6 - Credit Allocation and Collective Organizational Structures

Summary

THIS chapter shifts the focus from revenue extraction to credit allocation. As in the case of tax policy, township governments also had clear incentives to intervene in the implementation of credit policy. The rapid development of collective firms and their ability to undertake direct and indirect provision of public goods was supported by access to credit from the state banking system. Like revenue extraction, credit allocation for collective enterprises functioned as part of the larger collective organizational structure.This political backing allowed collectives in areas such as Wuxi and Songjiang to take on high levels of debt relative to equity, and it contributed to softness in the budget constraints of many collective firms. By contrast, private firms were not deeply embedded in this collective structure and were largely shut out of the state banking system through the early to mid-1990s.

Local institutional arrangements involving credit allocation had implications for the ability of the central state to realize its goals at the local level. Among the goals of financial reform in China have been for the central state to shift from direct, administrative means to indirect, economic means of controlling the banking system and for banks to enjoy greater autonomy in decisions regarding the allocation of credit. Yet these goals do not translate simply into a reduction of the state's role.