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Distribution of wealth has been a contentious issue in China since the communist regime embarked on market reforms more than 20 years ago. When Deng Xiaoping, the late paramount leader and the chief reform architect, said ‘some are allowed to get rich first’, he meant that most rural residents – who represent nearly two-thirds of the population – would largely be excluded from the growing prosperity enjoyed by urban dwellers. But how sustainable is this lopsided development policy? Growing rural discontent across the countryside suggests it is not, and that the regime’s legitimacy will be at stake if the discontent is not taken seriously.
The capacity of the central government to redistribute wealth from the rich to the poor is severely limited by the fiscal system. China underwent two major rounds of tax reforms during the 1980s and 1990s that transformed the fiscal system from a unified model, where all revenues collected by local authorities are turned over to Beijing, to a tax-sharing model, where local authorities are empowered to collect various taxes from local enterprises and residents – and retain them to cover local expenditures. This has greatly diminished the proportion of taxes that go to the central government’s coffers and, with it, the ability of the Beijing government to redistribute resources to impoverished areas. Simply stated, Shenzhen and Shanghai residents may be enjoying tremendous material wealth, but farmers in the inland provinces of Gansu and Guizhou are scrambling to make ends meet – and there’s little that the central government can do about it.
The plight of those living in the impoverished countryside is compounded by the fact that their access to essential public services, ranging from basic education to health care, is hampered by budget deficits that characterise most local authorities, especially those in poor regions. Under the current fiscal system, the provision of basic education and medical care falls on the shoulders of the township and county governments. This puts severe strains on these local authorities to find ways to generate tax revenues. In coastal provinces such as Zhejiang, Guangdong and Fujian, a combination of foreign capital, skilled labour and strategic locations have created a sizeable number of profit making township and village enterprises (TVEs). Conversely, in the impoverished provinces where there are less market opportunities for enterprise growth, the local authorities collect less tax revenues as a consequence. In a nutshell, they are trapped in a quagmire. This is nothing but a vicious circle of the rich getting richer, while the poor are getting poorer. In recent years, the central government has introduced some policies to assist the poor and the underdeveloped western region of China, but the extent to which the grants and subsidies are reaching the targeted areas is highly questionable. Evidence suggests that implementation of the poverty loans and development funds is distorted at the grassroots level, often going against what is intended by the central policymakers.
In the absence of enterprise tax revenue, local governments in many poor areas have resorted to extracting all kinds of arbitrary fees from peasants to fund basic public services and infrastructure, which are legitimate and sanctioned by higher authorities. However, some of these monies are said to have gone to pay for banquets and to support the lifestyles of local cadres, much to the resentment of the ‘have-nots’. Peasants are subject to all types of taxes and fees, ranging from agricultural taxes, fees for road or school construction, for marriage certificates to birth control violations. Not surprisingly, these impositions in total sometimes exceed their disposable incomes. This has been the major cause behind growing rural unrest in China, such as mass protests and violence against local cadres, which is often under-reported in the Chinese press. An experiment to improve the transparency of the rural tax system, specifically that of converting various fees into a unified agricultural tax as carried out in Anhui province four years ago, has since been rolled out in other provinces.
China's leaders have an acute paranoia about rural unrest. Some 350 years ago, oppressed peasants in the Henan province rallied behind a rebel leader to form much of the force that overthrew the Ming Dynasty. Social disorder in the countryside is a critical problem to which the central government cannot turn a blind eye.
WATCHPOINT: The tax and fiscal systems are expected to undergo another major overhaul this year to improve the central government’s revenue base as well as to address increasing trends of income inequality between urban and rural China.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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