China's Countryside Debt Trap

While the rest of the world is focused on how China's "belt and road" initiative saddles developing countries with unsustainable debt to finance grand construction projects, China has been doing the same thing in its own countryside. The public works, environmental protection, and beautification projects built by the country's rural revitalization campaign have visibly improved China's rural landscape, but the village debt problem is mostly hidden from view.

A Xinhua Semi-monthly Talk article warned that "star villages" and "model villages" had been visibly transformed but piled up excessive debts in the process. The article gave the example of a "national civilized village" in a mountainous region that built a culture square, a primary school, kindergarten, a day-care center for the elderly, and a 3500-meter retaining wall that transformed the village but left it deep in debt. Another village owed 1.38 million yuan for a well and a road. The well consumed most of the money because approvals were onerous. The government subsidized 30,000 yuan of the road construction, but the project cost 200,000 yuan.

According to Xinhua, finance officials in northeastern Hunan Province did an investigation three years ago that found 90 percent of their county's 445 villages had debt, including 109 with debt exceeding 1 million yuan. A county in Shanxi Province estimated that their villages had debts totaling 3.86 billion yuan (over $500 million).

Last year, an Economic Reference News reporter discovered many villages with debt problems in his investigations in western China. Many villages had debts of hundreds of thousands of yuan. Some villages have debts from the 1990s. New debts to finance rural revitalization projects have been piled on. While there are subsidies or grants for construction projects, they typically cover only a fraction of the cost. Village collectives short on cash often borrow money to finance their share of the cost. Village leaders sometimes use their personal connections to get bank loans. In other cases villagers or business enterprises make contributions in exchange for IOUs.

There are no official statistics on village debt. A rural research institute in Hubei Province issued an estimate that national village debt totaled 400 billion yuan...in 2006.

An article by Hubei Normal University researchers last week attributed heavy village debt to failure to understand policies, unwillingness to pay or even acknowledge debts.

The core problem is that village collectives don't have much cash flow, and many of the projects do not generate enough income to finance the debt. The easiest way to get cash is to turn over the village collective's chief asset--land--to companies to operate as industrialized farms, industrial parks, or rural-themed tourism projects or vacation homes.

What's a village collective? Imagine a world where all land is managed by homeowners' associations who are also responsible for building local roads, sewers, and electric grids, leasing land to farmers and factories, handing out subsidies, and running schools. But they have no authority to tax residents. This is an approximation of rural China, where it's not clear who owns what, possession is 90% of the law, and blow-out budgets for ill-considered projects and squabbling are common.

The burst of articles in May 2019 focused on village debt problems (some of them were warmed-over versions of articles that had appeared 10 years earlier when this topic was discussed on this blog) linked to the rural revitalization initiative. The 2020 "number one document" included a half-dozen references to villages with weak collective economies in its sections about enhancing the role of the communist party in village governance, but there was no mention of debt. This month's articles emphasize creation of cash-generating businesses to strengthen the finances of "villages with weak collective economies" and inspirational examples of villages that had cleared up their debt problems.

One example appearing last week is from Yancheng in central Jiangsu Province where the municipal government reportedly budgeted 58.8 billion yuan to aid 120 villages with weak collective economies.  The strategy calls for municipal leaders to initiate projects that will increase village income by 100,000 yuan. It combines injections of funds from upper levels of government with attraction of investments and contributions from companies and individuals with links to the villages, launch of bigger money-making projects, and better management and accounting. According to the article, Yinle village leaders focused on land transfers, development of new types of farm businesses and agricultural structural adjustment; Runhe village built an agricultural market; and Daqiao village opened a string of standardized factories in the town industrial park.

Four years ago, Farmers Daily claimed that Zhijiang municipality in Hubei Province cleared up 136 million yuan in debt owed by over 190 villages to 37,000 villagers in just a year and a half. Authorities banned new debt, budgeted funds for debt clearance, called for establishing "special funds" for companies and government units to finance construction and public works projects, and converted "village debt to private debt."

Despite having this apparently successful example to draw from, Hubei Province agriculture department officials have been visiting villages with poverty-alleviation programs to learn about their debt problems. They met with villagers to learn about the structure of village debt, the reasons for it, ways of addressing debt problems, and approaches to developing the collective economy. They plan to design a program to address the village debt problem.

Hubei Province officials visit a village to learn about debt problems.