93366 THE POWER OF PUBLIC INVESTMENT MANAGEMENT' Transforming Resources into Assets for Growth C O U N T RY C A S E S T U D Y China: PIM under Reform and Decentralization Christine Wong 2014 0 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization THE AUTHOR Christine Wong University of Melbourne This case study is one of a number of country cases in the Public Investment Management Series. The country case studies accompany the volume, “The Power of Public Investment Management: Transforming Resources into Assets for Growth”, World Bank (2014), and apply a common methodology to assess PIM systems globally. T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 1 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization CHINA ! China’s'transition'from'a'planned'to'a'market'economy'has'required'a'fundamental'change' in' the' role' of' government' in' economic' decisions.' Among' the' most' important' are' those' affecting' investment,'where'reform'has'seen'the'Chinese'Government'shift'from'directing'overall'investment' to' only' ensuring' that' the' level' of' investments' sufficient' to' support' economic' growth' and' public' services.'Negotiating'this'reduction'in'scope'of'government'has'proved'tricky,'since'many'parts'of' the' Party' and' government' structures' are' holdovers' from' the' planned' economy' and' have' resisted' giving'up'control'and'authority.'As'a'result,'progress'in'reforming'public'investment'management' (PIM)' has' been' uneven,' with' notable' successes' alongside' glaring' weaknesses.' This' chapter' examines' the' institutional' framework' of' China’s' PIM' system' and' its' evolution' through' the' transition'period,'its,'efforts'at'reform,'and'outcomes.' The' Government’s' strategy' was' to' reform' the' existing' PIM' framework' incrementally' by' decentralizing' responsibility' to' subnational' governments' (SNGs)' and' opening' up' investment' to' private' participation' at' the' margin.' The' process' of' decentralization' and' marketization' proceeded' much' faster' than' expected' in' the' 1980s' and' 1990s,' when' dismantling' the' planning' mechanisms' caused'a'steep'decline'in'government'revenues,'especially'central'government'revenues.'Guided'by' the' paramount' objective' of' promoting' economic' growth,' subnational' governments' were' encouraged'to'mobilize'extraZbudgetary'resources'to'keep'up'public'investment.'' On' the' upside,' local' government' ingenuity' and' entrepreneurialism' enabled' China' to' build' an' impressive' array' of' public' infrastructure.' From' less' than' 10,000' km' of' expressways' in' the' 1990s,' the' country' now' ' more' than' 65,000' km,' building' some' 33,000' km' of' expressways' and' 639,000'km'of'roads'during'2006–10'alone.'Over'the'same'period'China'also'expanded'the'railway' system' by' 16,000' km' and' built' some' of' the' world’s' most' modern' airports' and' container' port' facilities.' This' remarkable' catching' up' put' China' at' 27th' among' 155' countries' in' the' World' Bank' Logistics'Performance'Index'(LPI),'a'measure'of'a'country’s'efficiency'in'moving'goods'to'and'from' international'markets.'With'an'overall'LPI'score'of'3.49,'China'was'approaching'the'average'of'3.55' for' highZincome' countries,' substantially' outperforming' its' peer' group' and' earning' the' envy' of' competitors'like'India'and'Brazil.' The' downside' of' this' decentralized' investment' was' that' over' time,' the' Government' lost' aggregate' control' over' the' scale' and' composition' of' public' investment,' especially' during' the' “noughties,”'when'doubleZdigit'annual'growth'and'easy'credit'created'an'aura'of'infallibility.'While' the' fiscal' rules' called' for' decentralized' investment,' they' did' not' assign' SNGs' either' adequate' revenues' or' the' right' to' borrow.' Circumventing' this' limitation' SNGs' were' permitted' to' create' special' financial' vehicles,' operating' largely' offZbudget' and' unsupervised,' to' borrow' for' public' investment.'Unfortunately,'the'resulting'soft'budget'constraint'led'many'to'overZborrowing'by'local' governments'and'to'many'wasteful'and'inefficient'investments. + T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 2 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization China’s'transition'from'a'planned'to'a'market'economy'has'required'a'fundamental'change' in' the' role' of' government' in' economic' decisions.' Among' the' most' important' are' those' affecting' investment,' where' reform' has' seen' the' Chinese' Government' curtail' its' role' and' attempt' to' shift' from'directing'the'overall'pattern'of'investment'to'ensuring'adequate'support'to'economic'growth' and' public' services.' Negotiating' the' reduction' in' scope' of' government' has' proved' tricky,' since' many'parts'of'the'Communist'Party'and'Government'structures'have'remained'largely'intact'from' the'planned'economy,'they'have'often'resisted'giving'up'control'and'authority.'As'a'result,'progress' in'reforming'the'system'of'public'investment'management'(PIM)'has'been'uneven,'and'there'have' been'notable'successes'alongside'glaring'weaknesses.'' At' least' until' 2011' the' successes' were' far' more' salient' to' the' public,' among' them' the' exceptionally'high'savings'and'investment'rates,'which'are'credited'with'having'been'a'key'factor' behind'the'Chinese'“economic'miracle.”'Investment'in'fixed'assets'stayed'at'more'than'40'percent' of' GDP' for' nearly' two' decades,' reaching' nearly' 50' percent' in' 2009.' ' Especially' impressive' is' the' rate'of'investment'in'infrastructure,'which'rose'rapidly'throughout'the'transition'period,'reaching' 13' percent' of' GDP' in' 2007' and' an' extraordinary' 18' percent' in' 2009' (figure' X.1).' Indeed,' it' is' an' open' secret' that' China’s' success' in' attracting' foreign' investment' was' in' no' small' part' due' to' the' country’s' rapid' catchZup' improvement' in' infrastructure.' From' having' less' than' 10,000' km' of' expressway' a' decade' prior,' the' country' now' has' 65,100' km,' second' only' to' the' United' States' in' total' length.' During' 2006–10' alone,' the' road' system' was' expanded' by' 639,000' km,' including' 33,000' km' of' expressways.' China' also' expanded' the' railway' system' by' 16,000' km' over' the' same' period.'The'country'has'some'of'the'world’s'biggest'and'most'modern'airports,'not'only'in'Beijing,' Shanghai,' and' Guangzhou,' but' in' numerous' lesser' cities.' It' has' invested' heavily' in' container' port' facilities,'especially'around'the'export'centers'of'Shenzhen,'the'Pearl'River'Delta,'the'lower'Yangzi' Delta,'and'at'Tianjin'and'Dalian.'In'2010'China'was'ranked'27th'among'155'countries'in'the'World' Bank'Logistics'Performance'Index'(LPI).'With'an'overall'LPI'score'of'3.49,'China'was'within'striking' distance' of' the' average' of' 3.55' for' High' Income' Countries,' a' position' that' is' substantially' better' than'the'average'of'its'peer'group'of'middleZincome'countries'(table'X.1).'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 3 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Figure+X.1++++High+and+Rising+Investment+Share+of+GDP,+1989–2009+ %'OF'GDP' !!!!!!!!!!!!!!!!!!!!!!!!!! ! Source:' Estimate' based' on' New' China' 60' Years' Statistics,' China' Statistical' Yearbook,' and' China'Statistical'Abstract'2011.+ Note:'a.'For'1985–2002,'the'investment'in'infrastructure'was'calculated'as'the'sum'of'(a)' electricity,' gas,' and' water;' (b)' transportation,' storage,' post,' and' telecommunications;' (c)' social' services;'(d)'geological'survey'and'water'management;'and'(e)'social'sector'investment.'Due'to'a' change'in'Chinese'statistical'reporting'categories,'the'sum'for'2003–09'included'(a)'electricity,'gas,' and'water,'(b)'transportation,'storage,'and'post;'(c)'information'transmission'and'computer'service' and'software;'and'(d)'management'of'water,'environment,'and'public'facilities.'' Table+X.1+++Global+Logistics+Performance+Index,+2010+ a LPI% Country% LPI% Customs% Infrastructure % International% Logistics% Tracking% Timeliness% Rank% Score% shipments% competence% &% tracing% 27% China! 3.49! 3.16! 3.54! 3.31! 3.49! 3.55! 3.91! 1% High!income!! 3.55! 3.36! 3.56! 3.28! 3.5! 3.65! 3.98! 2% Upper! middle! 2.82! 2.49! 2.54! 2.86! 2.71! 2.89! 3.36! income! 3% Lower! middle! 2.59! 2.23! 2.27! 2.66! 2.48! 2.58! 3.24! income! 4% Low!income! 2.43! 2.19! 2.06! 2.54! 2.25! 2.47! 2.98! Source:!World!Bank!Logistics!Performance!Index.!!% ! http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTTRANSPORT/EXTTLF/0,,contentMDK:21514122~menuP K:3875957~pagePK:210058~piPK:210062~theSitePK:515434,00.html,!accessed!30/3/2011.!! ! ! By' the' numbers,' this' record' suggests' that' in' the' area' of' public' investment,' China’s' transition' from' a' planned' economy' has' been' spectacularly' successful.' The' withdrawal' of' the' Government'from'planning'and'funding'all'investments'in'the'economy'appears'to'have'proceeded' smoothly,'to'the'point'where'it'appears'to'play'only'a'minor'role.'Not'only'has'the'overall'rate'of' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 4 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization investment'stayed'high,'the'much'needed'investment'in'infrastructure'has'also'been'forthcoming,' mutatis' mutandis.' This' is' in' sharp' contrast' to' the' planned' economy' period,' during' which' the' Government' skimped' on' infrastructure' to' make' more' resources' available' for' investment' in' “productive”' sectors,' especially' industry.' As' a' result,' China’s' physical' infrastructure' was' in' deplorable'condition'in'the'1970s'and'into'the'1980s.' More' recently,' the' image' of' China’s' PIM' has' been' tarnished.' The' overly' rapid' rampZup' of' investment'under'the'fiscal'stimulus'program'(to'48'percent'of'GDP'in'2009),'worries'of'excessive' debt'in'local'governments,'and'the'abrupt'sacking'and'arrest'of'the'thenZMinister'of'Railways'Liu' Zhijun' in' February' 2011,' and' the' Government’s' subsequent' announcement' that' it' would' significantly'slow'down'the'country’s'highZspeed'rail'program,'all'suggest'government'weaknesses' in'controlling'aggregate'investment'as'well'as'ensuring'quality'under'the'current'system.'Given'the' high'proportion'of'GDP'absorbed'by'investment'in'China,'improving'the'system’s'efficacy'should'be' high'on'the'Government’s'reform'agenda.' This'chapter'examines'the'system'of'PIM'in'China'to'assess'its'performance,'reviewing'the' system’s' evolution' through' the' transition,' its' institutional' framework,' and' efforts' at' reform.' The' chapter'begins'with'a'review'of'the'institutional'setting'for'PIM,'from'the'inherited'framework'to' reforms'implemented'over'the'past'25'years,'followed'by'an'examination'of'the'current'situation' and'trends'in'public'investment.'It'concludes'with'an'overall'assessment.' PIM+Institutional+Setting+ The+Inherited+Institutional+Framework+for+Public+Investment++ From' its' planned' economy,' China' inherited' a' strong' institutional' framework' for' PIM.' The' fiveZyear' plans' provided' strategic' guidance' for' economic' development.' Through' an' iterative' process' of' upZandZdown' consultation' with' line' ministries,' the' State' Planning' Commission' formulated' the' investment' plan' and' allocated' resources' for' its' implementation.' There' were' wellZ defined'procedures'for'every'step'along'the'way,'from'project'preparation'to'application,'appraisal,' budgeting,'and'selection,'to'project'implementation.'' Even' after' 35' years' of' transition,' much' of' this' institutional' framework' remains' in' place' today,' albeit' in' a' somewhat' diluted' form.' These' institutions' are' summarized' in' table' X.2,' which' conforms' to' the' World' Bank' Framework' of' Public' Investment' Reviews.' The' investment' cycle' is' divided'into'eight'stages,'from'planning,'application,'appraisal,'and'construction,'to'completion'and' evaluation.'' ' ' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 5 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Table+X.2++++Institutional+Arrangements+for+Public+Investment+in+China+ Stage% China’s%practice% Agencies%involved% 1.!Strategic!Guidance! (1)! 5^year! plans,! annual! work! reports,! and! (1)!NDRC!with!inputs!from!MOF!and!line! and!Preliminary! annual! investment! plans;! all! stated! in! very! ministries! Screening! broad!terms!and!internally!consistent.! (2)! Examination! and! verification! of! project! (2)!Line!ministries!and!NDRC! applications! a 2.Formal!Project! (1)!Review!of!application!materials ! (1a)! Line! ministries! and! NDRC! with! Appraisal!pre^ technical! advice! from! IPACs! under! b! selection)! NDRC,!!and!third^party!consultancies (1b)! Over! the! past! 10! years! MOF! has! also!introduced!its!own!project!appraisal! procedures,! to! run! parallel! with! the! traditional!appraisals!under!1a.! (2)! Approval! by! line! agencies,! then! (2)!Line!ministries!and!NDRC! submission!to!NDRC!! 3.Independent! None!! !NA! Review!of!Appraisal! 4.!Project!Budgeting! (1)! Project! selection! based! on! project! (1)!NDRC! and!Selection! appraisal! (2)!Project!budgeting! (2)!MOF,!based!on!the!decision!of!NDRC,! and! with! technical! inputs! from! the! investment!appraisal!centers! c 5.Project! (1)!Organized!by!executing!agency ! (1)!Executing!agency! Implementation! (2)! Timetable! in! application! report! and! (2)!Executing!agency! annual!progress!report! (3)!Monitoring!for!technical!standards! (3)! On! site! supervision! agency! hired! by! the!executing!agency!! 6.!Project! Project!adjustment!is!loosely!controlled! Implementing! agency;! the! project! Adjustment! approval!agency!is!involved!only!in!cases! where! additional! budgetary! inputs! are! required.! 7.!Facility!Operation! Asset!recorded!in!accounting!table! (1)!Executing!agency! 8.!Project!Evaluation! Audit! report! by! NAO! and! feedback! report! (1)!Sample!audit!by!NAO! from!construction!or!executing!agencies! Source:!!Official!documents!from!the!relevant!agencies.!! Notes:! a.! Application! materials! include! the! project! application,! feasibility! studies,! funding! application,! and! land! use,!environmental!impact!assessments,!and!urban!planning!report!if!required;!b.!Mainly!from!China!International! Engineering!Consultancy!Corporation!(CIECC)!and!its!local!branches;!c.!Sometimes!by!a!committee!that!include!the! planning!agency,!finance!bureau,!executing!agency,!and!other!relevant!agencies.!! MOF! =! Ministry! of! Finance;! IPAC! =! Investment! Project! Appraisal! Center;! NAO! =! National! Audit! Office;! NDRC! =! National!Development!and!Reform!Commission! T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 6 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Of'the'eight'stages'in'the'investment'cycle'(table'X.1),'the'main'efforts'are'concentrated'on' stages' 1,' 2,' and' 4.' In' Stage' 1,' strategy' guidance' is' provided' by' documents' such' as' the' fiveZyear' plans' and' annual' government' work' reports' presented' at' the' National' People’s' Congress' each' March.' However,' by' now,' these' documents' state' only' the' broad' directions' for' public' investment;' for' example,' since' the' new' millennium,' the' government' work' reports' have' stated' that' public' investment'should'be'focused'on'meeting'the'strategic'goals'of'rural'development,'social'security,' health,'education,'culture,'energy'conservation,'emission'reduction,'and'construction'of'affordable' housing.'In'principle,'projects'that'do'not'conform'to'the'broad'guidelines'would'be'rejected'at'this' stage.'However,'the'goals'are'themselves'often'too'broad'and'allZencompassing'to'be'useful'in'fineZ tuning' project' selection.' In' fact,' projects' are' normally' rejected' at' this' stage' only' if' they' are' in' conflict'with'the'macroeconomic'goals'of'the'time,'such'as'to'prevent'overheating.''' Stages' 2' and' 4' were' traditionally' strong' focuses' in' China' under' the' planned' economy.' At' the' national' level,' this' effort' was' led' by' the' State' Planning' Commission' (SPC),' the' most' powerful' agency'in'Central'Government'for'allocating'state'resources'and'directing'economic'development.' Even' though' the' planned' economy' was' dismantled' in' the' 1980s,' the' SPC' (and' its' successor,' the' National' Development' and' Reform' Commission,' or' NDRC),' has' retained' control' of' planning' for' public'investment'through'its'control'of'project'approvals.'By'convention,'the'NDRC,'together'with' line' ministries,' organizes' and' undertakes' project' appraisals' and' project' selections,' without' any' independent'reviews'of'the'appraisals'(that'is,'skipping'stage'3).'Since'the'late'1990s,'the'Ministry' of' Finance' has' undertaken' its' own' project' appraisals,' and' it' created' an' Investment' Appraisal' Commission'under'the'ministry'to'create'a'bigger'role'for'budgetary'considerations'in'the'project' selection'process.'' Typically,'project'appraisals'consider:'(1)'the'necessity'of'the'project,'(2)'proposed'location,' (3)'estimated'cost'of'investment,'(4)'sources'of'funds,'(5)'economic'benefit,'and'(6)'social'benefit.' These' are' the' core' contents' of' project' application' reports,' which' are' also' highlighted' during' evaluation.' Economic' and' social' feasibility' and' environmental' impacts' are' studied' in' feasibility' reports.' Under' the' planned' economy,' project' appraisals' were' driven' by' the' material' balance' planning'system'and'focused'on'physical'inputs'and'outputs.'Economic'analyses'were'of'secondary' concern' and' very' much' neglected.' Even' today,' local' officials' admit' that' little' effort' is' put' into' estimating' economic' benefits.' After' three' decades' of' highZspeed' growth,' the' prevailing' belief' is' “build' it,' and' they' will' come,”' and' an' often' used' justification' is' that' it' is' better' to' stay' ahead' of' demand'growth'and'build'when'capital'and'labor'are'still'cheap.' At' the' budgeting' stage,' traditionally' the' MOF' had' little' or' no' say' in' project' selection,' because'the'capital'expenditure'budget'was'formulated'by'the'NDRC,'and'turned'over'to'the'MOF' only' to' implement' (Blöndal' 2002).' Beginning' in' this' century,' the' MOF' has' gained' a' bigger' voice,' often'sitting'at'the'table'in'project'selection'discussions.'However,'as'will'be'shown'later,'because' virtually' all' projects' are' now' financed' by' a' mix' of' budgetary' and' nonZbudgetary' resources,' for' example,' loans,' user' charges,' and' so' on,' the' gateZkeeping' function' of' the' budgetary' process' has' been'eroded.'Mikesell'et'al.'(2011)'report'that'normally'it'is'the'largest'funder'who'has'the'biggest' say.' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 7 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Once'the'project'is'selected'and'implementation'begun,'there'is'little'systematic'oversight' in' project' implementation,' facility' operation,' or' post' evaluation,' that' is,' stages' 5,' 6,' 7,' and' 8.' For' example,' public' investment' projects' have' fairly' high' flexibility' of' change' during' the' construction' process,'and'projects'can'be'adjusted'both'in'investment'and'construction'periods'in'response'to' changing' circumstances,' including' change' of' construction' plan,' change' of' location,' and' so' on.' Regulations'on' Government'Investment' (PRC'2005)'states'that'if'the'investment'or'the'project'plan' is' changed,' the' new' one' should' be' submitted' for' another' appraisal' to' the' agency' that' originally' approved' the' project,' if' the' implementing' agencies' can' cover' the' additional' costs' themselves.' Essentially,'this'means'the'public'investment'projects'could'be'changed'based'on'the'judgment'of' implementation'agencies,'significantly'eroding'the'intent'of'the'project'management'framework.' Although'there'is'no'information'on'cost'overruns'on'major'projects,'they'are'commonplace' in' China,' as' reflected' in' the' popular' saying' that' “investments' are' bottomless' pits' and' budget' estimates'cannot'be'capped.”'The'most'egregious'examples'of'cost'overruns'were'revealed'in'highZ speed'rail'projects.'When'the'117Zkm'Beijing–Tianjin'Intercity'Railway'was'built'during'2005–08,' the'approved'investment'plan'called'for'a'cost'of'12.34'billion'yuan,'with'trains'that'run'at'speeds' of'200'km/hour.'In'the'course'of'construction,'the'design'was'changed'to'support'train'speeds'of' up' to' 350' km/hour.' As' a' result,' costs' escalated,' and' the' total' cost' upon' completion' was' 21.55' billion'yuan,'a'75'percent'costZoverrun'(New'Century'2011).'' It' is' rare' to' see' public' investment' projects' closed' in' the' middle' of' implementation,' which' happens'only'in'cases'of'serious'public'security'problems'(like'pernicious'environmental'impacts' or' security' incidents)' during' construction.' One' such' example' was' the' Beijing' Waste' Incineration' Project,'whose'total'investment'was'1'billion'yuan,'and'was'closed'three'months'after'construction' had'begun'in'June'2007.'''' Reform+of+the+Public+Investment+System+in+China++++ Through' the' three' decades' of' transition,' numerous' changes' have' been' introduced' to' the' system' of' public' investment' management.' These' reforms' can' be' roughly' divided' into' five' (sometimes'overlapping)'strands:'' • Reforms'that'aim'to'reduce'the'role'of'government'in'financing'and'controlling' investment,' • Reforms'aiming'to'clarify'the'boundary'between'public'and'private'spheres,' • Measures'to'boost'government'financial'support'to'filling'gaps'in'investment'that' markets'cannot'or'will'not'make,' • Measures'to'strengthen'mechanisms'for'ensuring'efficiency'in'the'use'of'public' resources,'and' • Reforms'aiming'to'stimulate'private'investment'in'the'economy.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 8 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Brief'descriptions'of'reforms'up'to'2003'are'presented'in'table'x.3.'They'were'mostly'small,' incremental'steps'decentralizing'control'and'creating'funding'sources'to'replace'budgetary'funding' for' investment.' Reforms' to' strengthen' financial' management' of' public' investment' did' not' come' until'2004.'In'the'meantime,'fundamental'changes'in'PIM'were'being'brought'about'by'the'larger' forces'of'transition'changing'the'economy.' ! ! T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 9 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Table+X.3+++Reforms+in+China’s+Public+Investment+Management+System,+1979–2003+ Period% Main%reforms% Key%documents% 1979– 1. From! full^support! by! government! to! mixed^support! 1. Report! on! Trial! Implementation! of! Loans! in! 1983! by!government!and!banks! Capital!Construction!Investment!(1979)! 2. Foreign!investment!inflows!began!in!1980! 2. Trial! Administrative! Measures! on! 3. First! issuance! of! national! debt! to! finance! implementing! Feasibility! Studies! for! construction!(1981)! Investment!Projects!(1983)! 4. Set!up!Energy!Construction!Fund!(1983)! 5. Introduction! of! contracts,! feasibility! studies,! and! public! bidding! to! improve! efficiency! of! investment! projects! 1984– 1. Simplify!appraisal!procedures!! 1. Temporary! Regulation! on! Reform! of! 1988! 2. Introduce!bidding!invitation!contract!system! Management! Institution! of! Building! Industry! 3. Set! up! six! specialized! investment! companies! to! and!Capital!Construction!(1984)! allocate!fiscal!funds!for!public!investment! 2. Temporary! Regulation! on! Improvements! of! 4. Separate! the! China! Construction! Bank! from! the! Planning!System!(1984)! Ministry!of!Finance!and!designated!it!as!the!window! 3. Recent! Reform! Proposals! on! Investment! for!fiscal!loans!for!public!investment! Management!Institution!(1988)! 5. Set!up!the!National!Capital!Construction!Fund!! 4. Notification! on! Implementing! Construction! 6. Set! up! the! China! International! Engineering! Supervision!(1988)! Consulting!Corporation!! 7. Start!to!set!up!project!supervision!system! 1991– 1. Investment! projects! were! classified! as! “for! public! 1. Decision! on! Setting! up! Socialist! Market! 2003! benefit,”! “basic! infrastructure,”! and! “competitive.”! Economy!(1993)! Those!for!public!benefit!would!be!funded!from!fiscal! 2. Temporary! Regulation! on! Engineering! resources.! Basic! infrastructure! would! be! financed! Consultancies!(1994)! mainly! from! fiscal! resources,! but! foreign! and! 3. Regulation!on!Internal!Audit!(1995)! enterprise! participation! would! be! encouraged.! 4. Regulation! on! Conditions! of! Beginning! Projects! in! the! competitive! sectors! would! be! left! to! Operation!in!Large!and!Medium!Constructive! market!investment.! Projects!(1997)! 2. Set! up! State! Production! Office! under! State! Council! 5. Provisional! regulations! for! bidding! on! (1991).!It!was!later!renamed!the!State!Economic!and! national! large! and! medium^sized! capital! Trade!Commission,!which!was!abolished!in!1998.! construction!projects!(1997)! 3. Started!to!collect!fixed!asset!investment!redirection! 6. Provisions! for! improving! and! standardizing! tax!(1991)! management! of! commercial! bank! loans! for! 4. Set! up! China! Development! Bank,! China! Agriculture! capital!construction!(1997)! Development!Bank!and!Export^Import!Bank!of!China! 7. Notification! on! strengthening! management! (1994)!to!make!subsidized!policy!lending.! and! supervision! of! infrastructure! funds! 5. Set!up!State!Development!Investment!Corporation! (1999)! 6. Improved! the! supervision! system,! and! set! up! the! 8. People's!Republic!of!China!Law!on!Bidding! State! Office! of! Special! Inspectorate! for! Priority! 9. Provisional! Measures! for! the! supervision! of! Projects! bidding! on! major! national! construction! 7. Encouraged! non^governmental! funds! to! invest! in! projects!(2002)! infrastructural!investments! ! Source:* Key' documents' can' be' downloaded' from' the' websites' of' the' relevant' agencies' and' other' sites'available'on'google'or'baidu.** + + T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 10 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Withdrawal+of+Budgetary+Funding+ By' far' the' most' important' change' affecting' PIM' was' the' rapid' withdrawal' of' budgetary' inputs' to' investment.'The'swiftness'of'the'withdrawal'was'driven'mainly'by'fiscal'decline.'From'the'start'of' market' reforms,' dismantling' the' planning' apparatus' had' led' quickly' to' an' erosion' of' the' Government’s' main' revenue' mechanism—SOE' profits.' Government' revenues' went' into' a' steep' decline,'falling'from'35'percent'of'GDP'in'1978'to'20'percent'by'the'end'of'the'1980s,'and'reaching' a' nadir' at' just' 11' percent' in' 1995–96' (figure' X.2).' The' dwindling' fiscal' resources' squeezed' the' Government’s'capacity'to'finance'expenditures,'and'first'to'go'were'working'capital'and'investment' in'SOEs,'which'had'been'financed'by'budgetary'grants.'By'shifting'the'capital'requirements'of'SOEs' from' the' budget' to' the' banks' and' the' enterprises' themselves,' and' by' postponing' new' capital' construction,' the' Government' shed' expenditures' equal' to' 11' percent' of' GDP' from' 1978' to' 1988,' accounting'for'most'of'the'retrenchment'in'spending'during'the'period'(Wong'1991).'' With' the' withdrawal' of' budgetary' funding,' the' Government’s' share' in' investment' fell' steeply' (figure'X.3).'Except'for'a'small'spike'under'the'fiscal'stimulus'program'that'started'during'the'Asian' financial'crisis'in'the'late'1990s,'the'share'of'government'investment'has'remained'below'5'percent' of' total' investment' since' 1993.' By' default,' the' funding' of' fixed' investment' became' “diversified”' (table'X.4).' Figure+X.2++++China’s+Fiscal+Decline,+1978–96+ %'of'GDP' %%%%%%%%%%%%%%%%%%%%%% % Source:%Calculations!based!on!data!from!Chinese!Statistical!Yearbooks.! T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 11 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Figure+X.3++++China+Government+Share+of+Budgetary+Funding+in+Fixed+Investment+ %'Government'Investment'Budget' % Source:!Chinese'Statistical'Yearbook!2010! % ''Table'X.4''''Sources'of'Finance'For'Fixed'Investment'(%)' %% 1982% 1993% 1995% 2000% 2003% 2007% 2009% Budget% 22.7! 3.7! 3.5!! 6.8! 4.8!! 3.9! 5.1! Domestic%credit% 14.3! 23.5! 21.7!! 23.6! 23.0!! 15.3! 15.7! Foreign% 4.9! 7.3! 13.1!! 5.8! 4.5!! 3.4! 1.8! SelfOraised%and%othera% 58.1! 65.5! 61.7!! 63.8! 67.6!! 77.4! 77.4! Source:'New'China'60'Years,'and'China'Statistical'Yearbook.' Note:' a.' Includes' retained' earnings,' capital' from' bond' issue' by' enterprises' or' banks,' levies,' personal'capital'and'donations,'among'others.' ! Decentralization++ At' the' outset' of' market' reforms,' the' budgetary' and' planning' processes' were' highly' centralized,'with'decision'making'concentrated'at'the'Central'Government'level.'According'to'one' former'senior'official'in'the'Ministry'of'Finance,'even'the'purchase'of'an'XZray'machine'costing'less' than' 100' thousand' yuan' in' a' township' hospital' would' be' submitted' for' approval' by' the' State' Planning'Commission'and'the'Ministry'of'Finance'(Jiang'2008,'207).1'In'this'sense,'even'when'the' capital'expenditures'occurred'at'the'subnational'levels,'the'public'investment'decisions'were'made' at'the'top,'and'local'governments'merely'acted'as'agents'of'the'Central'Government.'In'this'context,' reducing' government' control' in' China' has' two' dimensions:' devolving' authority' and' resources' to' lower'level'governments'and'devolving'them'to'economic'agents'(“the'market”).' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 12 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Through' the' fiscal' decline,' when' the' Central' Government' could' not' provide' sufficient' transfers'to'finance'services'that'had'earlier'been'delegated'to'local'governments,'the'Chinese'fiscal' system'became'decentralized'by'default'(Wong'2009).'Along'with'the'responsibilities'for'providing' public' services,' those' for' providing' infrastructure' were' devolved' to' subnational' governments.' As' shown'in'table'X.5,'this'devolution'continued,'and'in'2007'subnational'governments'accounted'for' nearly' 90' percent' of' budgetary' investments.' How' this' decentralization' works' can' best' be' illustrated' by' a' concrete' example:' Central' Government' designs' the' national' highway' grids,' but' provincial'and'local'governments'are'responsible'for'financing'construction'of'the'sections'passing' through'their'jurisdictions,'often'with'central'subsidies'financing'only'a'small'portion'of'total'costs.'' Table+X.5+++Subnational+Government+Shares+(%+total+budget)+ % Budgetary%expenditures% Budgetary%investment% 1978% 52.6! 50.1! 1988% 66.1! 30.8! 1995% 70.8! 62.5! 1998% 71.1! 66.0! 1999% 68.5! 58.3! 2000% 65.3! 64.7! 2001% 69.5! 72.5! 2002% 69.3! 69.0! 2003% 69.9! 66.7! 2004% 72.3! 71.8! 2005% 74.1! 74.9! 2006% 75.3! 75.4! 2007% 77.0! 88.8! Source:%Calculated!from!data!in!China'Statistical'Yearbook!various!years,!MOF!dataset!and!Wong!(1997).! This'decentralization'goes'all'the'way'down'the'administrative'hierarchy.'Data'in'table'X.'6' show' that' financing' for' public' investment' was' shifted' progressively' downward' to' subnational' governments' at' the' provincial,' municipal,' and' county' levels.' In' fact,' it' goes' down' even' further.' In' Jiangsu'Province,'for'example,'in'2005'the'national'program'to'build'roads'connecting'all'villages' was'being'implemented'through'localizing'substantial'responsibilities'to'rural'administrative'units.' The'counties'were'building'the'roads'linking'the'county'capitals'to'the'townships,'but'left'it'to'the' townships'to'organize'and'divide'responsibilities'for'the'roads'going'to'the'villages.2'' ! ! T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 13 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Table+ X.6+ + + + Decentralization+ of+ Capital+ Expenditure+ Responsibilities+ to+ Local+ Governments+ (percent+of+total+budget)+ % Central% Province% Prefecture% County% Township% 2003! 33.8! 20.8! 27.9! 15.6! 1.9! 2004! 28.7! 20.1! 31.2! 17.8! 2.2! 2005! 25.3! 21.1! 30.4! 20.7! 2.4! 2006! 22.0! 19.8! 32.6! 22.9! 2.7! Source:'Compendium'of'local'fiscal'statistics'in'China,'2003,'2004,'2005,'2006.' Note:' “Investment”' includes' the' budgetary' items' of' capital' construction,' working' capital,' technological' upgrading,'geological'prospecting,'and'urban'maintenance'and'construction.' ! Along'with'financing,'the'authorities'for'investment'decisions'were'also'progressively'devolved.'A' key'indicator'is'the'threshold'for'administrative'approval'authority—'the'administrative'level'able' to' approve' investment' projects,' which' is' determined' by' the' National' Reform' and' Development' Commission.3' This' is' an' important' indicator' since' administrative' approval' is' the' first' step' in' the' investment' process,' as' project' approval' is' a' precondition' for' application' for' land,' raw' materials,' and'funding.'The'incremental'raising'of'the'threshold'for'local'approvals'from'RMB'10'million'to'30' million'and'then'200'million'can'be'seen'in'table'X.7.'' Table+X.7++++Incremental+Devolution+of+Approval+Authority+for+Investment+Projects,+yuan+ Level%of%approval% 1979–1983% 1984–1988% 1991–2003% Since%2004% authority% Only! for! state^funded! % % % % projects! or! projects! in! designated!sectors!% State%Council% over!100!million! over!200!million! ! Over!500!million! State%Planning% Commission/NDRC% 10–100!million! 30–200!million!! ! 200–500!million! Less! than! 30! Less! than! 200! Local%Government% Less!than!10!million! million! million! Less!than!200!million! Source:!official!documents!from!the!relevant!agencies.!! ! The+2004+Reform+ Through' the' first' two' decades' of' China’s' transition' to' a' market' economy,' public' sector' reforms' were' dominated' by' fiscal' decline' and' the' associated' adjustments' that' were' necessary' to' keep'the'Government'functioning'(Wong'2009).'It'was'only'when'revenues'began'to'recover'in'the' late' 1990s' that' Government' had' the' fiscal' “space”' for' focusing' on' the' expenditure' side' of' public' finance.'Reforms'in'public'expenditure'management'began'around'2000,'when'a'broad'package'of' reforms'was'introduced'that'included'changes'in'budgeting'processes,'treasury'management,'and' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 14 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization procurement' procedures' (Blöndal' 2002;' World' Bank' 2000;' 2002).' Attention' to' reforming' PIM' followed.'In'2004'the'State'Council'issued'the'Document'on'Reform'of'Investment'Institutions'(“the' Document”)'(State'Council'2004),'which'addressed,'for'the'first'time,'the'three'key'aspects'of'public' investment' together—the' scope' of' government' involvement,' funding,' and' project' management.4' The' first' priority' of' the' decision' was' to' reaffirm' the' central' role' of' the' market' in' investment,' ordering'all'administrative'approval'procedures'to'be'terminated'for'privately'funded'investments' except' those' in' strategic' sectors.' For' public' investments,' the' main' points' of' the' 2004' Document' included'the'following5:'' • Rationalizing+ the+ scope+ of+ government+ investment.' Addressing' the' previous' lack' of' focus,' the' Document' specifies' that' “Government' investment' should' be' mainly' used' (for' projects)' related'to'national'security,'market'failure'and'in'social'sectors.”'It'spelled'out'the'principle'for' the' division' of' responsibility' between' central' and' local' governments:' central' investments' should' focus' on' those' with' high' spillover' and' large' impact' on' economic' and' social' development,'leaving'the'rest'to'subnational'governments.'' • Improving+ the+ quality+ of+ fund+ management.' In' recognition' of' the' current' situation' of' diversified' financing' for' public' investments,' the' reform' proposed—for' the' first' time,' formulating' mediumZ' to' longZterm' investment' plans' that' integrate' all' fiscal' resources—inZ budget,' extrabudgetary,' fund' budgets,' and' domestic' and' foreign' loans,' to' rationalize' their' utilization.' It' also' proposed' using' different' management' systems' for' different' funding' mechanisms.'' • Introducing+ market+ mechanisms+ to+ public+ investment+ projects.' Governments' at' all' levels' were'called'upon'to'create'conditions,'using'special'permits,'subsidies,'and'other'instruments' to'attract'private'finance'for'public'investment'projects.' • Strengthening+project+selection+mechanisms.'To'improve'the'transparency'and'efficiency'of' decision' making,' the' Document' called' for' projects' to' be' vetted' by' independent' consultancies' and'expert'appraisals.'The'consultancies'are'to'be'awarded'on'a'competitive'basis.'It'called'for' public' comment' and' suggestions' to' be' solicited' through' public' announcements' of' the' investment'projects.' • Simplifying+approval+procedures'and'rationalizing'the'division'of'responsibilities.' • Improving+ project+ management.' Improvements' include' specifying' construction' standards' and'building'in'flexibility'to'adjust'the'plans'during'construction.'' The' Document' also' emphasized' the' need' to' strengthen' the' regulation' of' intermediary' agencies,'and'introduced'an'agency'system'for'public'works.'It'also'called'for'officials'to'be'more' alert'to'investment'risks'in'public'investment'projects.'' In' retrospect,' these' reforms' appear' to' have' been' too' little,' too' late.' Decentralization' had' moved' the' vast' majority' of' public' investment' into' the' local' sector,' where' oversight' is' much' less' certain.'Moreover,'the'Document'laid'out'only'the'general'direction'of'reform.'For'example,'it'made' the' important' proposal' that' mediumZlongZterm' investment' plans' should' integrate' all' sources' of' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 15 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization fiscal' funds,' but' did' not' specify' how' they' were' to' be' formulated,' who' would' participate' in' their' formulation,'nor'who'would'specify'or'coordinate'the'management'systems'for'the'different'funds.' As'is'typical'of'policy'making'in'China,'specific'measures'would'be'worked'out'stepZbyZstep'over'a' number' of' years.' In' the' meantime,' the' cessation' of' administrative' approval' over' nonZpublic' investment'was'widely'interpreted'by'subnational'governments'to'mean'that'only'projects'funded' by'the'budget'were'required'to'go'through'the'institutional'framework.'The'vast'majority'of'public' investment'was'considered'“exempted”'from'2004'onward.' The+Current+PIM+Framework++ This'section'estimates'the'size'of'public'investment,'describes'public'investment'trends'in' China,'and'analyses'how'public'investment'is'financed.'' Conceptual+Ambiguities+over+“Public+Investment”+ Under'China’s'gradualist'reform,'the'withdrawal'of'Government'from'the'economy'has'been' ambiguous' and' incomplete.' As' early' as' 1993' official' policy' called' for' dividing' investments' into' three' categories—“public' benefit,”' “basic,”' and' “competitive”—and' confined' fiscal' investments' to' the'first'two'types.6'The'problem'is'that'the'term'“public'benefit”(gongyi)'in'China'is'used'to'stand' for' “public' goods,”' but' it' in' fact' is' much' broader.' It' allows,' for' example,' arguments' such' as' supporting' the' development' of' “pillar' industries”—R&D,' and' highZtech' industries' and' the' like— contributes' to' strengthening' China’s' global' competitiveness' and' longZterm' prosperity,' and' thus' these' investments' are' “of' public' benefit.”7' In' the' paper,' “Research' on' the' Scope' of' Public' Investment'in'China,”'in'conformance'with'official'policy,'Yin'and'Lu'(2007)'explain'that'budgetary' expenditures' on' the' item' “economic' construction”' are' mainly' used' for' investment' in' basic' infrastructure,'basic'industries,'and'agriculture.'Writing'on'the'achievements'of'his'department'on' the'thirtieth'anniversary'of'reform,'Wang'Baoan,'Director'General'of'the'Department'of'Economic' Construction' in' the' Ministry' of' Finance' (responsible' for' budgetary' investments),' pointed' to' investments' in' infrastructure' as' well' as' subsidies' for' promoting' policy' priorities' in' agriculture,' environmental' protection,' and' restructuring' and' technological' upgrading' of' industries' (Wang' 2009,'121).''' This'lack'of'clarity'at'the'top'is'often'interpreted'as'giving'wide'latitude'at'the'subnational' levels,' where' incentives' for' local' government' officials' are' all' aligned' with' the' promotion' of' economic' growth.' In' this' context,' Zhang' (2004)' points' to' a' need' to' distinguish' “government' investment”'from'the'conventional'notion'of'“public'investment.”'Especially'responding'to'the'goal' of' promoting' local' economic' development,' many' local' governments' have' channeled' public' resources'mainly'into'facilities'that'improve'the'attractiveness'to'business'investments,'rather'than' public'goods'or'services'that'improve'the'quality'of'life,'and'fiscal'resources'have'sometimes'even' been'directed'toward'profitZmaking'activities.8'' There' is' a' clear' but' weak' tilting' of' budgetary' resources' toward' public' infrastructure' and' social'overhead'capital.'This'is'shown'in'Table'x.8,'where'data'are'reported'on'investment'by'sector' and' by' source' of' funding.' The' sectors' are' very' broad,' but' are' indicative.' In' the' education,' health,' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 16 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization urban' water' and' transport' sectors,' budgetary' appropriations' financed' 10–15' percent' of' total' investments,'compared'to'the'average'of'4'percent'for'all'investments.9'' Table+X.8++++Public+Investments+by+Source+and+Sector,+%+of+total,+2007+ ! By%Management% By%Source%of%Funds% Jurisdiction% ' Budget% Loans% Foreign% SelfORaised% Other% Central% Local% Social%Service%Facilities% ! ! ! ! ! ! ! Education! 12.3!! 12.9!! 0.6!! 66.2!! 8.1!! 10.2! 89.8! Health! 9.3!! 11.7!! 0.6!! 72.6!! 5.8!! 5.3! 94.7! Infrastructure% ! ! ! ! ! ! ! Urban!water!supply! 11.1!! 20.3!! 3.7!! 58.1!! 6.8!! 1.0! 99.0! Electricity! 6.0!! 43.6!! 1.0!! 43.5!! 5.9!! 38.6! 61.4! Transportation! 13.5!! 33.3!! 1.5!! 43.2!! 8.4!! 24.4! 75.6! Telecommunication! 1.5!! 1.9!! 0.9!! 92.9!! 2.8!! 50.7! 49.3! pIndustry% ! ! ! ! ! ! ! Coal! 1.3!! 11.5!! 1.2!! 82.7!! 3.4!! 10.9! 89.1! Gas!&!oil! 0.9!! 13.6!! 2.2!! 75.8!! 7.5!! 81.7! 18.3! Mining!and!processing!of!ores! 0.6!! 6.1!! 2.7!! 82.3!! 8.3!! 4.8! 95.2! Chemicals! 0.1!! 15.7!! 7.4!! 73.9!! 2.9!! 6.9! 93.1! Transport!equipment! 1.5!! 8.6!! 6.4!! 80.7!! 2.8!! 15.8! 84.2! Machinery! 0.4!! 6.9!! 5.8!! 84.0!! 3.0!! 4.4! 95.6! Electronics! 0.2!! 6.6!! 9.4!! 81.1!! 2.6!! 1.1! 98.9! Infrastructure%Investment% 9.8%% 34.1%% 1.4%% 47.7%% 7.0%% 30.4% 69.6% All%Investment% 3.9%% 15.3%% 3.4%% 60.6%% 16.8%% 11.2% 88.8% Investment%funding% ! (Billions'Yuan)' Infrastructure%Investment% 216.9! 756.6! 30.9! 1060.1! 156.1! 694.6! 1587.0! All%Investment% 585.7! 2304.4! 513.3! 9137.3! 2539.6! 1316.5! 10,429.9! Source:!China'Statistical'Yearbook!2009.! ! Financing+China’s+Public+Investment++ The' extent' of' government' finance' in' public' investment' is' in' fact' significantly' greater' than' shown'in'table'X.8,'which'(as'is'typical'for'statistical'reporting'in'China)'shows'only'the'budgetary' component' of' government' funding.' In' fact,' in' China’s' fragmented' system' of' public' finance,' the' budget,'comprised'mainly'of'revenues'from'formal'taxes,'is'only'one'component'of'fiscal'resources.' Other' components' include' extrabudgetary' revenues' (now' renamed' “nontax' revenues,”' NTR);' the' “government'fund'budget”;'and'the'social'security'budget.'Figure'BX.1'in'box'1'shows'the'shares'of' different'types'of'fiscal'revenues,'with'a'marked'trend'toward'“growing'out'of'the'budget”;'in'2012' budgetary'revenues'were'only'64'percent'of'the'total.' % T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 17 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization + Box+X.1+++China’s+Fragmented+Public+Finance++ The' fragmentation' of' the' Chinese' Government’s' fiscal' resources' has' reduced' budget' transparency' overall,' since' among' all' the' components,' only' inZbudget' revenues' and' expenditures' are'reported'regularly,'with'some'disaggregation.'Accounting'for'extrabudgetary'revenues'and'how' they'are'spent'has'long'been'an'elusive'goal.'“Government'funds”'were'introduced'in'the'1990s'as'a' way'to'incrementally'tighten'control'over'extrabudgetary'revenues.'This'followed'the'State'Council' decision'in'1996'to'create'13'“funds”'that'absorbed'roughly'30'percent'of'existing'EBR.'These'were' treated' as' “below' the' line”' items' in' the' budget,' and' to' which' budgetary' management' was' to' be' extended,'and'that'would'gradually'be'replaced'by'taxes'(Wong'1998).'This'has'been'done'with'the' biggest' Central' Government' funds—the' fuel' surcharges' and' the' fee' on' vehicle' purchase,' which' have' been' converted' to' the' fuel' tax' and' the' vehicle' purchase' tax.' The' remainder' are' mostly' subnational' funds,' and' little' is' known' about' their' management.' Social' security' funds' are' also' almost'entirely'local,'and'they'are'collected'by'the'Ministry'of'Human'Resources'and'Social'Security' and'its'subnational'counterparts.'They'were'included'in'the'draft'budget'for'2014'reported'for'the' first'time'to'the'National'People’s'Congress'in'March'2013,'and'local'reporting'has'been'spotty'' Figure+BX.1+++Diverse+Sources+of+Fiscal+Revenues+ x! + Source:'Estimates'based'on'Wong'(2013).+ ' ! ' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 18 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Government' finances' investment' from' budget' appropriations;' earmarked' tax' revenues' (such'as'the'urban'maintenance'and'construction'tax'and'the'vehicle'purchase'tax);'extrabudgetary' (now' nontax)' revenues;' “government' funds”;' as' well' as' policy' loans' from' the' state' development' banks.10'It'is'difficult'to'make'a'comprehensive'accounting'of'public'investment'since'expenditures' from'these'nonbudgetary'components'are'not'always'reported.'In'fact,'since'2007'even'budgetary' expenditures' on' investment' are' no' longer' reported' to' the' public.' Previously,' fiscal' accounts' reported' budgetary' expenditure' on' investment—under' headings' of' capital' construction,' working' capital,'technological'upgrading'and'research'and'development,'geological'prospecting,'and'urban' maintenance'and'construction—and'it'was'possible'to'estimate'total'budgetary'appropriations'for' public'investment'from'these'categories.'Beginning'in'2007,'the'Government'shifted'to'a'functional' classification'that'merged'capital'and'recurrent'expenditures,'and'information'on'investment'is'no' longer'available.' “Government' funds”' include' revenues' from' the' road' maintenance' fee' (levied' on' motor' vehicles)' and' sale' of' land' leases,' which' are' earmarked' for' investment' on' roads' and' other' infrastructure.'They'constitute'major'sources'of'fiscal'funding'for'public'investment,'but'there'is'no' systematic'reporting'of'their'revenues'and'uses,'either'at'the'national'or'subnational'levels.'A'check' on' provincial' reporting' shows' that,' at' least' until' recently,' reporting' on' land' lease' revenues' is' at' best'spotty,'with'many'provinces'in'noncompliance.11'Some'estimates'of'the'size'of'these'different' components'of'fiscal'resources'for'public'investment'are'presented'in'table'9'for'2000,'2006,'and' 2009.' Budgetary' appropriations' were' less' than' oneZquarter' of' total' fiscal' resources' spent' on' investment' in' 2000,' and' its' share' had' fallen' to' just' 17' percent' in' 2006' before' recovering' to' 27' percent' in' 2009,' at' the' height' of' the' fiscal' stimulus' program.12' All' sources' grew' rapidly' over' the' past'decade,'but'by'far'the'fastest'growing'component'was'“government'funds.”' Table+X.9++++Sources+of+Public+Investment+in+China++ Government%Funding%Sources% Funding%amounts,%yuan,%billions;%(%%share)% 2000! 2006! 2009! ! a Budgetary!appropriations ! 210.9!(23)! 467.2!(17)! 1268.6!(27)! Government!funds! 171.4!(19)! 827.3!(30)! 1936!(41)! b Extrabudgetary/NTR!expenditure! ! 88.2!(10)! 146.7!(5)! 158.7!(3)! c Net!national!debt! ! 260.1!(29)! 692.3!(22)! 693.8!(15)! Policy!loans!from!China!Development!Bank! 179.6!(20)! 576.0!(19)! 634.7!(13)! Loans!from!International!Financial!Institutions! 2.3!(0)! 16.0!(0.5)! 22.8!(0)! Total% 912.5! 3120.4! 4714.6! ! ' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 19 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Sources:'Data'and'estimated'derived'from'data'from'Financial'Yearbook'of'China'(2001,'2007);'China' Statistical'Yearbook'(2001,'2002,'2006,'2010);'Annual'Report'of'China'Development'Bank'(2000,'2006,' 2009).' Notes:'a.'This'may'be'somewhat'underestimated'since'some'of'the'expenditures'in'technological' upgrading,'geological'prospecting,'and'urban'maintenance'are'used'for'investments,'but'are'not'counted' here.'' b.'Estimated'as'oneZquarter'of'all'extrabudgetary'expenditures.'c.'It'is'assumed'that'all'national'debt' is'for'investment'purposes.' Another'important'source'of'funding'for'public'investment'is'not'listed'in'table'X.9—direct' and' indirect' loans' from' commercial' banks.' According' to' Honohan' (2007,' 118):' “Much' of' the' infrastructure'investment'is'being'financed'through'conventional'bank'loans,'some'of'them'made' to' contractors' with' an' explicit' or,' more' likely,' implicit' guarantee' from' the' city' and' other' local' authorities'that'wish'to'see'the'projects'completed.”'GovernmentZowned'hospitals'and'universities' recently'have'borrowed'heavily'to'fuel'rapid'expansion.'They'are'not'required'to'seek'government' approval' for' them,' and' the' information' is' not' reported' to' the' fiscal' system' for' record.' A' 2004' report'by'the'Ministry'of'Finance'estimated'that'credit'from'commercial'banks'that'are'guaranteed' by'municipal'governments'reached'as'high'as'760–850'billion'yuan.13'If'these'figures'are'correct,' then' commercial' bank' loans' financed' twice' as' much' as' policy' loans' from' the' China' Development' Bank.' Including' public' investment' from' commercial' bank' loans' would' increase' aggregate' public' investment.'To'the'extent'that'the'loans'are'backed'by'fiscal'guarantees,'they'should'be'included'in' government'finance.' Innovative+Local+Governments+ With' decentralization,' subnational' governments' have' been' responsible' for' providing' the' vast'majority'of'infrastructure'in'China.'Over'the'past'two'decades,'during'China’s'rapid'growth'and' urbanization,' local' governments,' especially' at' the' municipal' level,' faced' tremendous' pressure' for' investment' in' public' infrastructure.' In' this' period' the' fiscal' environment' was' extremely' inhospitable.'To'stem'the'fiscal'decline'and'the'hemorrhaging'of'revenues,'the'Central'Government' implemented' a' tax' sharing' reform' in' 1994' that' recentralized' revenues' while' leaving' expenditure' assignments'unchanged.'Thereafter,'subnational'governments'faced'on'average'a'substantial'fiscal' gap'and'became'increasingly'dependent'on'transfers'(World'Bank'2002;'Wong'2009).'The'Budget' Law'(1994)'had'assigned'no'taxing'powers'to'subnational'governments,'nor'were'they'allowed'to' borrow,'even'for'capital'spending.'Instead,'as'in'other'spheres,'local'governments'were'encouraged' and' given' a' great' deal' of' leeway' to' experiment' with' new' solutions' to' their' fiscal' problems,' to' ensure'that'economic'growth'could'continue'unhindered'(Wong'2007;'2009).'' Creation+of+Special+Financial+Vehicles+ Local'governments'were'able'to'achieve'and'maintain'high'levels'of'investment'through'the' use' of' extrabudgetary' resources' and' special' financial' vehicles.' To' work' around' the' constraint' on' direct'borrowing','starting'in'the'1980s,'local'governments—mostly'at'the'municipal'and'provincial' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 20 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization levels—turned'to'creating'corporate'entities'to'undertake'the'task'of'raising'funds'to'finance'public' investment.'They'were'initially'created'as'financially'independent,'singleZpurpose'entities,'often'for' the' purpose' of' taking' on' loans' from' international' financial' institutions.' Being' financially' independent' restricted' their' undertakings' to' those' with' the' capacity' for' debt' servicing' and' repayment,'and'these'corporations'were'prevalent'in'the'construction'and'operation'of'toll'roads,' power'companies,'water'companies,'and'utilities.' A' breakthrough' came' in' 1988' when' Shanghai' created' the' first' broadZbased' investment' corporation' to' make' investments' in' urban' infrastructure,' the' General' Corporation' of' Shanghai' Municipal'Property'(SMPD),'and'gave'it'the'mission'to'coordinate'and'provide'for'the'construction' of'facilities'such'as'water'supply,'sewerage,'roads,'and'utility'hookZups.'To'finance'these'tasks,'the' corporation' was' assigned' earmarked' revenues' from' the' municipal' budget' and' authorized' to' borrow' from' banks' and' issue' corporate' bonds' (see' figure'X.4' for' a' chart' of' the' corporation’s' sources'and'use'of'funds).'Its'creation'made'possible'a'quantum'leap'in'the'financing'available'for' investments'in'infrastructure'to'support'urban'renewal'and'expansion'in'Shanghai.' Over' time,' the' model' gradually' spread' to' other' municipalities,' and' local' investment' corporations' (LICs)' have' come' to' play' a' key' role' in' financing' urbanization' in' many' localities.' As' they' became' more' accepted,' they' have' also' evolved' to' be' less' strictly' financially' separated' from' government' and' broader' in' scope.' Typically,' the' LICs' raise' and' bundle' together' bank' loans' and' other'financing,'using'a'variety'of'municipal'assets'including'budgetary'and'offZbudget'revenues'as' equity'and'collateral.'Increasingly,'with'urbanization'bringing'rising'land'values,'land'has'become' the' principal' asset' backing' LICs,' and' municipal' governments' have' also' increasingly' relied' on' offZ budget'receipts'from'land'lease'sales'to'finance'debt'service'in'these'LICs.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 21 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Figure+X.4+++General+Corporation+of+Shanghai+Municipal+Property+(SMPD)+ Budgetary allocation for urban construction Urban maintenance and construction tax Public goods Public goods: (Urban Infrastructure: water, Urban infrastructure: sewerage, roads, Fees and charges on water, sewerage, roads, utility hook-ups, etc.) public facilities utility hook-ups, etc. SMPD Rental incomes from city-owned property Private goods (Profit- Private goods: 30% of tax-exempted making ventures in incomes of real estate Profit-making ventures development in real estate development development Commercial bank loans Bond issues ! Source:''SASS'(1988).' By' design,' LICs' are' complex' hybrid' financial' organizations' that' mix' public' (fiscal)' and' private'(financial)'funding'to'engage'in'both'public'and'private'(profitZmaking)'activities.'As'such,' they' bear' similarities' to' publicZprivate' partnership' arrangements' in' other' countries.' In' China,' though,'the'Government'is'the'only'participant'and'decision'maker.' There'is'little'doubt'of'the'key'role'played'by'LICs'in'public'investment'in'China.'The'China' Banking'Regulatory'Commission'(CBRC)'estimated'that'LICs'accounted'for'about'twoZthirds'of'local' government'debt'in'2009'(Investors'Bulletin'2010).'Indeed,'it'is'likely'that'the'successes'of'the'LICs' in' fundraising' are' what' pushed' the' further' decentralization' of' public' investment—which' accelerated' from' around' 2004,' coinciding' with' the' “takeZoff”' of' LICs.' The' subnational' share' of' actual'investment'has'simply'outgrown'that'funded'by'the'Central'Government.' One'implication'of'the'key'role'played'by'LICs'is'that'it'has'made'it'impossible'to'account' for'total'public'investment'in'China'and'its'configuration,'since'no'reliable'national'statistics'exist' on' LICs' because' there' was' no' system' in' place' that' requires' LICs' to' report' on' their' activities' or' financial' status.' Because' LICs' were' local' experiments' that' were' never' formally' endorsed' by' the' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 22 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Central' Government,' they' operated' happily' in' the' interstices' of' China’s' mixed' economic' system.' Until' the' problem' was' “discovered”' in' 2010Z2011,' LICs' were' not' under' the' purview' of' either' the' fiscal'or'the'administrative'planning'systems.'At'the'national'level'no'agency'had'been'assigned'the' responsibility' for' oversight' of' their' activities—neither' the' Ministry' of' Finance' (MoF),' nor' the' National' Development' and' Reform' Commission' (NDRC),' nor' the' Ministry' of' Construction' (MoC),' nor'the'CBRC.'In'the'absence'of'national'guidelines,'management'and'supervision'of'LICs'by'local' governments'varied'greatly'across'localities.' The' macroeconomic' risks' posed' by' LICs' came' to' light' dramatically' during' the' fiscal' stimulus' program' of' 2008–10,' when' they' proliferated' and' were' on' the' front' line' in' vigorously' competing' for' investment' funding' and' bank' credit.' According' to' the' CBRC,' LICs' grabbed' nearly' oneZthird'of'all'new'loans'issued'in'2009'and'increased'their'total'debt'by'CNY'3'trillion.'In'the'first' quarter'of'2010,'they'accounted'for'40%'of'all'new'bank'loans'(Investors'Bulletin'2010;'Wei'2010).' Later'estimates,'based'on'findings'by'the'National'Audit'Office'and'the'Central'Bank,'indicate'that' the'total'debt'of'LICs'were'likely'to'reach'10–14'trillion'yuan'by'yearZend'2010—as'much'as'45'per' cent'of'current'GDP'(Yang'2011).'From'midZ2009,'the'Government'engaged'in'a'massive'catchingZ up'exercise'in'collecting'information'on'LICs'and'their'operations,'with'several'regulatory'agencies' undertaking'investigations'and'surveys,'including'the'CBRC,'the'National'Audit'Office,'the'MOF'and' the'NDRC.'' Overall+Assessment+and+Next+Steps++ Setting'out'the'economic'structure'and'recent'trends'helps'to'provide'the'context'for' understanding'China’s'PIM'today.'The'key'features'are'outlined'in'table'X.10.' ' ' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 23 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Table+X.10+++Overall+PFM+(public+financial+management)+and+PIM+Context+ PFM%and%PIM%Feature% Situation%and%Trend% Impact%on%PIM% a! GDP!per!capita! US$7500! (PPP,! current! $),! grown! at! Created!huge!demand!for!PIM! 8%/year!for!30!years! b! Human! Development! Index! 89th!out!of!182! Clearly!perceived!need!for!increased! rank! spending!on!social!infrastructure! c! Genuine!savings!rate! High!and!rising! Has!not!constrained!PIM! d! Size!of!fiscal!space! Large!and!perceived!as!growing!rapidly! Resulted!in!rapid!scaling!up!of!PIM! e! Fiscal!decentralization! Highly! decentralized;! subnational! PIM! is! mainly! a! subnational! issue,! governments! account! for! 80%! of! but!reforms!in!PIM!are!implemented! budgetary!expenditures!and!nearly!90%! unevenly!across!regions!and!levels! of!capital!spending!from!the!budget! f! Comprehensiveness! of! Low—fiscal! resources! are! fragmented! PIM! is! funded! by! all! components! of! budget! under! several! headings! and! not! fiscal!resources! completely!reported! g! Level!of!fiscal!transparency! Low! and! declining—Since! budget! Little! reporting! on! PIM! financed! classification! reform! in! 2007! capital! from!off!budget!sources! spending! is! no! longer! reported! in! budget!tables.! Fragmentation! of! fiscal! resources! is! severe,! with! in^budget! revenues! less! than!50%!of!total! ' Features'a,'b,'c,'and'd'provide'conditions'favoring'an'aggressive'stance'that'pushes'public' investment' upward.' This' is' reinforced' by' the' structure' and' incentives' of' China’s' fiscal' decentralization' (feature' e),' which' has' devolved' the' responsibilities' and' authority,' as' well' as' incentives' for' public' investment,' to' both' subnational' governments' and' Central' Government' ministries' (World' Bank' 2002;' Wong' 2009).' The' cadre' evaluation' system' rewards' government' officials' for' taking' actions' that' produce' economic' growth.' Fiscal' fragmentation' and' the' lack' of' transparency' (features' f' and' g)' make' it' more' difficult' for' central' authorities' to' exercise' macroeconomic' control' over' investments.' In' sum,' all' of' these' features' work' together' to' push' the' system' toward' overinvestment.' The' fiscal' stimulus' program' greatly' exacerbated' this' tendency' in' 2009'and'2010.'With'investment'hunger'of'local'governments'pushing'the'stimulus'effect'to'twoZ andZaZhalf' times' its' intended' size,' investment' in' infrastructure' jumped' to' 18' percent' of' GDP' and' gross'capital'formation'to'nearly'50'percent.14' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 24 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization The'current'PIM'system'has'rendered'the'Government'able'to'control'neither'the'aggregate' scale' nor' the' content' of' public' investment.' At' present,' the' Government' finances' high' levels' of' investment,'only'some'of'which'is'public'infrastructure.'Fundamentally,'the'problems'with'PIM'are' closely' linked' to' (and' indeed' derived' from)' those' of' budget' management.' The' high' reliance' on' extraZbudgetary' resources' has' led' to' a' severe' fragmentation' of' the' budget' and' fiscal' control,' the' origins'of'which'lay'in'the'fiscal'decline'during'the'first'15'years'of'transition,'and'the'government’s' relentless' drive' to' pursue' growth' at' all' costs.' The' tolerance' of' alternative' ways' of' financing' government' and' the' permissiveness' over' the' use' of' extraZbudgetary' revenues' have' led' to' an' extreme' decentralization' of' fiscal' management' (Wong' 2009;' 2011).' LICs' are' a' natural' product' of' that'tradition.'' In' choosing' to' rely' on' LICs' to' finance' local' public' infrastructure,' the' Government' was' choosing'a'risky'strategy'that'served'its'preference'for'growth.'While'the'model'may'have'worked' well' for' large' municipalities' in' fastZgrowing' coastal' areas' with' good' public' administration' and' sound'governance,'its'eventual'spread'to'inland,'lowerZtier'cities'likely'tipped'the'balance'toward' greater'risks'and'lower'payoffs'in'growth.'The'deliberate'mix'of'private'and'public'activities,'with' no' set' rules' to' govern' how' much' of' each' was' permissible,' and' letting' banks' determine' whether' they'are'financially'viable,'opened'the'door'to'a'soft'budget'constraint'for'local'governments.'This' trust' in' the' banking' sector' to' impose' discipline' was' unwarranted—in' a' transition' economy' with' incomplete' and' immature' markets' and' legal' environments,' banks' are' incapable' of' assessing' the' financial' viability' of' LICs,' given' their' fuzzy' relationship' with' local' governments.' Local' public' finances'are'in'any'case'nontransparent,'with'LICs'contributing'significantly'to'making'them'more' so.' The'decentralized'financing'of'public'investment'and'the'subordination'of'decision'making' to' financing' capacity' applied' equally' to' Central' Government' agencies,' and' it' reinforced' the' “silo' mentality”'where'economic'agents'conducted'planning'and'budgeting'for'projects'without'regard' for' coordinating' with' others.' An' example' is' the' plan' announced' in' February' 2011' by' the' head' of' China’s'Civil'Aviation'Administration'that'45'new'airports'would'be'built'over'the'next'five'years,'at' a' cost' of' 1.5' trillion' yuan' (US$230' billion' at' the' exchange' rate' then' current)' (Dyer' 2011).' This' is' despite'the'fact'that'130'of'the'existing'175'airports'are'currently'lossZmaking,'and'there'is'also'a' massive'program'to'expand'the'national'railway'network'that'will'include'more'than'12,000'km'of' highZspeed'lines'(Liu,'Yong,'and'Xiangdong'2011).' Finally,' the' very' high' reliance' of' public' investment' on' repayable' funding' sources' has' two' additional' adverse' implications.' First,' it' biases' the' choice' of' public' investment' to' those' with' revenueZgenerating' capacity,' such' as' investments' that' attract' trade' and' industry.' The' outcome' is' that'while'investment'in'tradeZsupporting'infrastructure'(which'has'allowed'China'to'achieve'such' a'high'ranking'in'the'World'Bank'Logistics'Performance'Index)'has'risen'rapidly'to'worldZbeating' levels,'investment'in'social'overhead'capital'such'as'health'and'education'has'continued'to'lag'(see' table' X.11' and' World' Bank' 2005;' Wong' 2007;' Song' 2008).' Second,' this' infrastructure' often' involves'high'user'charges,'for'example,'in'education,'health,'and'highway'tolls.15' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 25 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization ! Table+X.11++++Patterns+of+Investment+Allocation,+%+of+GDP+ Investment%type% 1982% 1993% 2003% 2007% 2009% Gross!capital!formation! 33.5! 44.5! 41.2! 41.7! 48.2! Infrastructure!! 3.1! 5.9! 12.0! 13.4! 18.1! Social!sector! 0.9! 0.8! 1.9! 1.7! 2.3! Source: New'China'60'Years'Statistics,'China'Statistical'Abstract' 2011,'and'China'Statistical'Yearbook!2010,!2003,! 1990,!1986.!! The'glaring'weaknesses'of'the'PIM'are'the'outcome'of'35'years'of'incremental'reform'and'a' laissezZfaire' approach' to' experimentation—in' accordance' with' the' famous' dictum,' attributed' to' Deng' Xiaoping,' the' architect' of' China’s' transition,' who' famously' said:' “Black' cat,' white' cat,' it' doesn’t'matter'as'long'as'it'catches'mice.”'Of'course,'this'same'approach'has'produced'spectacular' successes' in' liberating' the' Chinese' economy' and' enabling' it' to' leapfrog' ahead.' This' chapter' has' focused'on'the'impact'of'this'approach'on'reforming'the'PIM'system,'which'has'both'unleashed'a' great'dynamism'but'also'severely'eroded'macroeconomic'control.' Going' forward,' strengthening' PIM' in' China' will' require' reZimposing' many' controls' and' coordination' mechanisms.' Unlike' in' other' countries,' the' process' will' rely' less' on' strengthening' legal'and'regulatory'framework'for'PIM,'but'rather'ensuring'that'more'fiscal'resources'are'routed' through'the'existing'institutional'framework.'In'other'words,'the'changes'should'start'with'reining' in' the' management' of' extraZbudgetary' resources' and' clarifying' the' role' and' authorities' of' government' at' all' levels.' To' ensure' incentive' compatibility,' a' significant' realignment' of' revenues' and'expenditure'responsibilities'will'be'needed'in'the'intergovernmental'fiscal'system.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 26 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Notes+ 1. Ms.'Jiang'was'DirectorZGeneral'of'the'Local'Budget'Department'of'Ministry'of'Finance'during' 1993–98.' 2. Fieldwork'to'Jiangsu'province'in'2005.' 3. This'is'the'successor'organization'to'the'State'Planning'Commission'under'the'planned' economy.' 4. It'was'preceded'by'the'Communist'Party'Central'Committee'Decision'on'Improving'the'Socialist' Market'System'in'October'2003,'which'called'for'substantially'reducing'the'scope'of'projects' requiring'state'approval.' 5. These'are'in'Section'II'of'the'Document'(State'Council'2004).'' 6. “1993'Decisions'on'Some'Issues'Concerning'Building'a'Socialist'Market'Economic'System,”' adopted'at'the'14th'Plenum'of'the'Third'Central'Party'Congress.' 7. See,'for'example,'Su'(2001),'for'an'impassioned'plea'along'these'lines.' 8. Many'scholars'have'written'of'local'governments'investing'in'business'(Zhang'2004;'Song' 2008;'Wong'2009).' 9. There'was'a'marked'improvement'in'targeting'public'resources'under'the'fiscal'stimulus' program'in'2009,'when'fiscal'funds'accounted'for'15'percent'of'investment'in'infrastructure,' compared'to'5'percent'of'all'investments'(NBS'2010).' 10. During'the'1980s'through'the'midZ1990s,'quasiZfiscal'activities'of'the'Central'Bank'and'directed' lending'by'stateZowned'commercial'banks'should'also'be'included'as'fiscal'resources.' 11. In'2004,'reported'land'lease'revenues'were'equal'to'28'percent'of'fund'revenues.'While'Jiangsu' reported'7.2'billion'yuan'in'land'revenues,'neighboring'Zhejiang'reported'only'500'million,'and' Shanghai'reported'none.'The'second'largest'item,'social'security'funds,'had'only'13'provincial' level'units'reported'nonzero'receipts'(MOF'2004).'' 12. These'shares'are'broadly'in'line'with'findings'of'Mikesell'et'al.'(2010).' 13. Such'debts'are'normally'raised'by'local'governments'themselves'or'government'affiliated' investment'corporations,'see'MOF'(2005).' 14. See'Wong'(2011)'for'an'analysis'of'the'fiscal'stimulus'program'and'its'implementation.' 15. Cartledge'(2008)'reports'that'China'has'very'high'logistics'costs.' ' References+ Blöndal,'Jon.'2002.' Budgeting' in' China.' Paris:'Organisation'for'Economic'CoZoperation'and' Development.'' Cartledge,' Simon.' 2008.' “Missing' Links:' Poor' Transport' Networks' are' Hampering' China’s' Evolution' into' an' Efficient' Place' to' Do' Business.”' Financial' Times' special' insert,' Doing' Business' in' China,'October'20.' Dyer,'Geoff.'2011.'“China'Reveals'Plan'for'45'More'Airports.”'Financial'Times,'February'25.' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 27 COUNTRY CASE STUDY: CHINA 2014 ! PIM under Reform and Decentralization Honohan,'Patrick.'2007.' China'Urbanizes.'Ed.'by'Shahid'Yusuf'and'Tony'Saich.'Washington,' DC:'World'Bank.'' Investors' Bulletin.' 2010.' “A' Tight' Hoop' Should' Be' Put' on' Local' Government' Financing' Platforms.”'June' 6.' http://finance.ifeng.com/news/special/dfzwwj/20100606/2282325.shtml,' accessed'20'May'2011.' Jiang,' Yonghua.' 2008.' China’s' Tax' Sharing' System' Reform' (in' Chinese).' Beijing:' China' Financial'&'Economic'Press.'' Liu,' Weixun,' Yong' Chen,' and' Xiangdong' Zhang.' 2011.' “Gaotie' yinji”' (Secret' Ills' of' HighZ Speed'Rail),'Economic'Observer'Online'(in'Chinese),'February'22'.' Mikesell,' John' L.,' Jun' Ma,' Alfred' TatZkei' Ho,' and' Meili' Niu.' 2011.' “Financial' Local' Public' Infrastructure:'Guangdong'Province.”'In' China’s'Local'Public'Finance'in'Transition.'Edited'by'Joyce' Yanyuan'Man'and'YuZHung'Hong.'Cambridge,'MA:'Lincoln'Institute'of'Land'Policy.'' MOF' (Ministry' of' Finance,' China).' 2004.' Finance' Yearbook' of' China' (zhongguo' caizheng' nianjian).'MOF,'Beijing,'annual.' ———.' 2005.' “Investigation' Report' on' Urban' Debt' in' China:' Department' of' Economic' Construction.”' MOF,' Beijing.' http://www.mof.gov.cn/jinjijianshesi/zhengwuxinxi/diaochayanjiu/200806/t20080620_47425.ht ml' NBS'(National'Bureau'of'Statistics).'2011.' China'Statistical'Abstract'2011.' Beijing:'National' Statistical'Press.' NBS' (1986,' 1990,' 2003,' 2010).' 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' ' ' ' !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 !Ms.!Jiang!was!Director^General!of!the!Local!Budget!Department!of!Ministry!of!Finance!during!1993–98.! 2 !Fieldwork!to!Jiangsu!province!in!2005.! 3 !This!is!the!successor!organization!to!the!State!Planning!Commission!under!the!planned!economy.! 4 !It!was!preceded!by!the!Communist!Party!Central!Committee!Decision!on!Improving!the!Socialist!Market!System!in! October!2003,!which!called!for!substantially!reducing!the!scope!of!projects!requiring!state!approval.! 5 !These!are!in!Section!II!of!the!Document!(State!Council!2004).!! 6 th !“1993!Decisions!on!Some!Issues!Concerning!Building!a!Socialist!Market!Economic!System,”!adopted!at!the!14 ! Plenum!of!the!Third!Central!Party!Congress.! 7 !See,!for!example,!Su!(2001),!for!an!impassioned!plea!along!these!lines.! 8 !Many!scholars!have!written!of!local!governments!investing!in!business!(Zhang!2004;!Song!2008;!Wong!2009).! T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 30