. 36.
established and how it has evolved. Based on this, it will analyze the reforms and initiatives underway or planned and discuss various directions for future development. II. The Formation and Evolution of the PRC Central­Local Relations (1949­1978) The new Communist regime was firstly established locally and culminated in the installment of the central government in 1949. Immediately prior to this, the North China People’s Government, the Shaangxi­Gansu­Ningxia Regional People’s Government, the Northeast China People’s Government and the Central China Provisional People’s Government were set up consecutively to perform the functions of local government. The establishment of the Central People’s Government on October 1, 1949 marked a profound change in China’s central­local relations. 2.1. The Installment of the Centralized and Unified Leadership The “Common Programme” adopted by the First Meeting of the CPPCC that announced the establishment of the PRC stipulates that during the off­session period of the NPC, the Central Government is the highest body of state power. Local governments at all levels obey the Central Government. The division of jurisdictions between the central and local governments is to be stipulated by the ordinance of the Central Government. This means that the PRC is a unitary state. The power of the Central Government originates from the people while that of the local governments is conferred by the former. The “Organic Law of the PRC Central People’s Government” defines the central power as enacting and interpreting laws, formulating domestic and foreign policies, and appointing the leaders of the state, regions and provinces. But the jurisdictions of the local authorities are not specified. Since the First Meeting of the NPC in 1954, the NPC and the State Council have shared the legislative power, highest decision­making power and highest executive power. The unified leadership and level­by­level management are in fact the application of the CCP’s principle of democratic centralism to the state. The CCP Central Committee’s absolute authority was established in the 1940s through a series of measures. Due to long­term guerrilla wars, CCP­controlled base areas were scattered around China. The CCP as a national party was in fact faced with a situation of decentralized management by the various base area leaders and field army commanders. After the victories of the CCP­led People’s Liberation Army in 1948, Chairman Mao and the CCP Central Committee issued very demanding directives to overcome the dispersed situation. The CCP regional bureaux and field armies were required to submit regular reports to the CCP Central Committee and Chairman Mao in addition to the regular system of asking for instructions on specific, important issues. It is believed that this series of directives consolidated the authority of the CCP Central Committee and laid down the foundation for the PRC central­local relationship.4 At the CCP Eighth National Congress in 1956, Deng Xiaoping elaborated on this point: “All of the following documents were issued to overcome the situation of dispersal: the Decision on Strengthening the Party Spirit (1941), the Decision on Implementing the Unified Leadership in the Anti­Japanese Base Areas (1942), the Directives on Establishing the System of Asking for Instructions and Strengthening the Organization and Discipline (1948), and the Decision on Consolidating the System of Party Committees (1948). The Second Session of the Seventh CCP Central Committee in February 1954 completely did away with all types of dispersal mistake. Since then the dispersal tendency has only residues in limited areas.”5 4 Wang Jingsong, PRC Government and Politics (Beijing: the Publishing House of the CCP Central Committee School, 1995), pp.273­75. 5 The Documents of the CCP Eighth National Congress (Beijing: People’s Press, 1956), p. 133.
The application of the Soviet­type nomenclature system in 1953 meant organizational centralization. The principle of this system was the management of cadres at the same level and the next two levels by the CCP Central Committee and local committees. On the nomenclature lists are not only the CCP officials but also the other four major institutions plus mass organizations like the trade union, the communist youth league and the women’s federation. Culturally, a series of criticism movements against some literary and film works and the socialist education campaigns among the intellectuals had established the absolute position of the socialist ideology. In the first few years of the People’s Republic, the CCP Central Committee and the organization departments of CCP Committees at all levels managed all cadres except military officers. In 1953, a separate cadre management system was introduced due to the requirement for economic construction and the expansion of the cadre ranks. This new system was based on the functional departments. Under the leadership of the CCP central and local organization departments, other CCP departments were authorized to manage cadres in their respective fields. For example, the CCP propaganda departments manage cadres in cultural, educational and mass media institutions. The CCP united front work departments manage cadres in the democratic parties, some social organizations and religious groups. 2.2. The Unified Financial Policy The previous sections show how political centralization by the CCP was instituted. It was strengthened administratively by the unified financial measures taken in March 1950. The first major challenge the newly founded People’s Republic faced was a serious shortage of financial resources. According to Vice Premier Bo Yibo, taxes were mainly collected and kept by the local governments. But 9 million public employees, including 5 million soldiers, were financed by the central government. The state had to print more money, resulting in huge price hikes.6 These measures comprised three steps: Firstly, the unified financial income and expenditure system was installed. Except for some approved local taxes, all types of taxes were transferred to the central government. As for expenditure, the Logistics Department of the PLA Headquarters was responsible for supplying the army while the National Establishment Commission took care of the civilian employees. Secondly, a special committee managed the materials and equipment together. And thirdly, cash was also managed by the People’s Bank of China, which set up local branches. In short, local incomes were transferred to the center and any local expenditure had to be approved and paid by the center. The central government had sole budgetary power over tax, the establishment of offices, salaries and wages and supply standards. The local governments were left with minimum financial resources for the needs of agriculture, culture, education, urban construction and other important institutions. 2.3. The Province as the Connecting Point of Central­Local Power In the first three years of the PRC, the highest local government was the regions7, which had a similar status to the republics of the Soviet Union. Each of them administered several provinces. As the agency representing the centre, the regional authorities enjoyed the power to relay the decisions and orders of the State Council and issue their own orders within their jurisdictions. These regional governments, 6 See Bo Yibo, Retrospect of Some Major Decision Making and Events, Vol. 1, (Beijing: Publishing House of the CCP Central Committee School, 1993), p. 82. 7 The regions were Central China, Southwest China, Northwest China, Northeast China, North China and East China.
most of which were military in nature, played a vital role in restoring and maintaining social order in the PLA liberated areas prior to and immediately after the founding of the PRC. However, with the launch of large­scale economic reconstruction, the regional level became cumbersome. Some of its leaders were showing independent tendencies and all of them were powerful CCP and PLA veterans. The limited number of regions meant that the management range of the center was too narrow. At the end of 1952, the Central Government decided to further centralize power by setting up more ministries and at the same time increasing the power of the provinces and cities. The regional governments were abolished and became the dispatched offices of the central government. Two years later, these regional offices were abolished, and the region as a level of administrative division disappeared. However, the CCP Regional Bureau remained until the late 1960s. As mentioned previously, the PRC Constitution promulgated in 1954 divided the country into five levels. Ever since, the provincial governments have played a pivotal role in central­local relations. In 1956 the CCP Central Committee put forth the principle of dividing power between the center and provinces as part of a decision to improve the administrative system. According to this, the provinces (autonomous regions and municipalities) were given management power over a “certain scope” of planning, finance, economic enterprises, service institutions, 8 materials and equipment, and personnel. Except for the economic enterprises and service institutions that held sway over the national economy, which were still to be managed by the centre, others should be delegated to the local authorities. For those locally managed enterprises and institutions, the local governments should be given some leeway regarding the main planning targets, establishment size and personnel quotas. The important role of the provincial level can be demonstrated with the following facts: Normally the center issues directives and instructions or assigns tasks to this level to be either directly implemented or relayed to the lower levels. This is the case with the quotas for establishment of offices and personnel, the monopoly of grain purchase and sale and examination and approval power over new infrastructure projects. All universities are under the control of either the centre or the province. 2.4. The Cycle of Delegation and Re­centralization As has just been shown, in the first half of the 1950s central authority was enhanced greatly. It was further economically consolidated after the implementation of the First Five­Year Plan (1953­57). The financial resources of the whole country were assembled to the greatest degree possible for the industrialization drive. By 1957, the budgeted state revenue made up 29% of the Gross National Product, of which 80% belonged to the central budget. Politically, the anti­Gao­Rao struggle9 had the effect of warning against local assertiveness and contributed to the abolition of the regional governments. As noted earlier, organizational centralization has been realized through instituting a Soviet style nomenclature system. Over­centralization impeded local initiative and the delegation of more power to local authorities became a popular demand. For example, Zeng Xisen, Secretary of the CCP Anhui Provincial Committee, complained to Chairman Mao during his inspection tour in 1955 that even large coal mines with 20,000 workers in southern Anhui had no power 8 Service institutions include schools, hospitals, theatres and research institutes. Gao Gang was Chairman of the Northeast China People’s Government, Vice Chairman of the Central Government and Chairman of the State Planning Commission. Rao Shushi was First Secretary of the CCP East China Bureau and later Head of the CCP Central Committee Organization Department. At the end of 1953, they were criticized by Chairman Mao and other central leaders for splitting the Party. More specifically, they were charged for plotting to replace Liu Shaoqi as the Number 2 CCP leader and Zhou Enlai as the Premier of the State Council respectively.
9 to approve any single expenditure exceeding RMB200 yuan and no power to employ a single worker by itself. According to him, a ministry claimed that the province was not qualified to set up any factories as Anhui was less industrialized. Tao Zhu, Secretary of the CCP Guangdong Provincial Committee, expressed the similar view to Chairman Mao that the province was classified as a frontier area so not fit for setting up factories. Although the provision of employment fell within the central responsibility, the state budget did not set aside any money. The province could no longer shoulder such heavy burden.10 In response to local demands, Chairman Mao made an important speech in 1956 titled ”On the Ten Relationships,” one of which was the central­local relationship. In it, he called to bring into play the initiatives of both the centre and localities. He termed the ministries the “vertical line authorities” and the provinces the ”horizontal block authorities.” Dozens of ministries issued orders everyday to the relevant departments of provincial governments, exerting heavy pressure on the local officials. With such criticism, Mao required the local agencies of the ministries to receive the supervision of the horizontal block authorities. Soon after the speech, the State Council convened a conference on improving the administrative system. In his report, Premier Zhou Enlai interpreted “bringing the local initiative into play” as delegating power to the localities. He put forth the basic principle that major power should be centralized while minor power could be dispersed. “Beside the power over the Party and executive branch, the localities should also enjoy power over personnel and finance. Only in this way can they increase production.” 11 The first major delegation of power to localities ensued, concerning the planning, finance and materials and equipment. Most of the centre­managed enterprises were put under the control of provinces. For example, all factories except five under the Ministry of Light Industry and 60­70% of enterprises in the heavy industrial sector were given to the provinces. In total, this exercise involved 88% of the centrally managed enterprises. As a result, the central revenue decreased to 50% of the total state budget while that of the localities increased from less than 25% to 50%.12 Along with the failure of the “Great Leap Forward,” 1961 saw the reversal of decentralization. The situation basically reverted to the way it was prior to 1958. During the Cultural Revolution (1966­76), Chairman Mao revived his idea of establishing “regional economic systems”, which was partly responsible for launching the “Great Leap Forward” in 1958. His instruction to delegate the management authority of the Anshan Iron and Steel Complex to Liaoning Province in 1969 led to another round of turning over centrally­managed enterprises to provinces. In 1965, the ministries directly administered 10,533 enterprises, which contributed to 46.9% of the output value of the state­owned enterprises. By 1970, the respective figures were 500 and 8%.13 Immediately after the end of the Cultural Revolution in 1976, the second round of re­centralization was implemented. Although the two cycles differ in timing, range, degree and purpose, they share many common features. The main lesson is that such a simple way of delegating power cannot help to fundamentally smooth central­local relations. Under the planned economic system, politics and economy were highly integrated. In this context, the economic enterprises are entirely controlled by the 10 Xin Xiangyang, Vassals of Big Country (Beijing: China Social Press, 1996), p. 275. Same as Note 12, pp. 273­85. 12 Wang Jingsong, PRC Government and Politics (Beijing: the Press of the CCP Central Committee School, 1995), pp. 294­95. 13 Zhao Lijiang, “Creation, Reform and Adaptation—On the Historical Experience of the Development of the Central­Local Relationship Since the Founding of the PRC” in Jianghan Tribune, Vol. 1, 2000, p.75.
11 government, either central or local. This explains why the delegation of power always leads to chaos and why re­centralization dampens the vitality of the economy. III. Transition Towards the Institutionalized and Legalized Central­Local Relationship in the post­1978 Reform Era Deng Xiaoping’s 1978 reform initiated the transition from a planned economy to a market economy in China. Along with the reform, the administrative decentralization has been accompanied by economic decentralization. More recently, a consensus has been reached on the need to specify the jurisdictions of the central and provincial governments. Based on this division of authorities, the tax­sharing system instituted in 1994 can be improved. These efforts could be culminated in the drafting of a “Law on the Central­Local Relationship.” 3.1. The Centre Grants the Localities Greater Autonomy In 1980, the centre did away with the unified revenue and expenditure system that was connected to the traditional planned economic system. All kinds of revenue­sharing systems were adopted in order to encourage local initiative for economic development. Under it, the revenue was divided into the three categories of fixed income; income calculated according to the fixed rate and adjusted income while the expenditure was classified according to enterprises’ management authorities, i.e., by central or local governments. The provinces were given quotas based on these rates, plus subsidies for deficit provinces, for a duration of five years. They had to draft and implement the budget within the respective quotas and maintain a balance. This system was modified twice in 1985 and 1988. After the last adjustment, six main types of revenue­sharing system were applied. In general, it meant that the centre designed different financial policies for different provinces. The revenue and expenditure figures were no longer issued by the ministries but decided by the provinces within the amount agreed with the centre. As a result, the provinces had more financial resources available to them while the pressure on the centre was slightly alleviated. The continuous decline in central revenue in contrast to the increase in local revenue spurred the centre to introduce the tax­sharing system in 1994. Under it, taxes are classified into the three categories of central, local and shared. The main kinds of taxes such as consumption tax and custom duty belong to the central tax. The local tax includes land use tax and tax on locally owned enterprises. The shared tax covers the value­added tax and business tax. A more detailed division of taxes is shown in Table 3. Two sets of tax bureaux have been established. Besides the central taxes, the State Tax Administration also collects the shared taxes to be distributed to the centre and local governments according to the fixed ratios. The centre’s macro­regulation capability has been enhanced with the revenue return and transfer payment arrangement in the new tax system. At the same time, the provinces were also delegated power over the approval of investment and capital construction projects, technical renovation projects, use of foreign exchanges, reduction and waive of taxes for businesses, pricing and wages.
Table 3. The Classification of the Central, Local and Shared Taxes Categories of Taxes Central revenue Custom duty Consumption tax Value­added tax and consumption tax collected by the custom houses Income tax on the centrally managed enterprises Income tax on the local banks, foreign banks and banking corporations Business tax, income tax and urban maintenance and construction tax collected via railway authorities, banks headquarters and insurance companies Income tax on the interests of bank savings Local revenue Business tax, urban maintenance and construction tax and personal income tax (excluding the central revenue as listed in the previous box) Income tax on the locally managed enterprises (excluding the local banks, foreign banks and banking corporations in the previous box) Urban land use tax Tax on taking farming land for non­agricultural purposes Land value added tax Housing tax Urban real estate tax Vehicle use tax Tax on vehicle plates Stamp duty tax Contract tax Slaughter tax Banquet tax Bequest tax Shared revenue Value added tax (the central government 75%; local governments 25%) Natural resources tax (those paid by the ocean oil corporations belong to the central government) Negotiable securities transaction tax (yet to be collected) Source: Jin Renqing, ed., A Reader on the Tax Knowledge for Leaders (Beijing: the Press of Chinese Finance and Economy, 2000), p. 116. Politically, the one­level legislative system by the NPC was replaced by the two­level system. The new Constitution passed in 1982 gives the PC and its Standing Committee of the province, autonomous region and municipality the power to formulate local regulations in light of the Constitution, laws and administrative regulations. Further, the “Organic Law on the People’s Congresses and Governments at All Levels” authorizes the provincial capitals and some other large cities to formulate local regulations. In personnel management, the nomenclature system has been revised by reducing the centre’s control of cadres at the provincial and prefectural levels to the former only. In principle, the horizontal block authority over the cadres has been instituted. Accordingly, the officials of the centrally managed institutions and enterprises in localities are under the dual management of the centre and the province. The decision making process for the appointment of officials has been an attractive
research topic to China scholars ever since the publication of the Communist Party’s nomenclature system in early 1980s. 14 Compared with decisions on the plan for national economic and social development, the state budget etc., the personnel decisions are not only major policy issues per se but also have a great impact on the functioning of the Party, state and social institutions. The dominant position of the CCP in the country’s political life is guaranteed to a large extent by the principle of the CCP control of cadres. The concept of cadre is very broad, but can be roughly explained as all salaried employees except workers and peasants. The CCP Central Committee and its Organization Department control the selection and management process of cadres. Since 1978 the cadre system has undergone extensive reforms. In 1980, the CCP Central Organization Department restored the system of managing cadres at the two lower levels after this was disrupted during the Cultural Revolution. This was reduced to the immediate subordinate level in 1984, giving the government leaders greater say in the appointment of their direct subordinates. The centralized personnel management system is instrumental in maintaining and enforcing the central authority. Any worries about localism threatening China’s unity as expressed in the early 1990s do not take into account the effectiveness of this system. In the reform era, the trend has been to move toward legalization. The recommendation, election and appointment of political appointees have been conducted according to the state Constitution. In 1993 the state civil service system was established for the former cadres working in the executive branch of government. Similar management systems were created for cadres in the legislative, judicial and service institutions.15 3.2. The Difference Between the Decentralization Exercises Pre­ and Post­1978 Although both exercises can be summed up as delegating greater authority to the localities, they differ in that in the first three decades of the PRC all attempts at empowering the local governments were administrative in nature. More specifically, they involved the reassignment of the subordination of enterprises to local governments without touching upon the issue of the autonomy of enterprises. Even the local government was given management power over the enterprises, power over planning, financial resources and materials and equipment was still in the hands of the center. In the last two decades, administrative decentralization has been accompanied by economic decentralization. While enterprises are given more autonomy, the local governments have received unprecedented jurisdiction over financial resources, planning and capital investment. Initiatives of both enterprises and local governments explain the rapid economic growth of the whole country. However, the empowerment of the local governments has produced some negative outcomes. In the early 1990s, local barriers to the free flow of raw materials and end products became a headache for both the central government and the local governments. The prevalence of local counter­measures against the central policies challenged the macro­economic policy and regulation of the centre. Prior to the implementation of the tax­sharing system, the ratio of the central revenue to GNP 14 For an English translation, see John P. Burns, ed., “Contemporary China’s Nomenclature System,” Chinese Law and Government, Vol. 20, No. 4 (Winter 1987­88). 15 For the definition of cadres, the explanation of the principle of Party control of cadres and the establishment of the civil service system, see Dong Lisheng (L.S. Dong), “The Recruitment of Cadres and Civil Servants in Mainland China,” Issues & Studies, Vol. 29, No. 10, October 1993, pp. 63­93; and “The Establishment of the Chinese Civil Service System: A Delayed Political Reform Programme,” in Dong Lisheng, ed., Administrative Reform in the People’s Republic of China since 1978 (Leiden: International Institute for Asian Studies, 1994), pp. 43­61.
decreased from 31.2% in 1978 to 13.9% in 1993. The main reasons were local governments’ control over economic enterprises and incompleteness of the reform of the enterprise management system. The local governments retained power over enterprises delegated by the centre without making enterprises autonomous as the reform intended. A recent development has been the center’s formulation of specific policies for the different regions of China. Under Deng Xiaoping’s strategy of letting some regions develop first before helping other regions to achieve the common prosperity, Guangdong and Fujian Provinces were allowed to implement special policies and set up four special economic zones in 1979. These policies included the revenue contract responsibility system, enlarged power over foreign trade, more leeway in implementing reforms in the management systems of banking, materials and equipment, wage and pricing.16 The opening of another 14 coastal cities to foreign investment in the mid­1980s followed the success of these zones. More area or region­specific development strategies were formulated for Pudong of Shanghai in the early 1990s, for the western region in late 1990s and for the Northeast in 2003. IV. Current Tasks and Directions of Future Evolution After 20­odd years of reform, China has crossed the threshold to a modern and rational central­local relationship. The necessity of defining central and local power has been fixed in the law. The tax­sharing system has been implemented. The major tasks now are to specify the central­local jurisdictions and eliminate the elements of the old revenue­sharing system left in the new tax­sharing system. Based on the clear demarcation of the jurisdictions and an improved tax­sharing system, a law on the central­local relationship should be put on the agenda of the legislation of the NPC. 4.1. A Lack of Specific Division between the Central and Local Jurisdictions The Constitution as amended in 1982 has reiterated the principle laid down in the Common Programme of 1949 and the first Constitution of 1954, which states that the “PRC state institutions implements the principle of democratic centralism.” And “the division of power between central and local state institutions follows the principle of under the unified leadership of the center to bring into play the initiatives of the localities.” The Organic Law of the Local People’s Congresses and Governments at all Levels passed in 1979 and amended in 1982, 1986 and 1995 lists some authorities of the local governments. But as the central authorities are not specified, in fact the central and local jurisdictions are not clearly demarcated. Chinese scholars described their relationship as “barrel” shaped, meaning the central and local jurisdictions are similar in terms of scope and scale; the only difference is that the centre or higher level enjoys greater authority with the centre having the final say. In November 1993, the CCP 14th Central Committee decided at its Third Plenum to implement the tax­sharing system on the basis of rationally dividing the central and local jurisdictions over public affairs. However, action has yet to be taken to actually specify the jurisdictions between the two. In 1995, I suggested that a “Law on the Central­Local Government Relationship” was drafted.17 Considering the long tradition of centralization, I cautioned against the top­down division of jurisdictions and recommended a bottom­up approach. Many public affairs, especially social services, can be handled more efficiently and 16 Xin Xiangyang, Vassals of the Big Country, (Beijing: China Social Press, 1996), p. 516. Dong Lisheng, “Formulating a ‘Law on the Central and Local Government: Necessity, Feasibility and Principles,” paper presented at the International Symposium on Chinese Administrative Reform organized by the Office of the Central Establishment Size Commission in Beihai in October 1995.
17 effectively by the local governments than the central government. This view is similar to the principle of subsidiarity. As a prerequisite, the local government at every level should be differentiated in function and responsibility. To the extent possible, specific functions or services should be assigned to one level of government. For example, except for some key universities, the provincial governments should administer all universities. The municipal government can manage the senior high schools. The district and county governments are responsible for the nine­year compulsory education. Every level of government should enjoy complete authority over personnel, finance and materials and equipment. The various forms of the existing “dual management system” has many defects. For example, in early 1990s, the banking institutions were baffled by the interference of the local governments. They ordered the banks to give loans to ailing locally managed factories. In general, banks are under the vertical line authorities. But the local CCP committees are consulted in the appointment of leaders of the local branches of banks. Therefore, stricter vertical or horizontal authorities need to be enforced. In November 1998, the centre decided to adjust the structure of the People’s Bank of China by abolishing the provincial branches and establishing nine regional offices. 4.2. The Deficiencies of the Tax­Sharing System to Date The tax­sharing system as implemented in 1994 is a significant step in the right direction. But it is not a regularized and complete tax­sharing system yet. First of all, as noted previously, the exact central and local jurisdictions have yet to be established. For example, power over investment in productive projects is not classified. As a result, the central and local sharing of investment for some major projects has to be decided ad hoc. Elements of the old revenue­sharing system that have been kept in the new system bring about some problems. The current arrangement for the enterprise income tax is a compromise between the central and local governments. The center and provinces treat enterprises differently according to their subordination. There have been cases of local governments encroaching on the central tax base while protecting the sources of local taxes. The different subordination of enterprises is not conducive to the uniform enterprise income tax or to the equal and fair competition of all enterprises. The enthusiasm of the local governments for capital investments coupled with local protectionism forced the central government to introduce new measures to deal with the over­heated economy in 2003. The base figure method prolongs the unequal and irrational sharing of financial resources among provinces under the old revenue sharing system. For the first year of the new system, provinces’ revenue in 1993 was taken as a basis for calculation. This is counter­productive to reducing the gap between the rich and poor provinces. It would be better to adopt the factor method based on capacity and need. The model of transfer payment is inappropriate and the amount of transfer payment is not large enough. Since the introduction of the new system, the central revenue has been increased steadily. But the local, especially county, financial situation has deteriorated. The central government began to improve the general transfer payment system in 1995. This system includes tax returns, structural subsidies, account settlement subsidies and specialized subsidies. The first three are non­conditional transfer payments. They play an important role in making up the shortfalls in local revenue and achieving the vertical financial balance. However, the base figure method continues the uneven distribution of revenue and renders the transfer payment weak as a means of macro­regulation. As the unconditional transfer payment is in the hands of local governments, the central government cannot use it for enforcing the
industrial policy or regulating the local expenditure activities. The special subsidies are mainly used for natural disaster relief and therefore also play little role in macro­regulation. Also, the current transfer payment gives little incentive to the local government either to improve the provision of public goods or for them to make better use of funds and spend more rationally. 4.3. A Call for the introduction of a National Financial Equalization System Since 1998, I have suggested on different occasions that a financial equalization system is established to address the uneven development of different regions.18 This issue is raised against the background of the ever­enlarging gap between the eastern, central and western regions of China.19 Initially, the standard of equalization can be modest so that the new system is accepted with less political resistance and is less financially demanding. With further economic development, the intensity of equalization can be increased to bring the provinces financially closer to each other. Considering the huge difference between provinces in terms of area, population and level of economic and social development, two or three tiers of equalization can be designed between provinces to be first followed by counties. If necessary, it can be crowned by the equalization of the eastern, central and western regions. 4.4. A Call for Increasing the Number of Provinces Scholars’ proposal for increasing the number of provinces and municipalities from current 33 to about 50 has been echoed by government officials.20 It is raised in the understanding that the management range of the central government is rather narrow while the five­level administrative structure is cumbersome. The long­term target is to designate another 16 main cities as centrally administered municipalities. In the next five or ten years, the candidate cities include Wuhan, Xi’an, Urumqi, Nanjing, Guangzhou and Shenyang. Most of China’s provinces are equal to a medium­sized country in terms of area and population. They tend to be economically self­sufficient, which is not conducive to a unified national market. It is hoped that some 50 provincial level governments plus 30­odd ministries would offset each other and give the center more leverage in coordination. Many provinces depend on the prefectural level cities to administer counties as on average a province has 100 counties. The smaller provinces will be capable of directly administering some 50 counties. In this way, China can reduce the administrative division to four levels or even three levels if the town or township level institutes the system of residents’ self­governance or becomes the dispatched office of the county government. 18 Dong Lisheng, “The Private Solution to the Public Issues: Chilean Experience of Local Government Reform,” in Chinese Public Administration, Vol. 5, 1998, pp. 42­45; “The Danish National Financial Equalization Scheme for Local Governments,” in China’s National Conditions and Strength, Vol. 10, 1999, pp. 26­28; A Comparative Study of the Central­Local Government Relations in EU Member States (Beijing: the Press of China University of Political Science and Law, 2000) 19 The gap between these regions can be partly shown in the income of urban residents. Before 1978, there was little difference between regions and because of the subsidies provided to workers in the west, the wages were slightly higher there than other regions. In the recent few years, the government has taken measures to help the central and western regions. Taking these factors into consideration, the gap is still evident. The province with the highest per capita income (Shanghai) versus that with the lowest (Guizhou) were 2.23:1 in 2002. 20 For increasing the provincial level to 50, see Zhou Minliang, “China’s Administrative Division Should be Reformed,” in Economic Reference News, May 20, 2004. For the comments of government officials, see remarks of Dai Junliang, Director General of the Department of Administrative Division, Ministry of Civil Affairs, in China New Website, http://news.163.com 2005­05­16 16:27:26
4.5. A Call for Establishing Regional Coordination Bodies Since the abolition of the regional governments in the early 1950s and the CCP regional bureaux in the late 1960s, there has been a vacuum in the institutions for meso­regulation. China’s political and economic situation is such that this mechanism is needed. For example, On October 12, 2001, 16 mayors from nine provinces or municipalities along the Beijing­Jiulong Railway held a coordination meeting together with the officials of the State Economic and Trade Commission. On June 17, 2002, the mayors’ joint meeting on the Southwest Economic Region was convened at Baoshan City, Yunnan Province. It is predicted that a regional management committee in the center will be set up for regional economic development and coordination in the formulation and enforcement of regulations and supervision. Two sets of plans have been proposed. 21 The first is a concentrated model that requires the establishment of a ministerial­level body for concentrating the management resources of regions. To this end, a foundation should be set up and all agencies and staff handling regional affairs that are currently scattered in various ministries and institutions should be brought together under the new committee. The second is a loose organization model of a cross­ministerial committee for regional coordination composed of representatives of the relevant ministries with a few ministries playing a key role. A legal system should be established for regional coordination. This will be a challenge considering the current fragmented situation resulting from vertical line authorities and horizontal block authorities. It is proposed that specific laws such as those on industrial distribution and usage and protection of water resources are enacted first and followed by a general law on regional development. The formulation and enforcement of a regional legal system requires the centre’s delegation of legislative power as such a system comprises both the central legislation on regional development and the regionally formulated regulations. 4.6. The Major Challenges Ahead If action is not taken to specify the central and local jurisdictions in the next two decades, the economic cycle of overheating and drastic measures of macro­regulation will be repeated again and again. It should be a priority for the government to withdraw from the direct running of productive activities. In this respect, the local governments face the tough challenge of suspending heavy involvement in investment in productive projects. Moreover, the local governments have kept a great deal of power since the central government’s decentralization efforts of 1978, especially the autonomy allowed to the economic enterprises. They should focus instead on the provision of public goods. A sound tax­sharing system could not be expected without a clear demarcation of the central and local jurisdictions. In relation to the tax system, there is a need to convert the government finance system to a public finance system. Transfer payment should play a larger role in helping the less developed central and western regions. If the central­local relationship cannot be set down in the laws in the next two decades, the current practice and arrangements will become less workable. An institutionalized coordination mechanism that can bring together the representatives of provinces for national policy making is necessary. This could be aided by a forum of informal discussion among the representatives of cities. 21 “The Central­Local Relationship in the Context of Regional Consolidation,” in China Reform, Vol. 2, 2003, p. 17.
The ever­increasing gap between the different regions and different social strata and the serious problems of the countryside, agriculture and farmers are all related to the central­local relationship. To some scholars and officials, middle­level impediment is responsible for the dire situation in the rural areas. The lower level governments are over­staffed and slack in discipline. They insulate the central policy from reaching the farmers and survive on extracting resources from farmers. 22 China’s continued development depends to a large extent on the more balanced regions, stability of the vast countryside and restfulness of the huge rural population. All these depend on a more institutionalized and legalized central­local relationship. 22 Zhou Bibo, “Reshaping the Central­Local Relationship—New Thinking on and Policy Response to the ‘San Nong’ Issues,” Strengthening the Country Forum, Renmin Website, Jan. 14, 2005.