China's New Social Policy: Initiatives For A Harmonious Society 9789814277747, 9789814277730

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CHINA’S NEW SOCIAL POLICY Initiatives for a Harmonious Society

Series on Contemporary China

(ISSN: 1793-0847)

Series Editors: Joseph Fewsmith (Boston University) Zheng Yongnian (East Asian Institute, National University of Singapore) Published* Vol. 7

De Facto Federalism in China: Reforms and Dynamics of Central-Local Relations by Zheng Yongnian

Vol. 8

China’s Elite Politics: Political Transition and Power Balancing by Bo Zhiyue

Vol. 9

Economic Reform and Cross-Strait Relations: Taiwan and China in the WTO edited by Julian Chang & Steven M Goldstein

Vol. 10 Discontented Miracle: Growth, Conflict, and Institutional Adaptations in China edited by Dali L Yang Vol. 11 China’s Surging Economy: Adjusting for More Balanced Development edited by John Wong & Wei Liu Vol. 12 Tobacco Control Policy Analysis in China: Economics and Health edited by Teh-Wei Hu Vol. 13 China's Science and Technology Sector and the Forces of Globalisation edited by Elspeth Thomson & Jon Sigurdson Vol. 14 Migration and Social Protection in China edited by Ingrid Nielsen & Russell Smyth Vol. 15 China’s Reforms at 30: Challenges and Prospects edited by Dali L Yang & Litao Zhao Vol. 16 Political Booms: Local Money and Power in Taiwan, East China, Thailand and the Philippines by Lynn T White Vol. 17 Politics of China’s Environmental Protection: Problems and Progress by Chen Gang Vol. 18 Oil in China: From Self-Reliance to Internationalization by Lim Tai Wei Vol. 20 China’s New Social Policy: Initiatives for a Harmonious Society edited by Zhao Litao & Lim Tin Seng

*To view the complete list of the published volumes in the series, please visit: http://www.worldscibooks.com/series/scc_series.shtml

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Series on Contemporary China – Vol. 20

CHINA’S NEW SOCIAL POLICY Initiatives for a Harmonious Society edited by

Zhao Litao & Lim Tin Seng East Asian Institute, National University of Singapore, Singapore

World Scientific NEW JERSEY

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LONDON

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SINGAPORE

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BEIJING

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SHANGHAI

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HONG KONG

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TA I P E I

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CHENNAI

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

Series on Contemporary China — Vol. 20 CHINA’S NEW SOCIAL POLICY Initiatives for a Harmonious Society Copyright © 2010 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN-13 978-981-4277-73-0 ISBN-10 981-4277-73-8

Typeset by Stallion Press Email: [email protected]

Printed in Singapore.

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Contents

Acknowledgement

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About the Editors

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About the Contributors Introduction 1.

Economic Reform, Social Policy and Political Transition in China Zheng Yongnian

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Thirty years of reform have helped China to attain spectacular economic achievements. The achievements, however, have also brought many challenges to the current Chinese leadership. How China should overcome these challenges would require careful restructuring of the existing political, economical and social structures in the country. 2.

Towards Central Planning or Regulated Marketization? China Debates on the Direction of New Healthcare Reforms Gu Xin

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China is facing many healthcare problems ranging from high cost to inadequate access. These problems have triggered a great amount of discontent among the Chinese. Fortunately, policymakers in China are trying to solve the problems in the country’s healthcare sector by introducing new measures. However, they must decide whether to base reform policies on the market or through rigid government regulations.

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Direct Provider Subsidies vs Social Health Insurance: A Compromise Proposal Åke Blomqvist and Qian Jiwei

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With reduced government subsidies to health care providers, the out-ofpocket cost of health care has risen very rapidly in China, as providers have sought to raise revenue by charging patients for the services they receive. Strengthened social insurance programs have not fully protected patients against rising costs, and some policy-makers have advocated a return to a more highly subsidized system. An important question for China is whether it is possible to preserve some of the incentives inherent in a decentralized, market-based health services production system even if it relies more heavily on government subsidies than the current one. 4.

China’s Higher Education: Growth and Problems Zhao Litao and Sheng Sixin

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China’s higher education has expanded rapidly since the late 1990s. The decision was made by the central government, but the expansion was largely driven by non-government resources. It is truly remarkable that such a rapid expansion has occurred at a time when the share of government contribution to higher education is on the decline. This chapter describes the growth of tertiary student enrolment, the changing pattern of financing, and the problems associated with the pace of expansion and the mechanisms of financing. 5.

China’s New Public Housing Policy: The Case of Xiamen Liang Ruobing

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It was in the 1980s when economic reforms started in the urban areas that China began to reform its public housing system. By the end of 1990s, the previous housing system was replaced by a market-based one. However, this reform resulted in one serious problem for the central government which is to provide affordable housing to the lower-income families. In order to prevent the housing problem from spiralling out of control, the central government began to experiment with a new housing directive in

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Xiamen. The directive aims to increase the supply of affordable public housing to the population, including low-rental housing. 6.

Land Market Development in China’s Central-Local Relations Su Fubing

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China’s emerging land market has improved economic efficiency and facilitated the country’s goal of modernization. Local governments’ heavy meddling in the market, however, have been criticized by both the central government and the society. Moreover, excessive land acquisitions by local governments have “robbed” millions of farmers of their land. Addressing this problem, however, is a difficult task for the government especially over the decision to introduce more regulations or to rely on the market. 7.

A Long Way to Go Green: Rethinking China’s Environmental Policy, Laws and Governance Chen Gang

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China’s phenomenal growth has imposed huge pressure on the country’s environment and scant resources. Water and air pollution, together with desertification and other environmental degradation, are now so severe that they not only threaten the sustainable development of the economy, the people’s health and lifestyle, but also pose an acute political challenge to the governance of the Chinese Communist Party (CCP). 8.

China’s Looming Water Crisis: Is Beijing Struggling to Overcome It? Yang Mu and Teng Siow Song

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China is currently facing many socio-economic problems and one of them is water shortage. This problem is getting very common in the northern parts of China where an unusually prolonged period of drought is affecting the region’s water supply for irrigation and consumption. This is most peculiar as the southern part of the country is frequently battered by serious floods. Nonetheless, the drought in northern China has greatly

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reduced the water level of major rivers. China seeks to address its water shortage problem through various measures undertaken by the Hu-Wen and introducing large-scale investment water projects across the country. 9. The Tainted Milk Formula Incident: Another Hard Lesson for China Zhao Litao and Lim Tin Seng

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The so-called Sanlu milk formula incident was an undesirable event for Beijing particularly under the glare of the international media less than a month after it highly successful Olympics games. Not only were six children killed and more than 290,000 children taken ill in China, it also triggered a global food scare on the safety of Chinese food exports. The incident highlighted the harsh reality of the country existing political and administrative structures being outpaced by its economic development. 10. A Pivot for Change: The Potential Role of the Haigui in Addressing China’s Social Problems Yang Mu and Tan Soon Heng

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China’s miraculous economic growth has created many social challenges in society. In order to meet these challenges, changes to the traditional societal structure is needed. Judging from their historical contribution to China’s development, Haigui or overseas returnees could provide the impetus for inducing the necessary changes. Index

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Acknowledgement

The publication of this volume has received considerable help from several individuals. Professor John WONG, the Research Director of East Asian Institute (EAI), National University of Singapore, was a key person for the production of this volume as he delegated the editing task to us and offered helpful comments on the policy papers that this volume is based. Professor ZHENG Yongnian, Director of EAI, also extended a helping hand by providing invaluable insights on the scholarly presentation of this volume and composing the opening chapter. We would also like to extend our gratitude to Jessica LOON, Senior Research Officer at EAI, for doing a timely and conscientious job in copy-editing this volume. Finally, we would like to thank the editors and other supporting staff from World Scientific for their help and assistance which make the timely publication of this volume.

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About the Editors

ZHAO Litao is research fellow at the East Asian Institute at the National University of Singapore. He obtained his B.A. and M.A. in Sociology from Beijing University and Ph.D in Sociology from Stanford University. His research interests include social stratification and mobility, sociology of education, organizational analysis, and China’s social policy. His research has appeared or is forthcoming in China Quarterly, Research in Social Stratification and Mobility, International Journal of Educational Development, Social Sciences in China, Built Environment, China: An International Journal, and Frontiers of Education in China. He is the author of Paths to Private Entrepreneurship: Markets and Mobility in Rural China (VDM Verlag, 2008) and a co-editor of China’s Reforms at 30: Challenges and Prospects (World Scientific, 2008). LIM Tin Seng is research officer at the East Asian Institute at the National University of Singapore. He received his M.A. in History from the National University of Singapore. His research focuses on the social effects of China’s development, the regional impact of China’s economic development and China’s foreign relations with developing countries. He is the co-editor of Harmony and Development: ASEAN-China Relations (World Scientific, 2007).

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About the Contributors

Åke BLOMQVIST received his undergraduate education in Sweden and his PhD in Economics from Princeton in 1971. In 2002 he moved from the University of Western Ontario in Canada to the National University of Singapore where he was the Head of the Economics Department from 2002 to 2006. He has taught and conducted research on development economics and, more recently, health economics, in several countries in Europe, Africa, and Asia. His work in the latter area includes many articles in leading field journals (Journal of Health Economics, Journal of Public Economics) as well as monographs and book chapters on health policy in Canada and, more recently, China. In 2009 he joined the newly founded China Centre for Human Capital and Labour Market Research (CHLR) at the Central University of Finance and Economics in Beijing. CHEN Gang is now research fellow at the East Asian Institute, National University of Singapore. He studied international relations and obtained his Ph.D. degree at the China Foreign Affairs University. He is the author of The Kyoto Protocol and International Cooperation against Climate Change (Beijing: Xinhua Press, 2008). His research papers have appeared in refereed journals such as The Chinese Journal of International Politics, The Journal of East Asian Affairs, American Studies Quarterly, Journal of China Foreign Affairs University and the International Forum. His research interests include China’s domestic politics and foreign policy, environmental governance, international relations and transnational cooperation against climate change.

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GU Xin is professor at the School of Government, Peking University where he teaches comparative social policy. He graduated from Peking University, and obtained his Ph.D degree from Leiden University, the Netherlands. Formerly a research fellow at the East Asian Institute, NUS, he has published widely on China’s social and political affairs in Chinese and English. LIANG Ruobing completed his doctoral research on the service industry at the School of Economics, Peking University. He has also researched on public economics, urban economics and public policies. Formerly a research associate at the EAI and a post-doctoral fellow at the Center of China’s Transnational Relations, Division of Social Science, Hong Kong University of Science and Technology, he is now an associate professor at the Department of Public Finance, School of Economics, Xiamen University. QIAN Jiwei is a Ph.D candidate in economics at the National University of Singapore. He received his B.S. in Computer Science from Fudan University, Shanghai and a M.Sc. in Development Economics from the School of Oriental and Africa Studies, University of London. His research interests include health economics, political economy and development economics. SHENG Sixin obtained his Bachelor of Management from Jimei University of China in 2004, and attained his Master degree in Social Sciences (Sociology) from the National University of Singapore in 2007. With a strong belief in the explanatory power of interdisciplinary approaches, his main research interest focuses on organisation studies covering emotions at work, corporate governance and organisational decision-making. Currently he is a research officer at East Asian Institute of NUS. He has done policy studies on various social issues in China, including higher education, healthcare, gambling, and social stratification. His publications include one edited book, three translated articles and one translated book, five book chapters in English and Chinese, and a dozen Chinese or English journal articles. His commentaries have also appeared on Lianhe Zaobao.

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SU Fubing is assistant professor of Political Science at Vassar College. After getting his B.A. and M.A. from Nankai University, he studied at the University of Chicago and received a Ph.D in Political Science. His research focuses on political economic issues in contemporary China, such as village elections, rural public finance, social regulation, land development, and central-local relations. He has published in Chinese Economic Review, Journal of Contemporary China, Asian Perspective, Gender and Politics, as well as chapters in edited volumes. TAN Soon Heng received his Master of Social Science in Applied Sociology from the National University of Singapore. His main research interests include globalization, sociological theories, mass media, politics and philosophy. He has contributed chapters to China’s Surging Economy: Adjusting for More Balanced Development (World Scientific, 2007) and Interpreting China’s Development (World Scientific, 2007). TENG Siow Song received his Master in Economics from the University of Sydney and his research focuses are on trade and economics-related issues on ASEAN and China. Prior to joining academia, he worked in the private sector and was based in China and Vietnam and is currently a part-time PhD candidate at the International Graduate School of Business, University of South Australia. YANG Mu is senior research fellow and coordinator of China’s Cooperation Programme in East Asian Institute, National University of Singapore. He previously served as chief executive officer and executive vice president of several companies in Hong Kong and China. In the 1980s, he was deputy director of the Institute of Industrial Economics, CASS and had participated in China’s central government policy formulation in industrial development, the reform of State-Owned Enterprises, etc. He is the author of China’s first academic book, (Industrial Policy Research). In 1988, he was awarded Sun Ye Fang’s Economic Prize for his article on the People’s Daily ( ). His acclaimed 1994 paper on in the China Journal of Social Sciences is still widely quoted today. Presently, his research focuses on the global financial crisis, China’s macroeconomic policy, China’s

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industrial development and Chinese companies’ merger and acquisitions deals abroad. ZHENG Yongnian received his B.A. and M.A. degrees from Beijing University, and his Ph.D at Princeton University. He was a recipient of the Social Science Research Council–MacArthur Foundation Fellowship (1995–1997) and John D. and Catherine T. MacArthur Foundation Fellowship (2003–2004). Currently, he is director of East Asian Institute, National University of Singapore. He is also editor of a series on Contemporary China (World Scientific Publishing) and editor of China Policy Series (Routledge). He is also the co-editor of China: An International Journal. He has studied both China’s transformation and its external relations. His papers have appeared in journals such as Comparative Political Studies, Political Science Quarterly, Third World Quarterly and China Quarterly. He is the author of 13 books, including Technological Empowerment, De Facto Federalism in China, Discovering Chinese Nationalism in China and Globalization and State Transformation in China, and co-editor of 11 books on China’s politics and society including the latest volume, China and the New International Order (2008).

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Introduction Zhao Litao and Lim Tin Seng

By the turn of the 21st century, China is a drastically different country from the late 1970s. Three decades of economic reform have substantially raised the living standards of the Chinese people. Chinese society, however, is even more stratified than ever. The rising new rich have attracted much international attention for their luxurious lifestyle. At the same time, a huge number of people are unable to make a decent living and increasingly vulnerable to all kinds of income shocks and health problems. This divergence is, in part, the result of China’s reform strategy which sought to achieve breakneck growth at the cost of social development. Under Deng Xiaoping and Jiang Zemin, the central government’s key concern was to lower welfare expenses of the government, reduce welfare commitments of State-Owned Enterprises (SOEs), and marketise or privatise public services. Within the government hierarchy, the central government asked local governments to finance public services. As a result, while China was changing from one of the most equal countries in the world to one of the highly unequal, those left behind were not properly protected. There was increasing public frustration and anger from vulnerable groups of the rural poor, migrant workers and laid-off workers. Even among those who were economically better off, there were widespread complaints about the soaring costs of education, housing and health care. When Hu Jintao came to power in late 2002, he decided to shift the focus in an effort to garner social support and consolidate political power. In many ways his pro-people approach is in sharp contrast with Deng’s

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call for getting rich first and Jiang’s proposal to co-opt private entrepreneurs. Hu successfully used the Severe Acute Respiratory Syndrome (SARS) breakout in 2003 to make a point that gross domestic product (GDP) growth per se does not solve all the problems. While economic development remains important, there has to be a shift from a singleminded pursuit of GDP growth to a more balanced development. Hu’s scientific outlook on development, written into the Party Constitution at the end of his first term in 2007, is a guideline calling for less income inequality, less regional disparity, more social justice, better protection of the disadvantaged, higher energy efficiency and more environmentfriendly development. In an indirect way, the Hu–Wen administration acknowledges the social reality that in a generation’s time China has gone from not having enough inequality to having excessive inequality. In the new millennium, efforts have been made to narrow the ruralurban gap and reduce the regional disparities. From 2003, the central government had begun to reduce the agricultural tax to the point that it was entirely phased out in 2006. The Eleventh Five-Year Programme (2006–2010) proposed to build a new socialist countryside, pledging increasing financial support to the rural areas. In October 2008, nearly 30 decades after China began its market-oriented reform, the Chinese Communist Party Central Committee redefined development priority in favour of rural development. In an effort to balance the development between rural and urban areas, China will expand policy support for agriculture, establish a modern rural financial network and spend more on public services in the countryside. The focus is on rural education, health care, social safety net and local infrastructure. Rural China is expected to become another engine of economic growth, and government expenditures will increase substantially starting from 2009. To reduce the regional disparities, China has introduced a series of regional developmental programmes in recent years. The 2000 western development initiative was followed by a programme to revive the northeast — China’s rust belt region with a high concentration of failed SOEs — in 2003, and another programme to develop the central region in 2004. The developmental gap between the rural and urban areas and between the coastal and inland provinces remains large as of the printing of this book. As there is a time lag for any major policy to take effect, it

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remains to be seen whether the Hu–Wen leadership will begin to see the payoff of its policy initiatives in the second term (2007–2012). Hu Jintao’s call for a harmonious society has led to more policy attention on economically and socially disadvantaged groups. Not only laid-off SOE workers, but other types of urban and rural poor are also included in the expanded system of public assistance. The Minimum Standard of Living Scheme has been extended to the countryside to form a nationwide social safety net, and the level of subsidy has been raised to provide better protection against poverty. Other than the urban and rural poor, rural migrant workers have received unprecedented policy attention since Hu and Wen came to power. Efforts have been made to provide vocational training to rural workers and potential migrants, and basic education to migrant children in public-funded primary and secondary schools in cities. Labour bureaus have been asked to conduct regular inspections of wage payments in industries with a high concentration of migrant workers, such as construction, manufacturing and services. As part of the effort to improve the employment environment for migrant workers, the central government has been pushing since 2004 to expand injury insurance to millions of migrant workers in construction, mining and other high-risk sectors. There has also been an extension of various types of insurance schemes from state employees to those working in the non-state sector, and in some cases to the non-working urban population and the rural population. As the problem of population ageing is looming large in China, efforts have been made to expand the pension system to cover workers in the informal sector, including migrant workers. In the countryside, after years of stagnation, a new round of pilot projects was implemented in 2007 in Shandong and some other provinces to expand the pension system. For the first time, local governments at various levels were willing to make contributions to the rural pension system. Much progress has been made to extend healthcare insurance to nonworking urban population and rural residents under different schemes. After having been abandoned for two decades, a rural cooperative medical scheme was re-established in 2003, with 80 percent of contribution from the central government and lower levels of government. Although the

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level of government subsidy was low — initially 40 yuan per enrolee, it was increased to 80 yuan in 2006 — the enrolment rate has increased rapidly since 2006. By the end of June 2007, 720 million rural residents had voluntarily participated in the scheme, accounting for 83 percent of the rural population. In the case of basic education, the nine-year compulsory education was made free in 2006 for rural students in the western provinces. In 2007 the policy was extended to rural students in other parts of China. In 2008, free education was extended to urban students all over China. To establish a stable and regularised financing mechanism for rural education, China decided in 2006 to set up an expense guarantee system, with the central government pledging to help rural education in the central and western regions in some categories of expense. For example, for capital spending such as the renovation of school buildings, the central government would share the cost on a 50/50 basis with lower levels of government in the central and western provinces, while leaving it entirely to local governments in the eastern region. The government would provide free textbooks to students from poor families and cover all costs in the central and western regions with the exclusion of the eastern region. While policies are being put in place to build a harmonious society, it is important not to take policy statements at face value. As is well known, law enforcement and policy implementation can be a serious problem in China. For one thing, Hu needed “pro-people” policies to rally public support to consolidate his power in the first term. The purpose of the Hu–Wen new deal was to legitimise their leadership. The implementation was a secondary issue in this regard. For another thing, Hu has to go through the system — the party and government hierarchy — to implement whatever policies formulated at the central level. To a large extent, the system remains in favour of GDP growth. Officials are assessed on their economic performance; local governments also need high growth to create jobs and generate revenue. One large problem is the misalignment of fiscal capacity and financial responsibility of the central and local governments. The 1994 tax reform favoured the central government in terms of revenue sharing. However, the responsibility of funding education, health care and other social services

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remained at the local level. Local governments in poor areas have a much narrower revenue base than their counterparts in the urban areas and the coastal region, leading to large regional disparities in the distribution of financial resources in the areas of education, public health and social security. Many local governments over-stretched their budget to the extent that they had to pay school teachers out of non-education budgets in order to avoid the problem of late or non-payment of salaries to rural teachers. It is quite common to see local governments struggling with unfunded central mandates. The central government has increased responsibility to the poor areas, but this has created its own problems of lack of efficiency and transparency. Financial difficulties at the county and prefecture levels pose a big challenge for the implementation of central policies, particularly those that require local governments’ funding. Thus far the Hu–Wen government has shown no determination to overhaul the misaligned system. There are other problems as well. Some policies should have public participation in the decision-making process. But China’s political system makes local officials less willing to listen to the public. Some public projects, such as affordable housing and low-rental housing, thus become wasteful investment or “image” projects because officials fail to understand the public interest and preference. While the success of any social policy requires public participation, Hu has not made it a priority to hold local officials accountable to local residents. It seems to be clear that Beijing has a long way to go before it can shun its GDP-centred doctrine in favour of the people. However, the onset of the global financial crisis in the third quarter of 2008 has provided a much needed shift on the focus of the Hu–Wen government. Facing a worldwide slowdown in demand, China’s export-oriented economy was badly embattled. For the final quarter of 2008, the Chinese economy registered one of its slowest growths of 6.8 percent. This pulled down the economic growth for the whole of 2008 to 9 percent, ending its five-year double-digit growth. Behind the numbers, the slump was translated into job losses as factories were forced to shut down its production. In January 2009, the government announced that more than 20 million Chinese migrant workers had lost their jobs in the final months of 2008.

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In order to stimulate the economy, the Chinese government revealed a four trillion yuan (US$586 billion) public spending package in November 2008. Although the focus of the package is to induce growth in the economy and to create jobs, the Keynesian approach behind the package is indirectly translated to improving the welfare of the people, something that the Hu–Wen administration has been struggling to achieve so far. In fact, a huge portion of the package will be spent on large-scale social welfare projects such as building affordable housing and environmental protection. Parts of the package will also be channelled to raising rural incomes via land reform and to upgrade infrastructure, particularly roads, railways, airports and the power grid. While these projects created by the stimulus package have the potential to improve the welfare of the people and thus addressing some of the socio-economic problems, it remains to be seen how they will be executed. From a long-term perspective, however, the sustainability of these “pro-people” policies to improve many of the current social policies in China is still dependent on more decisive initiatives by the government. II The Hu–Wen administration has put a great deal of emphasis on more balanced development and better protection of the vulnerable in recent years. Not only have new social policies been introduced, old programmes have also been revised and expanded. It is, therefore, important to keep track of China’s social policy changes. The East Asian Institute (EAI) has been following these changes very closely and has produced a number of high quality policy papers to address them. The papers provide an updated account of a wide range of new social policy initiatives in China that address various socio-economic issues ranging from healthcare and housing to environmental protection and food safety. Selected papers are compiled into the 11 chapters of this book. However, before delving into the insights provided by the papers, it is necessary to understand why it is important for the Hu–Wen administration to address the various socio-economic problems in China. In Chapter 1, Zheng Yongnian provides a concise but comprehensive overview of the evolving focus of the central government. While acknowledging the

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spectacular economic achievements of the 30 years of reform, the chapter also noted the many socio-economic problems that came with it. To address them, the central government has re-oriented its reform direction by focusing more on the society rather than the economy. Indeed, the goal to “build a harmonious society” using the so-called “scientific development” approach to “strike a balance” among previous reform policies is the policy goal of the Hu–Wen administration. Achieving this goal is important as it would set the momentum for China to embark on a political democratisation reform. In Chapter 2, Gu Xin addressed the issue of rising healthcare cost in China. This is brought about by the market-oriented reforms in the country’s healthcare sector in the past two decades. Taking note of the rising discontent among the population over this issue, the central government is in the process of launching a new round of healthcare reforms that will not only try to lower healthcare cost, but also increase the accessibility of healthcare services. However, the introduction of the new reforms has been delayed as the government could not agree on the general framework of the new system. While some advocated regulatory measures to bring down healthcare cost, others want the market-oriented reforms to continue. The chapter suggests that a regulated market-based approach should provide the middle-ground solution that can break the deadlock on both sides. Åke Blomqvist and Qian Jiwei picked up from where Gu Xin had left off by examining in Chapter 3 how the interests of patients can be protected in China’s decentralised, market-based health services system. Similar to the previous chapter, Blomqvist and Jiwei stressed that the cost of healthcare is rising very rapidly in China. Partly, this is caused by the reduction of government subsidies to healthcare providers. As a result, this forces providers to push the extra cost in their services to the patients. In order to address this problem, the authors suggest strengthening social insurance programmes and providing government subsidies to healthcare providers. In Chapter 4, Zhao Litao and Sheng Sixin examined the recent expansion of higher education in China. The authors noted that higher education opportunities are increasing rapidly in China. In fact, the gross enrolment ratio of university students in China increased from 9.1 percent

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in 1997 to over 20 percent in 2007. This expansion is primarily driven by non-government resources. Official statistics identified the three sources of non-government education funds as 1) investments by organisations and individuals running schools; 2) donations and fundraising for running schools; and 3) tuition and miscellaneous fees. Since the 1990s, the contribution of these resources to China’s higher education has increased quite significantly. However, this does not mean that the government is withdrawing its support for education. Instead, it is shifting its focus to the nine-year compulsory education. This is in line with the World Bank’s advice that public educational investment should be focused on primary education and, to some extent, secondary education. In Chapter 5, Liang Ruobing examined the current stage of China’s market-based public housing system and the problems it is creating in society. One of the main problems identified in the chapter is the affordability of public housing. After going through a period of reforms in the 1980s, China’s previous centrally-planned public housing system has been replaced by a market-based one. This resulted in the soaring prices of public houses which gathered speed during the property boom in China after 2000. As lower-income families have smaller disposable income, purchasing public houses became a major problem for them. To prevent the public housing problem from spiralling out of control, the central government began to introduce a new housing directive on an experimental basis in Xiamen. To increase the supply of cheaper public housing, the directive includes using government subsidies to keep housing rental at an affordable rate. Other than public housing, China’s market-based reforms, as illustrated by Su Fubing in Chapter 6, have also caused problems in the acquisition and redistribution of land by local governments. During the planning period, China did not have a land market as all land was considered state property. Ownership of land came in the form of leasing. For instance, in the rural areas, land was distributed to collectives where farmers could lease it for a stipulated period for farming activities. The onset of the economic reform programme in 1979, however, saw the emergence of a land market brought about by industrialisation and urbanisation and the leap in urban land demand for commercial use. Local governments had to turn to rural lands to increase land supply. Very often, this resulted in excessive land

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acquisition from farmers who were not properly compensated for their loss. The central government is aware of the problem but is still trying to craft a balanced resolution that will not hamper the country’s progress towards the market economy and at the same time protect the interests of rural land owners. China’s relentless drive in developing its economy has also caused many environmental problems in the country. In Chapter 7, Chen Gang offered a study on some of the major environmental problems and an overview of the government’s response. In the chapter, he warned that China’s phenomenal growth is imposing huge pressure on the country’s environment and resources. It is also causing high levels of water and air pollution and other environment degradation. The author stressed that if the government did not address these problems well, they could, in the long run, affect the sustainability of China’s growth and the health and lifestyle of the people. Apparently, the government is not turning a blind eye to the country’s deteriorating environment. Apart from taking decisive steps to protect the environment as laid out in the Eleventh Five-Year Programme, Beijing and local governments are working to devise an environment-oriented method of measuring the latter’s economic performance. In Chapter 8, Yang Mu and Teng Siow Song also focused on the environment by studying China’s water shortage problem. While the authors noted that water shortage is very common in the northern parts of the country because of prolonged periods of drought, they also noticed the peculiar development in the southern provinces even though they are constantly embattled with high levels of rainfall and devastating floods. The authors explained that this is due to the country’s ineffective water distribution system. Over the years, despite facing an increase in water demand from its huge population and growing number of factories, China has failed to take decisive steps to improve its water system. In fact, water supply in China is growing at only a mere 0.05 percent annually. Therefore, the authors stressed that it is crucial for the government to start improving the country’s water system as water shortage is likely to become even more severe in the coming years due to water pollution and wastage. Addressing China’s socio-economic problems is not a piecemeal effort. It requires keeping existing political and administrative structures in pace with the challenges brought by the country’s economic development.

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Zhao Litao and Lim Tin Seng highlighted this point in Chapter 9 with special emphasis on the Sanlu milk formula incident that occurred less than one month after the Beijing Olympics in August 2008. More than 290,000 babies fell ill after consuming melamine-tainted milk formula produced by a respectable China milk company. As the tragedy unfolded, the Chinese authorities also discovered traces of melamine in other locally-produced dairy products such as biscuits, yoghurts and candies, some of which had been exported overseas. This led health authorities worldwide to ban the sale and import of Chinese dairy products. The incident became an international embarrassment and wiped out the euphoria in the wake of China’s highly successful Olympic Games. Months of investigations revealed that Chinese officials at the local level were aware of the incident but chose to cover it up. The milk companies involved managed to bypass inspections due to their reputation. All in all, the incident illustrated that there is still a great level of inefficiency in the local government structure as well as existing health controls. In Chapter 10, Yang Mu and Tan Soon Heng suggested that overseas returnees or Haigui could be “agents” of change to help address the various socio-economic issues the country is facing. Having received their education overseas, Haigui usually bring back experiences that could prove to be useful for the country’s modernisation process. As it was, they had a big part to play in China’s development in Science and Technology. They also brought in political ideology such as Marxism and helped established the country’s education system. During the Cultural Revolution, however, Haigui’s contribution to China’s development came to a halt as China shut itself from the outside world. After China re-opened its doors in 1979, these overseas returnees were among the first to be restored. Today, Haigui continue to play an important role in the country’s development particularly in Science and Technology and other high-tech sectors. There are signs that the central government is bringing in these overseas-trained talents to renew its leadership and help it prepare to address the various socio-economic issues the country is facing.

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CHAPTER 1

Economic Reform, Social Policy and Political Transition in China Zheng Yongnian

China has experienced 30 years of reform and opening up of its economy. In the period between 1978 and 2008, China has achieved spectacular economic achievements. Its economy grew at an average rate of more than nine percent reaching over US$3.2 trillion in 2007, ranking it as the world’s third largest economy after the United States and Japan. Similarly, its per capita GDP reached US$2,000 in 2007, catching up with the level of mid-income countries. China’s economic achievements over the past three decades have ushered in conditions for the development of a more open society. Indeed, China has the world’s largest telephone market after surpassing the United States in 2003. It also has the world’s largest “Web population” as its registered Internet users exceeded 220 million in 2008. However, the development of a more open society has led to massive socio-economic transformation which presented many challenges for the Chinese leadership to address. In the early 1990s, then-ruling communist parties in Russia and Eastern Europe failed to survive reforms. In contrast, China has retained its authoritarian political system despite the liberalisation of its economy and society. Now, will the Chinese political system be able to address the challenges posed by the rapid socio-economic transformation? What has the Chinese Communist Party (the only ruling party) done so far to survive the ongoing transformation? Will China become democratic? What form of democracy will China be able to develop? These are key questions posed by many in the West. Many people believe that China is responsible for the uncertainties faced by the rest of the world. For some of them,

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the future of India, Russia, or Indonesia can be charted with more certainty because these countries have established democratic political frameworks. All major transformations bring about uncertainties. China’s current transformation is unprecedented in the history of modern states, so its associated uncertainties are understandable. The question is whether China is able to overcome all these uncertainties arising from its socioeconomic transformation. Political transition is the key. In the scholarly community, political transition is usually understood as transformation from authoritarianism towards an uncertain “something else”. What is this “something else”? This is debatable. However, most people would agree that a meaningful political transition in China must involve a transition from the existing authoritarian structure to one with a higher degree of political democracy. After three decades of economic reforms, it is unlikely for China to return to either Maoist or other types of totalitarianism. Will China become democratic? I would argue that democratisation is increasingly becoming inevitable in China. For the Chinese leadership, democratisation is only one of the many goals it has to pursue. China’s political transition at this stage takes second place to socio-economic development and state-building. To date, China is still in a process of becoming a modern state. Without developing a set of modern state institutions, democratisation will not help China resolve all the uncertainties resulting from its rapid socio-economic transformation. However, its rapid socio-economic transformation is also generating increasing momentum for political transformation in China. In what way will political democratisation take place in China? Theoretically, there are many paths towards democracy. But empirically, China seems to be following the path that takes the state through economic reforms first, followed by social reforms, and eventually political reforms. While the focus of the reform during the eras of Deng Xiaoping and Jiang Zemin was overwhelmingly on the economic aspect, the current government led by Hu Jintao and Wen Jiabao has made social reforms its highest priority since the early 2000s. Of course, I am not saying that over the past three decades, China has neglected to undertake measures of political reform necessary for its economic or social reforms. Nevertheless, it is reasonable to argue that so far,

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political reform has played a secondary role to either economic reforms, or social reforms. I disagree with the popular notion that China’s reform has been characterised by “economic reform without political reform”. Like Russia and other Eastern European countries, China has also experienced simultaneous economic and political reforms. The difference is that China’s reform has been gradual and in different stages. In the first stage, China’s leadership placed an overwhelming emphasis on economic reforms. In the ongoing second stage, the current emphasis is on social reforms. Although some political reforms have been carried out, they are meant to support either economic reforms or social reforms. China has yet to enter a third stage in which political reform or democratisation is the central theme. Economic Reforms China’s economic reform under Deng Xiaoping and Jiang Zemin fits the neo-liberal paradigm, which emphasises efficiency, privatisation, property rights, and so on. China differs from other former communist states in that it has adopted a gradualist approach while others have taken a “big-bang” approach. China’s economic reforms can be further subdivided into two different phases. The first phase (from the late 1970s to the middle 1990s) was characterised by intergovernmental decentralisation. During this period, economic decision-making authority went to the local governments. Local governments became de facto owners of state enterprises. They were highly interventionist and became what the scholarly community termed as local “developmental states”. Under this intergovernmental decentralisation, the performance of local government officials was linked to local economic growth. Although intergovernmental decentralisation was successful in promoting local economic growth, it weakened the central government’s capacity to macro-manage the country’s economy. Around the mid-1990s, the Chinese leadership began to engage a second wave of economic reforms through what I call “selective recentralisation”. “Selective recentralisation” involved the establishment of key state institutions that

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allowed the central government to play a more active role in managing the national economy without undermining market principles. “Selective recentralisation” was centred on two major reforms, i.e., taxation reforms and central banking system reforms. In 1994, the central government implemented a new taxation system, i.e., the tax-division system, otherwise known as the federal style taxation system. In 1998, the central government began to reform China’s financial system: all provincial branches of the central bank were closed and nine cross-provincial or regional branches established. These two reforms have greatly strengthened central economic power. After the establishment of the macro-management system, the Chinese government in recent years has shifted its emphasis to financial reforms. The government has speeded up the opening of the country’s financial sector to foreign investors. China undoubtedly faces enormous problems in deepening its economic reform. However, as long as there is a strong will on the part of the leadership as well as mounting pressure from both inside and outside the country, there is good reason to believe that the country will be able to complete its unfinished reforms. Social Reforms While China’s economic reform stresses efficiency, its social reform focuses on social justice. Since the Hu Jintao–Wen Jiabao leadership came into power in 2002, China’s reform focus has turned towards social issues. In China’s context, social reforms are responses to the negative social consequences resulting from the country’s economic boom. In the 1980s, the Chinese leadership operated under Deng Xiaoping’s principle of “get rich first”. The state of the poor became a secondary priority on the leadership’s agenda. Then under Jiang Zemin in the 1990s, Deng’s directives were carried to the extreme. It was under Jiang Zemin that GDP growth became the most important performance indicator for local government officials. Private properties were granted constitutional and legal protection. Capitalists or what China calls “private entrepreneurs” were invited to the CCP party membership. All these measures indeed promoted economic growth. However, after more than two decades of ruthless, single-minded pursuit of GDP growth,

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the Chinese leadership is acknowledging the need to take a step back from the existing mode of economic development. Undesirable consequences, such as widening income disparities and environmental degradation, are today affecting not only economic growth itself, but also social stability. Hu Jintao therefore began to turn the wheels of China’s economic growth in a different direction when he first took over the helm. Evidence of this change is the new policy goal of “building a harmonious society” (hexie shehui). The new approach of “scientific development” is to “strike a balance” among Beijing’s various policies. More specifically, it stresses the importance of social justice in China’s pursuit of long-term development in terms of a more even distribution of economic, legal and political rights between different regions and various social groups. The Chinese leadership is now giving priority to social reforms in areas including social welfare, medical care, education, public transportation and environmental protection. The government is trying to transform itself from an agent of economic development to a provider of public services. Social reforms also include measures to provide more institutionalised mechanisms for different social groups to enjoy wider participation in the political and economic processes, as well as ways to allow them to share the fruits of China’s growth. Following the call to build a “harmonious society”, several new plans are being discussed. One plan is to expand public feedback mechanisms. China currently does not have in place extensive, open, transparent and institutionalised feedback mechanisms (e.g., direct elections) that allow different social groups — especially less privileged ones such as farmers, rural workers and urban workers — to articulate and aggregate their interests. As social grievances run high following the leadership’s long period of negligence, the task of expanding public feedback mechanisms becomes imminent. Similar to the policy of making administrative procedures more transparent, public feedback channels are set to undergo changes. More social participation has been encouraged through the expansion of existing democratic institutions at the local level. Relevant policies aim to improve accountability and build better governance. While not quite as ideal as more institutionalised and nation-wide feedback methods,

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the expansion of local participation will help to temporarily address current failings by translating more public opinion into proper political action. Another major development is the new pledge to rein in the activities of “special interest groups” (teshu liyi jituan). These “special interest groups” mainly refer to state-owned enterprises (SOEs) that had been formed under the strategy of “zhuada fangxiao” or “nurturing the big SOEs into giant conglomerates while letting the small ones face the forces of the market”, implemented during Zhu Rongji’s administration from 1998 to 2002. Over the years, many of these enterprises have outgrown their original scope and size. Owing to their economic clout and the lack of effective corporate governance, these enterprises have ended up monopolising the Chinese economy. Within their own closed market settings, these conglomerates operate according to their own rules, which are hardly in line with market principles. Price-fixing is a major concern, affecting social and economic equity both at the consumers’ as well as the producers’ ends. Prices are often inflated to feed the needs of the employees of these monopolies; while a graduate in a major coastal city earns an average of about 2,000 RMB per month, a highway toll collector working for a monopoly earns as much as 8,000 RMB. This adds to the disparities that China faces today. A new Anti-Monopoly Law, which was passed on 30 August 2007 and took effect from 1 August 2008, was designed to curb the monopolistic actions of SOEs and to promote fair competition in the market. Corruption, cronyism, and profiteering activities have greatly exposed the need for more monitoring and accountability. Corporate social responsibilities need to be enforced, and a sense of “fairness” instilled. To take a wider view, these activities provide the context to the ongoing debate on developing methods of “good governance”, which the Chinese leadership is keenly in favour of. As ideological dogma becomes less convincing, the sustainability of the CCP regime depends increasingly on an institutionalised, and thus reliable, governance structure, legitimated in one way or another. To a great degree, social reforms also mean empowering the society. Such reforms help to build up China’s social infrastructures that are necessary for future political changes. Take the development of non-governmental organisations (NGOs) in China, for example. The number of Chinese NGOs

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has increased steadily over the years though the development of NGOs in different sectors has been uneven. In the economic sphere, the Chinese government tries to reduce its direct management role by establishing intermediary organisations such as trade associations and chambers of commerce to perform sectoral coordination and regulatory functions. In the social welfare sphere, the government wants to foster NGOs to which it can offload some burden as a public service provider. Social development-wise, the government wants NGOs to mobilise societal resources to supplement its own spending. Of course, these NGOs will have to toe the line of the government, which is that of playing the role of a helping, albeit hardly independent, hand. Due to the lack of autonomy, the political influences of China’s NGOs vary widely among themselves, and across different areas. Some NGOs are more powerful than others. Most commercial organisations are extremely powerful at influencing the government’s policy-making process. It is common to find business people sitting in the People’s Congress and the Chinese People’s Political Consultative Conference at all levels of the government. The People’s Congress and Chinese People’s Consultative Conference are China’s two major representative bodies. However, workers and farmers are still not allowed to organise themselves, and they are also under-represented in the party and the government. Meanwhile, NGOs are encouraged to play greater roles in areas such as poverty reduction, charity and environmental issues, but they are virtually absent in others which are regarded as politically sensitive such as religious issues, ethnicity and human rights. Again, China is at an early stage of economic development whereby development is still given higher priority than political participation. Social groups might be able to play a more important role with further economic progress. For example, the Chinese government’s attitude towards workers’ rights is changing. Today, even the government-dominated All-China Federation of Trade Union has recognised the need to take a more activist approach to workers’ rights. As China now faces a rising tide of labour disputes, which could potentially destabilise the Chinese society and undermine the political legitimacy of the CCP, there is a need for employers to better understand and honour their obligations under China’s labour laws. Hence, at its annual congress in 2003, the federation

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made a direct appeal to multinational retail corporation Wal-Mart Stores to allow its workers to establish trade unions. Today, more and more foreign firms have established trade unions.

What Type of Democracy is China Developing Into? While the Chinese leadership continues to give the highest priority to social reforms, it continues to exercise tight political control. However, the question of democratisation cannot be avoided. China is now at a critical stage in terms of political development. Rapid socio-economic transformation has also brought about a growing middle class, including different social groups, such as “red capitalists”, private entrepreneurs and professionals. These groups have played an increasingly significant role in promoting and sustaining China’s economic development. Moreover, with their rapidly rising wealth, they want to have their voices heard. This translates into increasingly strong demands for political participation. As mentioned earlier, to accommodate these demands, the CCP leadership under Jiang Zemin made great efforts to justify the ownership of private property. The government made a constitutional amendment in 1999 to provide, for the first time in the history of the People’s Republic, constitutional protection for the private economy. Despite considerable controversies, the government also passed the Property Rights Bill in March 2007. More importantly, because of the growing middle class, the Party leadership has to broaden its social base. The leadership recognises that without the political support of newly rising social classes, the CCP would not be able to survive new socio-economic conditions. While justifying capitalism, the Jiang Zemin leadership also raised a new concept of “three represents” in 2001, implying that the CCP has to represent different social and economic interests. Though the CCP traditionally represented only the interests of workers, peasants, soldiers and government officials, it now has also to represent the interests of various newly rising social groups. The Party leadership thus allows and encourages private entrepreneurs to join the CCP. The CCP has been undergoing a drastic transformation from being peasantry and labour-based to being a “catch-all” party. Party members

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now come from increasingly diverse social and economic backgrounds. Over the past three decades, the percentage of workers, peasants and soldiers in the CCP has dropped significantly. From 1978 to 2006, the proportion of workers declined from 18.7 percent to 11.1 percent, peasants from 46.9 percent to 31.7 percent, and soldiers from 6.9 percent to 2.2 percent. In the meantime, proportions of party members from other social backgrounds increased dramatically. White-collar party members (including management personnel and engineers) took 21.4 percent, and party members of private business background took 5.1 percent. When new social groups became pro-active politically, traditional social groups reacted strongly. Workers, peasants and other social groups which have all along been represented by the CCP felt they were increasingly marginalised in party politics and their interests undermined by changes made by the Party leadership. Furthermore, while the Chinese economy has grown rapidly in the past three decades, the corresponding socioeconomic transformation has resulted in enormous problems. Chinese liberals among retired party cadres, government officials, university professors and private entrepreneurs are beginning to demand for radical political reforms. They argue that all the difficulties encountered by China in deepening its reform had been due to the lack of political reform. For them, more globalisation, privatisation, and democratisation would solve China’s problems. Radical advocates such as the former vice president of the People’s University, Xie Tao, even urged the Party leadership to give up the communist rule and to adopt the European model of democratic socialism. On the other hand, the rise of the Left is also evident. The old Left, which consists of retired old revolutionaries and ideologues, began to appeal to Maoist social justice. The new Left, which is strong among young intellectuals and students, is calling for social justice through income redistribution on the part of the state. Maoism is becoming increasingly appealing to disadvantaged social groups such as urban workers, migrant rural workers and farmers. China is now experiencing a new wave of social protests, with about 70,000 to 100,000 social protests (or qunti shijian in Chinese) every year. If the new Left and disgruntled social groups team up, they will wield formidable and politically significant power.

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Faced with increasing social pressures for political reform, the CCP leadership has begun to design a feasible route for the country’s democratisation. The Party’s national congress last year presented a road map for political reform and democracy. Integrating different practices, the plan comprises three main components. The first is what can be called social democracy or what the Party calls “people’s democracy” and “grassroots democracy”. The Party appears ready to pursue this line of democratic building by expanding the political participation of citizens mainly through the People’s Congress system, and by expanding the autonomy and self-governance of civil society at the grassroots level. Political participation of citizens will be expanded in local electoral and decision-making processes, governance, as well as supervision of local affairs. At present, each urban resident is entitled to four times as much representation as a resident in rural areas. For the first time, the leadership has proposed that both urban and rural areas gradually adopt the same ratio of deputies to the represented population in electing deputies to the people’s congresses so as to elevate the political status of farmers. This proposal, if realised, will significantly affect the tone of Chinese politics. In particular, the most populous provinces such as Henan, Shandong and Sichuan will be able to send even larger delegations to the National People’s Congress than they are entitled to presently. It is worth noting that during the National People’s Congress in March this year, the government proposed to allow migrant workers elect representatives to the NPC in the future. The second area of political reform is in government reform, in terms of building a transparent, efficient, accountable, responsive, law-abiding and service-oriented government. The Party also shows a clear interest in building a competent judicial system. Such reforms, however, are complex and will take years to accomplish. The third area of political reform is in intra-party democracy, which would allow for mechanisms that appoint capable members to the right job and prevent power abuses by party leaders at various levels of the Party-state structure. The Party is interested in introducing a form of voting system in two areas. The first is in appointments to major positions. Besides encouraging

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more input from the public as well as from party members, the party is introducing a party committee vote to confirm candidates in their appointments. The second is that major policies are to be subjected to a party committee vote as well. Hu also vowed to gradually extend the adoption of direct elections to the appointment of leading members in Party units at the grassroots level, and explore various ways to expand intra-party democracy at the local level. In general, the Party is seeking institutional mechanisms of transparency, internal pluralism and accountability. Of course, one has to wait and see whether this plan will be implemented. China is democratising, but very slowly. A mixed regime is slowly materialising. The ruling communist party is accommodating newly emerging social and political forces. To a degree, the regime is becoming more transparent and accountable. The maturing social and economic infrastructure is laying the foundation for China’s democratisation. New social forces are pushing for political changes, with economic wealth and a vibrant civil society providing a sound socioeconomic infrastructure for democratic politics to occur. However, one should not have high expectations. While democracy is becoming inevitable, the current authoritarian political structure will not simply disappear, at least not in the foreseeable future.

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CHAPTER 2

Towards Central Planning or Regulated Marketization? China Debates on the Direction of New Healthcare Reforms Gu Xin

In recent years, high healthcare cost has emerged as one of the main social issues in China as the Chinese are finding it increasingly difficult to pay for their healthcare expenses as well as accessing healthcare services. All these have triggered discontent among the Chinese population. As a result, the Chinese government is planning to launch a new round of healthcare reforms. The Chinese government has been trying to come out with a new healthcare system since late 2006.1 However, disagreement among key policymakers on the general framework of the new healthcare system is causing huge delay in the release of a revised healthcare system. For instance, some of the policymakers, particularly those from the Ministry of Health, favour the idea of restoring the healthcare system adopted during the planning period. They advocated centralising public healthcare services with the cost being determined by the government. Although this approach can bring down the healthcare cost, it will hamper the country’s progress towards the market economy. Other policymakers backed by the Ministry of Finance and the Ministry of Human Resources 1

The group was chaired jointly by Ma Kai, chairman of the National Development and Reform Commission, and Gao Qiang, Minister of Health. See http://gov.people.com.cn/ GB/49901/5261572.html. For a review of previous proposals as well as China People’s University’s proposal, see Centre for Public Policy Studies. Command-and-control versus Regulated Marketization: A Review of Eight Proposals for China’s New Health Care Reforms (2008). Beijing: China Society for Economic Reforms.

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and Social Security prefer a market-oriented solution, an ambitious healthcare insurance system for the entire population. This would not only ensure that all Chinese would enjoy basic healthcare services, but also preserve the market reforms in the healthcare sector. This chapter shows how policymakers in China are trying to solve the problems in the country’s healthcare sector. It discusses how past reforms have created some of the major problems in the sector now before focusing on the market-based or government-directed reform strategies. It then identifies some of the problems in the two strategies and concludes by explaining how a regulated market-based reform is the best option. Setting the Scene: Market Reforms and High Healthcare Cost After adopting the open door and economic reform policy in 1978, China’s healthcare system underwent a major transformation from a centrally planned to a market-based system. During the central planning period, the healthcare sector in China was basically an integral part of the economy, manifesting many characteristics of what Kornai called “classical socialism”2 with Chinese characteristics. In urban areas, the Chinese healthcare regime was very similar to those found in the former socialist countries of Eastern Europe and in the Soviet Union. Almost all healthcare providers were owned and operated by the state; all healthcare professionals were state employees, and most Chinese urban residents enjoyed free healthcare services. The only difference was that the provision of these services was delivered through the workplace rather than the state.3 Each workplace unit operated as a mini-welfare state, and free health care services were one of many benefits offered to unit members.4 In rural areas, on the other hand, healthcare financing was organised by 2

Kornai, J. and Eggleston, K. (2001). Welfare, Choice and Solidarity in Transition: Reforming the Health Sector in Eastern Europe, 135–140. Cambridge: Cambridge University Press. 3 Whyte, M. and Parris, W. (1984). Urban Life in Contemporary China, 65–68. Chicago: University of Chicago Press. 4 Gu, E. (2001). Dismantling the Chinese Mini-Welfare State: Marketization and the Politics of Institutional Transformation. Communist and Post-communist Studies, 34, 91–111.

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the People’s Commune through the so-called “Cooperative Medical Scheme”, which featured basic healthcare services delivered to rural residents by “barefoot doctors”. However, this socialist healthcare system was unable to keep up with the challenges brought by the market reform after 1978. The idea of providing free health services was leading to other problems ranging from inefficiency (crowded hospitals and long waiting times for treatment) to low quality healthcare services. Patients were also offered limited treatment choices and the whole healthcare system was hampered by technological backwardness.5 It is clear to Beijing that the old healthcare system had to be changed. Over the years, market reforms had been carried out in the healthcare sector but these have created a new set of problems. For example, one of the market-based reforms involved healthcare financing. Although some measures were piloted in the 1980s, substantial reforms only started in 1994 when China began to introduce a social health insurance scheme, namely Urban Employees’ Healthcare Insurance (UEHI), to replace the previous workplace-based free health care system in urban areas.6 However, this task has yet to be completed. The reform was slow in its implementation and urban residents were not fully covered by the new health security system. In fact, more than half of urban residents were not covered by any form of health insurance. This exposed them to the high cost of a market-based healthcare system.7 Similarly healthcare services were becoming unaffordable to rural residents. After depriving the Cooperative Medical Scheme of its sources of community-based financing following the collapse of the commune system during the economic reforms, local governments were slow in introducing new measures to boost funding.8 This effectively reduced 5

Kornai and Eggleston (2001). Welfare, Choice and Solidarity in Transition, 136–139. Gu, E. (2001). Market Transition and the Transformation of the Health care System in Urban China. Policy Studies, 22(3–4), 197–215. 7 Liu, Y. (2002). Reforming China’s Urban Health Insurance System. Health Policy, 60(2) 133–150. 8 Gu, X. and Fang, L. (2004). Between Volunteerism and Compulsion: Institutional Embeddedness of the Cooperative Medical Scheme and Its Sustainable Development. Studies in Sociology, 5, 1–18 (in Chinese). 6

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medical subsidies that rural residents were given to aid healthcare financing.9 From 2000, the proportion of China’s total health expenditure to GDP has remained relatively stable. Ranging from 4.6 to 4.8 percent (Chart 1), it is slightly higher than the average of middle-income countries. However, private spending accounted for a large proportion of total health expenditure (Chart 2). Healthcare costs on average have been on the rise since 1990 (Chart 3). By 2006, outpatient cost had increased 12 times from the 1990 level while hospitalisation cost, about 10 times. In comparison, income levels in urban and rural areas only registered a small growth of about five- and seven-fold from 1990 to 2006 respectively. Furthermore, due to the practice of out-of-pocket payment, Chinese patients were seldom given risk-pooling options. As a result, an increasing number of Chinese were not able to afford healthcare services.

6%

10000 9000 4.8%

8000

4.5%

4.6%

4.8%

4.7%

4.6%

4.7%

4.7%

5%

4.4%

7000

4.0%

4.1%

4.1%

4.0% 3.9%

3.8%

4%

3.5%

6000 5000

9856.3

3%

8659.9

Total Health Expenditure

4000

% of GDP

100 million yuan

3.7%

7590.3

%of GDP

2%

6584.1

3000

5790.0 4586.6

2000 2709.4

1000 747.4

893.5

1096.9

1990

1991

1992

1377.8

1761.2

3196.7

3678.7

5025.9

4047.5

1%

2155.1

0%

0

Chart 1: 2005.

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

China’s Total Health Expenditure and its Contribution to GDP 1990 to

Source: China Health Statistical Yearbook, 2007, 83 and 347.

9

Liu, Y., Hu, S., Fu, W. and Hsiao, W. C. (1996). Is Community Financing Necessary and Feasible for Rural China. Health Policy, 38, 155–171.

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990

1991

1992

1993

1994

1995

1996

1997

1998

Private

Public

1999

2000

2001

2002

2003

2004

2005

Chart 2: Share of Public and Private Spending in China’s Total Health Expenditure 1990 to 2005. Source: China Health Statistical Yearbook, 2007, 83 and 347; China Labour Statistical Yearbook, 2006, 910.

1300 Outpatient Per Person Per Visit Hospitalization Per Person Per Time Disposable Income Per Capita in Urban Areas Net Income Per Capita in Rural Areas

Yuan

900

500

100 1990

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Chart 3: Comparing Growth of Healthcare Cost in General Hospital and Income Levels in Urban and Rural Areas 1990 to 2006. Source: China Healthcare Statistical Yearbook, 2003 (various issues).

For example, according to a survey conducted by the Ministry of Health, the number of Chinese who cited “economic difficulties” as the reason for not seeking outpatient treatment increased nearly four-fold from 5.2 percent in 1993 to 18.7 percent in 2003 (Chart 4). The same

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25%

Total

Urban

Rural

20%

15%

10%

5%

0% 1993

1998

2003

Chart 4: Chinese Patients Who Did Not Seek Outpatient Care Due to Financial Constraint. Source: Centre for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, 36–37.

survey also shows that from 1993 to 2003 about 20 percent of Chinese patients who needed inpatient care declined hospitalisation because they could not afford it (Chart 5). The study also revealed that the existing healthcare system was lacking in terms of providing affordable inpatient treatment during the period. China’s healthcare delivery system also experienced changes during the early part of market reform. However, it was not until 1989 especially after healthcare providers were given greater financial autonomy in their operations that major changes could be observed. One good example is the practice by all types of healthcare providers trying to maximize their profits from the healthcare marketplace. However, the effectiveness of the new market-based system was compromised because the management of healthcare facilities was still based on the old model where facilities were managed by state officials and not managers. Furthermore, the healthcare market lacks many regulatory measures. This allows healthcare providers to either raise the cost of their services or simply pass extra cost to patients in order to generate higher revenue.

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40% 35% Total

Urban

Rural

30% 25% 20% 15% 10% 5% 0%

1993

1998

2003

Chart 5: Chinese Patients Who Avoided Hospitalisation Due to Financial Constraint as Percentage of All Who Needed Hospitalisation. Source: Centre for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, 44–45.

Central Planning or Regulated Marketization? In recent years, particularly after the SARS outbreak in 2003, debates over China’s healthcare reforms came under the spotlight of the media. Backed by critics who were weary of the problems in the country’s healthcare system, the State Council’s Development Research Centre (DRC) published a report in early 2005 stating past health reforms as a failure because of the excessive reliance on market mechanisms. Arguing affordability as the major problem, the report proposed re-adopting the centrally planned healthcare system. This could then lower the cost of basic healthcare services as healthcare facilities would be funded and controlled by the government.10 However, others felt DRC’s proposal was too radical and would undermine the country’s progress towards the market economy. This group acknowledged the problems in the healthcare sector but stopped short of attributing them to an over-reliance on the market. For instance, they argued that the unaffordability of healthcare services was caused by the 10

DRC Research Group (2005). China’s Health Care Reforms: Appraisals and Suggestions (Abstracts and Key Points). China’s Hospital CEOs, 16, 36–41; 17, 34–39.

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malfunctioning of the risk-pooling mechanism which could be solved by introducing a universal public healthcare insurance system. They also proposed regulating the competition in the healthcare sector to bring down healthcare costs. In fact, healthcare providers in China have been competing fiercely with each other since market reforms began in the 1980s. Revenue maximisation rather than providing health care became the most important goal for them. This encouraged hospitals to over-prescribe medication and provide excessive services which eventually led to over-consumption and soaring healthcare costs.11 In response to the differing views, the Ministry of Health (MOH) proposed a “government-directed” approach ( ) as the guiding principle when the process of drafting a new healthcare system began in late 2006. The approach advocates the government to provide funding to public healthcare providers. This aims to reduce their financial commitments which would in turn encourage them to shift their focus from revenue maximisation to providing low cost healthcare services to the people.12 In the long run, this will bring down the cost of healthcare in China. Other policymakers, mostly from the Ministry of Finance and the Ministry of Human Resources and Social Security, however, prefer a market-oriented solution. They viewed that healthcare services can become more affordable and the coverage of healthcare safety nets can be expanded if the existing universal insurance system is improved and a third-party purchase mechanism is established.13 According to this approach, every Chinese citizen will be covered by certain health insurance schemes and health insurance agents will play a role in purchasing healthcare services from providers on the enrolees’ behalf. With a universal coverage of health insurance, the financial risks of people seeking healthcare can also be pooled. Furthermore, as healthcare insurance

11

Yang, C. (2003). Yi Shang (The Elegy of the Health Care Profession). Beijing: Guangming Daily Press (in Chinese). 12 Ge, Y., Gong, S. et al. (2007). Zhongguo Yigai: Wenti, Genyuan, Chulu (China’s Health Care Reforms: Problems, Origins, and Way Out). Beijing: China Development Press. 13 Gu, X., Gao, M. and Yao, Y. (2006). Zheduan yu Chufang: Zhimian Zhongguo Yiliao Tizhi Gaige (China’s Health Care Reforms: A Pathological Analysis). Beijing: Social Sciences Documentation Press.

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agents perform purchasing functions, healthcare providers can be induced to offer services on a cost-effective basis. The debate on which model to adopt has been going on since DRC published its report to call for reforms of the existing healthcare system in 2005. In order to help them to reach an agreement, the National Healthcare Reform Coordinating Group invited seven organisations, namely Peking University, Fudan University, Beijing Normal University (BNU), the DRC, the World Bank, the World Health Organisation, and McKinsey, in early 2007 to share their views on China’s new health reforms. Their proposals were presented at a two-day conference jointly chaired by the National Development and Reform Commission and the MOH in May 2007. One common concern highlighted by the proposals is the low public spending on China’s healthcare system. The government, in particular the Ministry of Finance, acknowledged this point and promised to increase spending in the health sector. However, the organisations have differing views on where the spending should be channelled. Among them, at least five argued that more public money should be spent on consolidating existing public health insurance schemes and improving and upgrading healthcare services, not on subsidising public healthcare providers. This argument was strongly backed by the Ministry of Finance. The seven organisations also jointly highlighted that one of the biggest problems in China’s healthcare system is the underdevelopment of its health security system and the ineffectiveness of the insurance purchasing mechanism. In 2003, about 45 percent of the urban population had no healthcare security (Chart 6). The situation is worse in the rural areas where nearly 80 percent of the the population had no healthcare security coverage and were paying their healthcare bills entirely from their own pockets (Chart 7). Largely due to the fact that the vast majority of urban and rural population enjoyed no healthcare insurance, China ranked 188 among 191 WHO members in terms of fairness of healthcare finance. It ranked 144 on the overall health system performance score.14 The ranking is a major 14

See World Health Organisation (2000). The World Health Report 2000: Health Systems: Improving Performance. Geneva: World Health Organisation.

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44.8 44.1

Self-Payment 27.3 5.6

Commercial Insurance

3.7 3.6

2003 34.4

Social Health Insurance

4.7

1998

1.1

1993

6.6

Cooperative Medical Scheme

2.7 1.6 4.6

Labour Insurance Scheme

28.7 48.2 4

Government Health Care Scheme

16 18.2

0

10

20

30

40

50

60

Percentage

Chart 6:

Changes in Health Security Coverage in Urban China 1993, 1998, 2003.

Source: Centre for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, 16.

79

Self-Payment

87.3 84.1 8.3

Commercial Insurance

2.8 2.2 2.8 1.4 0.4

Social Health Insurance

9.5

Cooperative Medical Scheme

2003

6.6 9.8

1998 Labour Insurance Scheme

Government Health Care Scheme

0.1 0.7 2.8

0

Chart 7:

1993

0.2 1.2 1.6

10

20

30

40

50 Percentage

60

70

80

90

100

Changes in Healthcare Security Coverage in Rural China 1993, 1998, 2003.

Source: Centre for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, 16.

embarrassment for the current leadership who prides itself for building a “harmonious society”. Nonetheless, the Chinese government tried to improve the situation by introducing a new rural cooperative medical scheme (NRCMS) in the countryside in 2003. This was a public health insurance scheme based on voluntary enrolment. From 2003 to 2005, the government provided

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a 20 yuan enrolment subsidy for each new applicant before raising the amount to 40 yuan in 2006 and to 80 yuan in 2008. The 80 yuan enrolment subsidy was only the minimum subsidy level set by the central government. Many localities actually offered a high level of subsidy. During the first three years, the NRCMS enrolment rates were low even though the subsidised enrolment fee was only 10 yuan.15 However, after raising the enrolment subsidy level and improving the institutional arrangements, the enrolment rates increased considerably. By the end of 2007, the number of NRCMS enrolees reached 726 million, or 99.7 percent of the rural population (see Table 1). The central government also took decisive steps to implement the universal healthcare insurance system. In July 2007, the State Council launched pilot experiments for the introduction of Urban Residents’ Healthcare Insurance (URHI) in 79 cities, and the scope of experiments was expanded to more than 300 cities in 2008. The URHI targets nonworking people in the cities, including the unemployed, children (including students), and the elderly who did not have any health insurance. It is a voluntary programme, similar to the NRCMS in rural areas. The government set an official enrolment subsidy of 40 yuan in 2007 and 80 yuan in 2008 but this could be adjusted at the local level. The benefits from the insurance package were also determined by the local

Table 1:

2004 2005 2006 2007

Number of Enrolees and Enrolment Rates of the NRCMS 2004–2007. Number of Enrolees (Million)

Number of Rural Residents (Million)

Enrolment Rates

80 179 410 726

757 745 737 728

10.6% 24.0% 55.6% 99.7%

Source: China Health Statistical Yearbook, 2008, 335, 341.

15

Evaluation Group on Pilot Programmes of the NRCMS (ed.) (2006). Fazhanzhong de Zhongguo Xingxing Nongcun Hezuo Yiliao (The New-type Cooperative Medical Scheme in Development), 2–10. Beijing: People’s Health Press.

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government.16 The existing Urban Employees’ Healthcare Insurance (UEHI), which covers the working population and retirees, has been consolidated. Funds for the UEHI were contributions from both employers and employees. The URHI and UEHI constitute two pillars of basic health care security system in urban areas. By the end of 2007, the enrolment rate reached 37.6 percent of the urban population (see Table 2). In the near future, the three insurance schemes, namely the RCMS, URHI and UEHI, would be part of a three-tier public health insurance system. The schemes offered different benefit packages to enrolees. As enrolment is compulsory, every citizen would be covered by one of the three schemes. In other words, the three-tier public health insurance system has established the institutional framework for the provision of a universal insurance system. Reforms in Healthcare Delivery: Restoring a Planned System? Basically, healthcare insurance reforms are on track towards universal coverage. But the direction for institutional and organisational restructuring

Table 2: The Number of Enrolees and Enrolment Rates of Basic Health Care Security System in Urban Areas 2003–2007.

2003 2004 2005 2006 2007

Number of UEHI Enrolees (Million)

Number of URHI Enrolees (Million)

Number of Urban Residents (Million)

Enrolment Rates

109 124 138 157 180

NA NA NA NA 43

524 543 562 577 594

20.8% 22.9% 24.5% 27.3% 37.6%

Source: China Health Statistical Yearbook, 2008, 336, 341; China Statistical Yearbook, 2004, 132; 2005, 130; 2006, 134; 2007, 132; 2008, 134.

16

The text of the policy guidance issued by the State Council can be found at the official website of the Ministry of Labour and Social Security, see http://trs.molss.gov.cn/was40/ mainframe.htm.

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of healthcare delivery system in both urban and rural areas is still unclear. The proponents of the government-directed approach embrace an administrative hierarchy in which public healthcare providers act only as budgetary units. The market-oriented approach, however, favors corporatisation as well as privatisation of the healthcare sector. The government-directed approach favors the dominance of public providers in the healthcare sector. It seeks a model where most operational funding for public providers comes from the government budget, managers are appointed by the government, healthcare professionals salaried, and medical equipment and drugs supplied by a governmentrelated company. Yet this model cannot be sustained due to the limited fiscal capability of the Chinese government. Therefore, a quasi-centrally planned system governing basic healthcare has been put forward as a substitute. According to this proposal, all Chinese citizens are entitled to free “basic healthcare”, probably with 20–30 percent of co-payment. Public community primary healthcare centres serve as the providers of basic healthcare services and deliverers of essential drugs in both urban and rural areas. The large proportion of their operational funding comes from the government budget, and production and delivery of essential drugs are organised in a planned system. Private clinics are not included in this system, and are restricted to serve only the higher income groups. The risk-pooling for hospitalisation still needs social health insurance, however. That is to say, public health insurance schemes covering the vast majority of people should be enhanced to pay the “non-basic healthcare”, mainly hospitalisation. Again, it is proposed that public hospitals should be dominant in providing non-basic healthcare, and the marketisation of healthcare services be restricted.17 Under this circumstance, “basic” and “non-basic” healthcare would be paid by two players. However, coordinating it can be difficult as the government has to draw an objective demarcation between the two categories of healthcare services. To adopt a centrally planned system in providing basic healthcare and essential drugs, the government would 17

Ge, Y., Gong, S. et al. (2001). Zhongguo Yigai: Wenti, Genyuan, Chulu (China’s Health Care Reforms: Problems, Origins, and Way Out). Beijing: China Development Press.

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have to double or triple existing level of health budget. More importantly, the command economy would do away with healthcare services providers’ incentive, thus improving their performance. On the other hand, the market-oriented approach does not require such level of intervention from the government. Public health insurance agents can play the role of a player for both outpatient and inpatient care. There is no necessity to artificially draw a line between basic and nonbasic healthcare. All healthcare services (including utilisation of drugs) covered by existing public healthcare insurance schemes can be regarded as “basic healthcare”. As financing levels vary across localities, the benefit packages of existing public healthcare insurance schemes, namely basic healthcare, would be localised. Public healthcare insurance agents can also purchase healthcare services from any kind of providers, public or private, non-profit or profit, as long as providers are willing to comply with the contract. Intensive competition among providers would be in the interests of the public. In light of the World Bank’s suggestion, the proponents of the market-oriented approach propose that all public healthcare providers should be corporatised, acting as independent legal persons and competing with other kinds of providers in a levelled playing field.18 There is no necessity to impose harsh restrictions over the entry of private capital into the healthcare sector, and privatisation of existing public providers should be allowed. Payment modes that healthcare insurance agents use are important tools to induce providers to act in the interests of the public as more attention to the cost-effectiveness of services adopted and drugs prescribed will be paid.19 Currently, fee-for-service is a widely used payment mode, which is highly likely to create an incentive for providers to induce an over-consumption of healthcare services and drug use. The consensus among all proposals favouring market-oriented solutions is to replace feefor-service with a combination of multiple payment modes. 18

Preker, A. S. and Harding, A. (eds.) (2003). Innovations in Health Service Delivery: The Corporatization of Public Hospitals. Washington, D.C.: The World Bank. 19 Preker, A. S. (ed.) (2005). Spending Wisely: Buying Health Services for the Poor. Washington, D.C.: The World Bank.

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Another strategic move to induce public healthcare insurance agents to improve their purchasing function is to introduce a gate-keeping mechanism into China’s healthcare sector. Community health centres (stations) and other small hospitals, public or private, can play the role of a gatekeeper. If enrolees choose them as the first point of contact and accept their referral arrangements to higher ranking hospitals, they would enjoy low co-payment rates; otherwise, they would have to pay more out of their own pockets if they go to high-ranking hospitals directly for primary healthcare. Concluding Remarks China’s new healthcare reforms are at a crossroads. A heated debate over the direction of the new reforms is still raging. Nevertheless, some consensus have been reached. The first is that China’s healthcare system is indeed facing problems, particularly in providing affordable healthcare. Therefore, a new round of healthcare reforms is absolutely necessary. Second, public spending on healthcare is insufficient, and needs to be increased. Third, almost all sides embrace in principle the combination of government intervention and market mechanism, and no one proposes leaving the healthcare sector solely to the government or solely to the market. Fourth, everybody agrees that equal treatment should be top priority for future health policy, but not at the expense of efficiency. Finally, universal coverage of health care security is now a common goal. Yet, there are many disagreements on institutional designs or reform strategies in the future. These disagreements originate from different perceptions of appropriate roles for the government and the market in China’s healthcare sector. In the Chinese context, “the government” is normally perceived as a command-and-control system in which government organs and other public service providers are integrated into a huge administrative hierarchy. The government plays a comprehensive role in administration, funding, service provision, and regulation. The “market” refers to competition with a set of incentives, in which a variety of organisations attempt to accomplish their goals with the least possible costs. The government is just a player in the market, although, in many cases, it is powerful or big.

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Two reform approaches have emerged from the debate over the direction of and strategies for China’s new healthcare reforms. One approach is to divide the healthcare sector into two parts, basic and non-basic. For the basic part, a mini-NHS model is proposed, but internal market mechanism is excluded. Most (if not all) primary care providers are in public ownership, and their employees are paid by the government. As they have become budgetary units of an administrative hierarchy, they are subject to government regulations. All aspects of management, including financial, personnel, operational, and strategic decisions, are controlled by the government. Ordinary people can enjoy free public health services and basic health care with a low rate of co-payment. Secondary and tertiary health care are largely financed by social health insurance, and supplemented by commercial health insurance. Public ownership and a command-and-control mechanism still dominate in the provision of secondary and tertiary health care, but marketisation is partially allowed. Another approach pushes forward a model of regulated marketisation in the healthcare sector. The government plays an active role in establishing a multi-tier healthcare insurance system. Everyone enrols in at least one public healthcare insurance scheme, and some can enrol in commercial health insurance. Healthcare insurance agents purchase health care services on behalf of enrolees. All legal providers, public or private, for-profit or non-profit, are allowed to compete for service contracts from healthcare insurance agents. Healthcare insurance agents and healthcare providers can negotiate to encourage the cost-effective provision of medical services and drug prescriptions by using a combination of multiple payment modes. As public healthcare providers de-link their administrative relationship with the government, health bureaus across the country can serve as a regulator over the health care market. In brief, China’s new healthcare reforms must choose between two roads. One road return to the planned system or command economy, and the other moves forward to a regulated market system. To a large extent, it is likely that the market-oriented approach would prevail, as a number of its key policy recommendations have been realised. The suggestion of a planned economy governing the healthcare sector is unlikely to be incorporated officially as it has been strongly opposed by the MOF and the majority of public hospital managers. To cater for the vested interests

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of bureaucrats within the healthcare administration, however, certain adjusted versions of the quasi-centrally planned system would operate at the community level in rural and urban areas. As far as privatisation is concerned, investors would have to wait and see how policy and the regulatory environment would change in the near future.20

20

This chapter was finalised on 27 January 2009, when the text of the official reform proposal has yet to be released to the public. It was widely believed that the official version of the new health care reform proposal will be formally released in January or February 2009. Basically, the official proposal embodies certain components of the two reform approaches. On the demand side, namely, the health care security system, the market-oriented approach has been adopted, while on the supply side, namely the health care service delivery, the government-directed approach has been partially adopted. A separate paper is needed to analyse the contents of China’s new health reform proposal.

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CHAPTER 3

Direct Provider Subsidies vs Social Health Insurance: A Compromise Proposal Åke Blomqvist and Qian Jiwei

One sector that has undergone particularly dramatic transformations since the beginning of the opening up of the Chinese economy in the late 1970s is healthcare. The cost of healthcare has grown even faster than the economy as a whole, with total health expenditure in the early 2000s approaching five percent of GDP (in 1980 it was only 3.15 percent of a much smaller GDP).1 Moreover, the earlier system under which most of the cost of healthcare was paid for by third parties (either directly as government subsidies to providers, by employers, or by rural collectives) had gradually disintegrated in the 1980s and 1990s. Government subsidies to providers were slashed, and doctors and hospitals had to raise an increasing share of their income from markups on drugs and charges to patients. By the late 1990s, as much as 59 percent of total health care costs were paid for by patients out of their own pockets.2 While the fees and prices for certain basic health services and drugs were controlled, others were not (particularly those involving new and advanced treatment techniques or recently invented drugs). Because doctors and hospitals could generate more revenue from the (non-basic) services and drugs that were not subject to controls, they tended to favour those treatment techniques and drugs, something that contributed to the rapid increase in costs. As a consequence of these developments, many individuals and families experienced severe financial hardship when serious illness struck.3 Alternatively, many people did not seek medical care even 1,2

Ministry of Health (2008). Chinese Health Statistical Digest. Government of China. Liu, Y., Rao, K. and Hsiao, W. C. (2003). Medical expenditure and rural impoverishment in China. Journal of Health, Population and Nutrition, 21, 216–22.

3

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when they needed it urgently because they could not afford to pay for it, or feared that they would be impoverished if they did.4 What Has Been Done So Far? In recent years, and especially since the late 1990s, China has tried to deal with problems in the health sector through various policy initiatives. Until the present, direct subsidies to providers have remained limited but major efforts have been made to protect consumers against the high cost of care by increasing the degree of third-party payment. The principal elements in this effort have been three kinds of social insurance programmes: the basic Health Insurance Scheme (HIS) for urban employees, the new Cooperative Medical System (CMS) for rural residents, and the urban residents’ plan (UR) for city residents that are not eligible for the HIS. Detailed discussions of these social insurance plans are available elsewhere;5,6 only a brief sketch is provided here. The HIS, established in 1998, is intended for urban employees and retirees and is financed through payroll deductions shared between employers (minimum six percent of salary) and employees (minimum two percent). Plans are managed by the municipal government in each major city in China. One part of the total contribution goes into either an “individual account” (similar to what is called a Medisave account in Singapore) which is owned by the insured person but which can only be used to pay for approved health care expenditures, particularly outpatient services and the deductibles and co-payments for which hospitalised inpatients are responsible under the plan. The rest goes into a “social pooling account” which pays for a share of approved categories of health expenditures for those with major illness episodes (typically requiring inpatient care), subject to an upper limit on benefits (in the basic plan, the limit was four times the annual salary in the city). The intention is that enrolment for regular employees would be compulsory though some employers have yet to join the plan in many cities. 4

Gu, X. (2008). China’s New Round of Healthcare Reforms. EAI Background Brief No. 379. Singapore: East Asian Institute, National University of Singapore. 5 Blomqvist, Å. and Qian, J. (2008). Health system reform in China: An assessment of recent trends. Singapore Economic Review, 53, 5–26. 6 Yip, W. and Hsiao, W. C. (2008). The Chinese health system at a crossroads. Health Affairs, 27, 460–468.

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For those not eligible for the HIS (that is, dependents, the selfemployed, and so on) most cities are now offering a more basic “urban residents’ plan” (UR). These plans are voluntary, but are heavily subsidised by the government in the cities where they are offered. Their benefits are less generous than those of the HIS, with fewer services and drugs being eligible for reimbursement, higher deductibles and patient co-payments, and lower limits on maximum annual benefits. Finally, in rural areas, county governments are now expected to offer a version of the Cooperative Medical Scheme (CMS). While local models vary, a common feature is that the plans must be voluntary so that only those individuals who have paid a premium (20 yuan in 2008) are covered. Again, however, the plans are heavily subsidised by state and local governments, which together contributed 80 yuan per insured person in 2008. Like the HIS and URs, most CMS have both an individual component (sometimes equivalent to the premium the individual has to pay to join) and a social-pooling component. Because the premium and subsidies are low (much lower than the average for the HIS, and those in most URs), the benefits for which seriously ill individuals are eligible are typically modest, both because a narrower range of services and drugs can be reimbursed, and because of lower annual maximum benefits per insured person. With the encouragement of the state (both in the form of subsidies and in other ways), enrolment in the three social insurance plans has been growing rapidly in the last several years. The most recent available statistics suggest that 730 million people (86 percent of rural population) had enrolled in the CMS by the end of Sep 2007 while over 180 million people registered in the HIS by the end of 2007 and 43 million people registered in the urban residents’ plan in year 2007.7 While these numbers are encouraging in that they show considerable progress towards the goal of universal health insurance in the sense that the entire population is being covered by at least some form of insurance, it is nevertheless clear that the extent of coverage is limited. There are restrictions to the categories of services and drugs that are eligible for reimbursement, substantial deductibles and patient co-payments, and relatively low upper limits on annual benefits. As a result, even people who are covered by social insurance continue to face the risk of significant 7

See the report http://politics.people.com.cn/GB/1026/7375806.html.

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economic hardship if they become seriously ill. Thus, even if there is further progress towards the goal of universal coverage, most people agree that there is an urgent need for further changes to the system of health financing so as to strengthen the degree to which citizens are protected against this risk. However, there is considerable disagreement over the methods that will be used to accomplish this.

Proposals for Increased Provider Subsidies Most observers of the remarkable success of the Chinese economy in recent decades ascribed it, at least in part, to the dismantling of the earlier system of centralised economic management and the greater reliance on the market mechanism for the allocation of economic resources. The changes that have taken place in the health services industry since around 1980 were consistent with this trend. With reduced government subsidies, hospitals and clinics have, like most other kinds of firms, become dependent on the revenue earned from selling their services to buyers (patients) in the market. Although this method of financing implies higher charges to patients and hence a larger risk of financial hardship, those who favour the marketbased approach argue that this problem can be substantially overcome through social insurance programmes that are being introduced in China. However, not everyone supports this approach. In particular, many of those currently debating Chinese health policy are arguing that a better option would be to return, at least partially, to a system in which there would be larger direct government subsidies to health service providers, and less reliance on charges to patients for financing them. Supporters of this view include representatives for the state, the Ministry of Health; many of them also believe that hospitals and other providers should be more actively managed by the state than they have been during the last several decades.8 In concrete terms, the proposals for more direct state funding and management of health care focus on two state initiatives. One involves the supply and pricing of pharmaceuticals for hospital patients. Under the current system, many hospitals earn large amounts of revenue by the 8

Gu, X. (2008). China’s New Round of Healthcare Reforms. EAI Background Brief No. 379. Singapore: East Asian Institute, National University of Singapore.

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markups that they charge patients on the drugs they receive. In the proposed system, these markups would be strictly controlled and much smaller. In return, there would be increased direct state subsidies to the hospitals, and the state would also take greater responsibility for supplying hospitals with pharmaceuticals at low prices. The second initiative would consist of state subsidies to local governments for the purpose of establishing and operating a network of rural health centres and urban community clinics that would produce “basic” health services at low controlled prices for all residents. While few details have been provided with respect to the way the clinics would operate and be managed, it seems clear that these reforms have the objective of re-establishing a strong role for the government and the Ministry of Health in issues relating to the funding and operation of the institutions that supply health care. Critics of the new proposals have characterised them as a move back to the earlier “command and control” approach to managing the health care sector, and predict that they would make the system both wasteful and less responsive to patient needs if they are adopted. What they favour instead is continued decentralisation and privatisation of health services provision, and a strengthening of the social insurance system under which patients are reimbursed for part of the cost of the health services they use.

Social Insurance versus Direct Subsidies to Providers The main purpose of the social health insurance plan is to help protect patients against the financial impact of the high cost of serious illness. They do so by partially pooling the risk associated with illness: Part of the cost of the health services that patients use in cases of serious illness is paid for from a fund to which all plan members have previously contributed. But social insurance is not the only method for pooling risk. In one sense, direct government subsidies to health services providers can be thought of as an alternative way of accomplishing the same thing. When subsidies to providers are used to pay part of the cost of their operations, they can lower the charges to patients and still balance their budgets. The shift of part of the burden of paying for health care to taxpayers and away from patients implies an increased degree of risk-pooling as it reduces the financial risk associated with illness, just as social insurance does.

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However, the two approaches differ in one very important respect. Under social insurance, the revenue that providers use to cover their costs consists of what they can earn by “selling” their services to the patients they treat in the market for health services. In contrast, when providers receive much of their funding through direct government subsidies, there typically is no direct link between the amount of subsidy they receive and the services they provide. In the view of those who support the social insurance alternative, the lack of incentive for providers is a critical weakness of the direct subsidy approach. When much of the providers’ revenue is independent of the services they supply, the result may be low productivity in the sense that relatively few services will be produced, or that the quality will be low. In the view of those who are critical of the direct subsidy approach, attempts at compensating for the lack of incentives for providers through administrative measures are unlikely to be effective. Those who support the direct subsidy approach do so in part because they believe that careful bureaucratic management of health service providers can raise productivity and maintain a high quality of health services. They also argue that in reality, the incentives that providers have to earn high revenue under a social insurance system do not benefit consumers/patients. Instead, they lead to high fees and markups on hospital drug sales, as well as provision of many services that patients do not really need but which earn high revenue for providers. A major shortcoming of the current Chinese health care sector, in some of these critics’ view, is that too many resources have been channelled to hospitals to pay high-salaried doctors, and not enough have gone to lower-level clinics that provide important public-health services (such as control of contagious diseases) and basic primary care. While this has happened in both urban and rural areas, the problems are especially acute in the countryside. For these reasons, they feel that government subsidies to establish clinics that would both strengthen the supply of public health services and offer basic primary care should be a policy priority.9 9

The case for a change of direction in Chinese health care reform along these lines was forcefully made in the important collection of essays by scholars associated with the Development Research Centre of the State Council (Development Research Centre 2005).

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A Compromise: Government Purchasing of Health Services In our opinion, there is some merit in the arguments of both sides in this debate. We agree with those who see an urgent need for devoting more resources to strengthening the provision of public health and primary care services in China, and for promoting more cost-effective utilisation of pharmaceuticals. We also share the view that the trend towards decentralisation of health system management and greater reliance on charges to patients for financing health care providers has produced highly undesirable side effects, including a tendency for health care costs to rise rapidly, as they have done in other countries that have followed such policies, most notably the US. At the same time, we also believe that it would be a mistake to return to the earlier “command and control” approach to managing health services providers. Both China’s own experience in an earlier era, and that of other countries (such as the UK and Sweden) provide evidence of the difficulties of centralised top-down management of health services production in the absence of incentives for those that supply them.10 This leads to the question: Is it possible to imagine a system which preserves some of the incentives inherent in market-based health services production, but which gives better protection for patients and society against the high cost of health care than what an unregulated market system does? In the rest of the chapter, we will discuss how such a compromise system could be constructed, based on the principle of insurers (whether private or government-organised) acting as “third-party purchasers” of health services from decentralised or private producers of health services.11 Why is Third-party Party Purchasing Needed in Health Care? In an economic sector governed by market mechanisms, profit-seeking firms compete with each other in selling their goods and services to 10

Helpful descriptions of the UK and Swedish health care systems are in European Observatory on Health Systems and Policies 1999, 2001. A discussion of the most recent reform approaches in the UK is in Talbot-Smith and Pollock (2006). 11 Yip and Hsiao (2008) also suggest that the idea of third-party purchasers should be further explored in the context of Chinese health system reform.

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consumers who are free to buy from whichever seller offers the best alternative (combination of price and quality). For many types of goods and services, the market system works well for consumers, as China’s experience in the past quarter century has demonstrated. However, there are some types of goods and services for which competitive markets are unlikely to work well on their own, so that they give rise to a need for an institution such as a third-party purchaser.

Why Market Competition in Health Care May Not Be Effective? One instance when competitive markets may not work well is when the goods or services being bought and sold can only be understood and evaluated by someone with highly specialised knowledge, something that is very much the case in health care. When there is “information asymmetry” in the sense that sellers have much more knowledge about what is being sold than buyers do, the effectiveness of competition is reduced.12 In particular, sellers may be able to increase their revenue by advising buyers (patients) to pay for services that they do not really need, given the nature of their health problem. Moreover, it is even difficult in the case of health services or drugs to tell whether a particular patient was given proper medical advice even after treatment has taken place. Patients who recover might have done so even if they had received less extensive treatment or drugs; conversely, even patients that have been properly treated may get worse or die.13 The effectiveness of competition as an instrument to promote lower prices and better quality also depends on how costly it is for consumers to search for alternative offers from different sellers. For patients who need health care, search costs may be very high, explicitly or implicitly. In rural areas, there may only be one provider within a reasonable travelling distance. For patients with acute illness, delaying treatment may be dangerous and painful, effectively making it necessary to be treated by the first available provider. In other cases, the process of getting an accurate diagnosis of 12

McGuire, T. (2000). Physician agency. In Culyer and Newhouse, (eds.), 461–536. In economic theory, a good whose quality can be inferred after it has been used is sometimes referred to as an “experience good”. In contrast, goods such as health care are sometimes referred to as “credence goods” to signify that it may not be possible to ascertain its quality even after it has been used, so that effectively they are bought “on faith”. 13

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the patients’ health problem may be time-consuming and expensive, making them less likely to look for an alternative provider even when they believe they might be able to find one that would charge a lower fee. Because of factors such as information asymmetry and high search costs, competition among providers cannot, by itself, be expected to be very effective in keeping medical fees and drug prices at reasonable levels if health services and pharmaceuticals are sold directly to patients, with no involvement by a third party. If patients are insured so that insurance pays part of the costs of services and drugs, they have even less incentive to try to find a provider that will treat them at lower cost. For all these reasons it is not surprising that in countries where there is widespread insurance and medical fees are not regulated, the aggregate cost of health care tends to grow very fast. As already noted, the clearest example of this process has been the US where the cost of health care reached as high as 16.3 percent of GDP in 2007.14

Third-party Purchasers in the Private Sector: Prepaid Care and Competition for Contracts In the US, one response to the upward pressure on healthcare costs has been the development of new forms of health insurance based on some version of the principle of “managed care”. Private managed-care plans can be interpreted as examples of third-party purchasers of health services. While there are many types of such plans, they all have one feature in common: they only cover the services of providers with whom the plan has a contract regarding the fees that they can charge, and perhaps also regarding other aspects of the care they supply.15 By restricting fees and imposing rules on the services that providers are allowed to charge for, the plans can control costs more effectively than conventional plans that do not have such restrictions and rules. The reason they are able to do so (that is, are able to make providers agree to these restrictions) is that providers can only get access to the patients in the plan if they agree to the plan contracts. That is, in a system with managed-care plans, providers do not compete directly 14 15

US Department of Health & Human Services (2008). http://www.cms.hhs.gov/ Glied, S. (2000). Managed care. In Culyer and Newhouse (eds.), 707–745.

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for patients. Instead, they compete for the contracts that give them the right to treat (and be paid for treating) the patients covered by the plans. Negotiations of the terms of such contracts are much less affected by the problems of information asymmetry and high search costs that make competition for individual patients relatively ineffective. Because they represent many patients, managed-care plans can afford to hire medical experts that negotiate in advance regarding the terms of the care that all the plans’ patients will receive. They also have the medical expertise and the cost of searching for competitive providers is borne collectively by many insured patients. In other words, the plans can act much more effectively as buyers of healthcare than individual patients can. From the viewpoint of patients, being covered by a managed-care plan may in some ways be less attractive than being in a conventional plan, since it restricts their choice of provider, and may place restrictions on what treatment they can receive in specific circumstances. However, the cost of their care on average is likely to be lower and most people may be willing to accept restrictions on the way they can be treated as long as they have confidence that doing so is not going to significantly increase the risk of adverse health outcomes.

Purchasers in Publicly Funded Systems In a system with private managed-care plans, each plan plays the role of the third-party purchaser of health services. In some countries where healthcare is paid for by the government, various government agencies may play the role of third-party purchaser if health services are supplied by private or decentralised producers. In Canada, for example, the government pays for all physician and hospital services, but physician practices and hospitals are privately owned and supply their services on terms that are negotiated with government insurance plans or provincial health ministries or regional authorities. In the UK, the government also pays for physician services and owns and operates most hospitals. Since the 1980s, however, there has been a trend towards more autonomy and decentralised management of hospitals, with agencies such as the District Health Authorities or (under the Labour government) Primary Care Trusts acting as third-party purchasers from health services providers that,

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although publicly owned, are subject to the same market-like incentives as private providers would be.16,17 The role of purchasing agencies in publicly funded systems is similar to that of managed-care plans in that they also negotiate with physicians and hospitals about methods and rates of reimbursement for the services they supply to the insured. However, it is also different in some respects. Firstly, in countries such as Canada and the UK where the public plans are financed out of general tax revenue and cover every citizen, the public-sector purchasers are automatically allocated their revenue from the government, and do not have to rely on insurance premiums paid by clients, as managed-care plans must do. Secondly, because the publicly funded plans cover every citizen, they are, effectively, the only third-party purchaser of health services in these countries, giving them a very dominant market position. (In contrast, when there are many managed-care plans, as in the US, they must compete for the services of doctors and hospitals, since the providers can choose with which plans to contract.)

Integrating the Social Insurance and Provider Subsidy Approaches in China: A Proposal In China today, the existing social insurance plans are managed by local governments. In urban areas, the agency that is responsible for doing this is some form of a social insurance bureau (henceforth referred to as SIB),18 whereas in rural areas the CMS schemes are managed by the county health bureau (HB). In the recent Chinese debate about health reform, it has already been suggested that these agencies should take on a more active role as third-party purchasers.19 That is, they should 16

Talbot-Smith, A. and Pollock, A. M. (2006). The New NHS: A Guide. Abingdon, Oxon: Routledge. 17 Blomqvist, Å. (2002). Canadian Health Care in a Global Context. Toronto: C.D. Howe Institute. (Available for downloading at www.cdhowe.org) 18 In most cities, the body in charge of health insurance in urban areas is “Labour and Social Security Bureau”. In some cities, there are independent health insurance bureaus to oversee all social health insurance plans. (e.g. Hangzhou City, Zhenjiang City). 19 Gu, X. (2008). China’s New Round of Healthcare Reforms. EAI Background Brief No. 379. Singapore: East Asian Institute, National University of Singapore.

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negotiate contracts with health services providers regarding the methods and rates of payment that would be used to pay providers for services rendered to plan members, and possibly also regarding other restrictions on the services and drugs to be used in treating patients, similar to those in managed-care plans in the US and elsewhere. Under the rules of existing social insurance programmes, SIBs and county HBs are already responsible for establishing lists of approved providers (hospitals and clinics) whose services are eligible for reimbursement under the HIS, CMS, and UR plans. In doing so, they presumably are in a position to set the conditions with respect to the nature of the care the providers are supplying, and the way they will be compensated for their services. In a later section we will discuss in more detail the specific methods that SIBs and county HBs can use in their role as purchasers on behalf of members of the social insurance plans. Our proposals for future reform, however, go further. Specifically, we suggest that these agencies should act as purchasers not only on behalf of members of the existing social insurance plans, but also on behalf of all Chinese residents that are entitled to care in basic care clinics and subsidised hospitals. That is, the increased resources that are to be made available by the government to subsidise the operation of basic care clinics and hospitals should first be transferred to the SIBs and county HBs, and then allocated to individual clinics and hospitals based on negotiations regarding the fees they would charge and other conditions of care. Under such an expanded purchaser role, the SIBs and county HBs would contract for health services not just on behalf of members of the existing social insurance plans, but indeed on behalf of all Chinese residents (since any resident would be eligible for subsidised care in basic care clinics, or in subsidised hospitals). Although most of the subsidies would go to government-owned providers (at least initially) private providers could also be invited to compete for them. To see the logic of this proposal, it is useful to note that in one sense, direct government subsidies to health service providers can be interpreted as a form of partial risk-pooling or insurance. When subsidies to providers are used to pay part of the cost of their operations, they can lower their charges to patients and still balance their budgets. As noted earlier, such a shift of part of the burden of paying for health care to taxpayers and

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away from patients reduces the financial risk associated with illness in the same way that social insurance does. If a subsidy scheme is implemented in such a way that all residents are eligible to receive health care at subsidised rates, it can be interpreted as a limited form of universal public health insurance. This raises the question of how to treat those individuals that are already covered by one of the existing social insurance programmes. The simplest answer would be to allow existing programmes to continue in more or less the same form as they currently have. That is, the social insurance programmes would continue to reimburse patients for a share of whatever charges they had paid, even though these charges would be lower than before because of the subsidies. Since the reimbursements would be lower than before, the social insurance plans could either reduce their premium contributions, or offer increased insurance protection in the form of lower deductibles and patient co-payment rates, a wider range of services and drugs eligible for reimbursement, and higher upper limits on annual benefits. In the next two sections, we will discuss two important issues that must be considered if such a model of expanded third-party purchasing is to be implemented: What methods should the purchasers use to pay for health services under the contracts to be negotiated, and how large a share of the cost should patients be required to pay?

How Should Purchasers Pay Providers? The question of how providers are to be paid by purchasers for the services they provide to insured clients is one of the most important ones to be decided in managing a health care system with third-party purchasers. In China in recent years, most outpatient and inpatient services have been paid for through the method known as “fee for service” (referring to outpatient services) or “itemised billing” (referring to hospital services). Both are examples of retrospective payment methods, meaning that the total payment for a given treatment episode is determined after treatment has been given, and based on what services (drugs) have actually been supplied to the patient. Fee for service and itemised billing have been widely used not only in China in recent years, but also in many other countries.

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Retrospective Payment via Fee for Service and the Cost of Care During the pre-reform era, providers were typically not paid through retrospective methods, but instead via methods such as fixed salaries (for doctors and other personnel) or fixed annual budgets for hospitals. In comparison with these methods, fee for service and itemised billing have the advantage of giving providers more of an incentive to be productive by supplying a high volume of services (since their total income or revenue increases with a higher volume). However, these arrangements also have a serious potential disadvantage: They may lead to very high aggregate costs of care for a given population. The problems with payment through fee for service or itemised billing can be overcome to some extent by government regulation to reduce the providers’ market power by controlling the fees for different drugs and services, as the Chinese government currently does to some extent. Alternatively, the providers’ market power can be reduced in systems where there is an agent (such as a managed-care plan, or a government purchaser) that negotiates with them regarding fee levels, even if there is no direct government regulation. While this may help keep fees down, it does not address the problem that arises because doctors can exploit their information advantage to induce patients to utilise a larger volume (or more expensive kinds) of services than they would if they had better information.

Prospective Payment Methods I: Salary and Fixed Budgets In contrast to fee for service and itemised billing which are retrospective financing methods, paying for outpatient and inpatient services via fixed salaries for doctors and fixed global budget allocations for hospitals means that one is using prospective (determined in advance) financing of health services.20 From the viewpoint of a purchasing agency, prospective financing implies better ability to predict and control the aggregate cost of 20

Basic primary care clinics in Shanghai have been paid prospectively by a global budget since 2007. See Shanghai Health Insurance, 2006, document 160. Hospitals in Hainan province are also paid prospectively (Hainan province government, 2007).

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health care. At the same time, however, the fact that these forms of financing do not imply any immediate relation between the revenue that doctors and hospitals receive and the volume of services that they provide is a potential weakness: Under such financing, providers have little or no incentive to be productive with the supply of a large volume of services, since their income is independent of service volumes. Moreover, their incentive to provide good quality care is also weakened since their revenue is independent of the number of patients they attract. The result may be overcrowded medical facilities, low quality care and generally provision of less health care services than is economically efficient. Another possible consequence of payment for health services through fixed salaries or provider budgets is that it may give rise to an inefficient pattern of medical service production across health facilities at different levels. A well-functioning system of health services production must have a mechanism to ensure that patients with different illness conditions are treated in the right kind of facility: A village or municipal health clinic, a township hospital, a county-level hospital, or a specialised urban hospital. Patients themselves cannot usually tell whether their health problem is an uncomplicated one that can be treated in a low-level clinic, or whether it may be a serious and difficult illness that can only be properly diagnosed and treated in a higher-level hospital. In order for patients to be appropriately treated, therefore, a system of referrals must exist so that each patient can be steered to the right level of care. But if outpatient doctors and primary-care clinics are funded via fixed budgets and are staffed by salaried employees, there may be a tendency for too many patients to be referred to hospitals, as primary-care providers have little incentive to treat patients that they can refer. Clinics’ or doctors’ revenues will not suffer if they do so, and by referring patients for treatment elsewhere, they reduce their own workloads. A tendency for too many patients to be referred to higher-level hospitals can be reduced through close monitoring of referrals, or by various forms of financial incentives (further discussed below). It is important to note, however, that a well-functioning system which efficiently allocates care between health facilities at different levels (such as primary-care clinics and higher-level hospitals) is more likely to emerge if both levels of facilities are funded and co-ordinated by the same agency, as they would be (implicitly)

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under a system where the same agency (SIB or county HB) is responsible for funding and negotiating terms of care for both kinds of institutions.

Prospective Payment Methods II: Capitation in Primary Care Payment for health services via capitation has the same advantage as salary or fixed budgets in that it is a prospective method, so that the total cost to the purchaser of the services covered is known in advance of the services being produced. However, it can also be used in such a way that it gives providers an incentive to supply services of high quality, and to be productive by keeping the average cost of care low in the population for whom they produce services. In other countries, capitation is most often used as a method of paying for primary care, whether it is supplied by individual privately practising doctors or clinics similar to the basic care clinics that will be part of the future Chinese system.21 In a capitation system, each clinic must maintain a list (or a roster) showing the patients for whose care it is responsible during a given period. Patients can only appear on the list of one clinic at any given time, but have the right to change clinics at particular times during the year. The funding that a clinic receives during a given interval then is determined only by the number of patients that appear on its roster during that interval, but does not depend on the volume of services that has been provided to the patients. To reflect the fact that there are predictable differences in the amount of care that patients in different categories are likely to need, the capitation amount may be adjusted for factors such as age and sex (so that, for example, the payment is larger for an older person than for a younger one). Under a capitation system, each clinic (or individual provider) has the incentive to sign up as many patients as possible on its list, but to provide as little care as possible to each patient, since its revenue does not depend on the volume of services it provides. Typically, clinics receive capitation funding in return for a contractual agreement to provide specified types of care to all patients on their list as needed, and are monitored by their funding agency to ensure that they do in fact fulfill this obligation. 21

Zhenjiang has started to experiment with a capitation system for its basic care clinics since 2007. See 21st Century Business Herald, 22 Dec 2007.

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In addition, they have the incentive to earn a reputation for supplying high quality care since if they do not, patients can leave and register with another one. As before, the incentives for clinics to produce services efficiently will be stronger if the doctors that work in them are also rewarded for providing care efficiently, for example, by having their income tied to the number of patients on the clinic’s roster. As noted in an earlier section, one issue that arises when funding is regulated through a fixed budget is that clinic doctors have the incentive to keep costs and service volumes down by referring patients to hospitals (higher-level providers). A capitation system also gives rise to such an incentive.22 One method to overcome this tendency is to make the clinic where a patient is registered responsible for payment of at least a part of the cost of any treatment that this patient receives in hospital. A similar method can be used to give clinic doctors the incentive to reduce the cost of the drugs that the patient uses: The clinic can be made responsible for paying a share of the cost of the drugs that the patient uses on the clinic doctor’s recommendation. The term fundholding was used in the UK in the 1990s to describe a capitation system with these features.23 From the patients’ point of view, the fact that their choice of clinic is restricted during the period that they appear on a given clinic’s list can be considered a disadvantage with a capitation system. (Under FFS, a patient can go to any clinic they want to, at any time.) The fact that the clinic doctors have the incentive to treat each patient with the smallest amount of services can also be regarded as a potential disadvantage, although its significance can be limited by purchaser monitoring, and by competition among clinics for patients. In spite of these possible disadvantages, our view is that on balance, a system of adjusted capitation, with a fundholding element, is more promising than other alternatives, and we would favour a system in which purchasing agencies would at least have the option of choosing this method to pay for primary care. 22

Blomqvist, Å. and Léger, P. T. (2005). Information asymmetry, insurance, and the decision to hospitalize. Journal of Health Economics, 24, 775–93. 23 Scott, A. (2000). Economics of General Practice. In Culyer and Newhouse, (eds.), 1175–1200.

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Alternative Payment Methods III: DRGs for Hospitals While capitation is often used to pay for primary care, it is less commonly used to pay for inpatient care in hospitals. However, another payment method that is similar to capitation in certain important respects and has been coming into widespread use in recent decades is “diagnosis-related groups” (DRGs). The DRG method originated from the US Medicare system, but other versions of it have been developed and used in Europe, Australia and elsewhere.24 The basic ingredient of the DRG method is a list of diagnostic categories describing what kind of illness a patient has and how he or she will be treated. The payment that the hospital will receive for treating a given patient is, in principle, determined only by the diagnostic category in which the patient is placed on admission. While the method is not prospective in the sense that it determines the purchaser’s total cost of hospital services at the beginning of the contract period, it is prospective in the sense that it gives the hospital a fixed revenue for treating a patient in a given category in advance of actually treating him or her. Thus in contrast to payment via itemised billing (fee for service), under a DRG system the hospital cannot increase its revenue from a given treatment episode by providing and charging for things like extra bed days or diagnostic services, or more expensive drugs.25 At the same time, a DRG system gives the hospital the incentive to be productive by treating a large number of patients, something they can try to do by negotiating a low set of DRG rates with purchasers, or with the primary-care clinics or doctors that refer patients to them when the latter are responsible for paying part of the cost of their patients’ hospital care (as they would be under a system of fundholding). Like capitation as a method for paying primary-care providers, payment of hospitals through a DRG system has potential problems. In some cases, introduction of DRG-based payments has led to much higher aggregate hospital costs than purchasers had anticipated, as hospitals found ways of attracting more patients than expected for various kinds of 24

Canadian Institute for Health Information (2004). Acute-care grouping methodologies: From Diagnosis-Related Groups to Case Mix Groups redevelopment. http://secure.cihi.ca/ 25 Dranove, D. and Satterthwaite, M. A. (2000). The industrial organization of health care markets. In Culyer and Newhouse (eds.), 1093–1140.

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procedures. Furthermore, by giving the hospital the incentive to keep the cost of each treatment episode low, the quality of care may suffer to some extent (for example, because patients are discharged earlier than they otherwise would be, or are given fewer diagnostic tests). Nevertheless, like capitation in primary care, some form of a DRG system may be considered a reasonable compromise between payment via itemised billing (which tends to drive up costs) and payment through a fixed budget (which does not give hospitals the incentive to be productive in the sense of treating many patients, or in the sense of holding down the cost of treating each patient).26 How Much Should Patients Pay? Demand-side vs. Supply-Side Incentives The method used to pay health care providers is important because different methods create different incentives for those who supply the services that are produced in the markets for health services. But while decisions made by those on the supply side of the market are important to determining the quantities and pattern of health services utilisation, decisions by those on the demand side (that is, patients) are important as well. Demand-side decisions are also influenced by incentives. In particular, utilisation is influenced at least to some extent by out-of-pocket costs (the “user fees”) that patients have to pay for the services they receive. The role of user fees in publicly funded health care systems is a very controversial topic, with some arguing that all payments to providers should be from third-party purchasers and not from patients. Those who support payment of at least some fees cite at least three reasons for doing so. First, user fees deter patients from seeking medical care for health problems that are relatively trivial, self-limiting or can be treated by patients themselves. Second, user fees help finance health care, thus 26

In some instances, SIBs in China have begun using DRG-like reimbursement methods. For example, hospitals in Zhenjiang are reimbursed in some cases according to category of illnesses, which are determined by the SIB; see http://www.zjyb.gov.cn/ybzc2.asp?id=128. Under a pilot project in Beijing, some hospitals have been reimbursed via a DRG system from the year 2008. See http://money.business.sohu.com/20080331/n255999130.shtml.

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reducing the amount of money the government has to raise via taxes or payroll deductions for this purpose. A third reason is that reducing the demand for care via user fees is more efficient than allowing waiting times for care to become long when demand at zero fees exceeds the capacity to provide care. Those who oppose user fees do so for two principal reasons. Most importantly, they believe that in a health care system, most of the decisions that influence utilisation and total cost are made not by patients, but by providers. In their view, therefore, the supply-side incentives that influence the way providers make decisions are much more important than the demand-side incentives (such as user fees) that influence patients. Another argument against significant user fees is that they are regressive, in the sense that it imposes a relatively heavier burden on those with low income. Different countries have balanced these conflicting arguments differently. In the UK and Canada, there are almost no user fees for any kind of hospital or outpatient care. In other countries (for example, Sweden and France), substantial patient charges are imposed even though most health care is publicly funded. In China today, an important argument in favour of significant patient fees is that, by helping pay for health care, they reduce the need for the government to raise tax revenue. Moreover, the burden of user fees on poor people can be reduced by exempting those who are classified as poor from paying such fees.

User Fees: Paid to Providers or Purchasers? In a system where payment for health services is shared between patients and third-party purchasers, the patients’ share is usually collected by the providers. This can be done either by requiring patients to pay the full amount that providers charge, and then let them collect partial reimbursement (the purchasers’ share) from the purchasers, or by providers issuing separate bills to the patients and the purchasers for their respective shares of the total cost. In principle, these methods have equivalent incentive effects, but in practice they are somewhat different. The first one may pose problems for patients who may have difficulty raising the funds to pay for their treatment in the first place, even though they will

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be reimbursed for part of the cost by the purchaser. The second method overcomes this problem, but may involve a somewhat higher administration cost for the provider, as two bills have to be issued, and puts the responsibility on the patients to check that they have been correctly billed for their share of the cost. An alternative method of patient cost sharing is to initially have the purchaser pay the full cost of the services that have been provided (in accordance with the terms that have been negotiated between the provider and the purchaser); the patients would then be billed by the purchasers for their share of the cost. The advantage with this method is that it removes any incentive for the provider to manipulate the patient charges in order to raise their revenue; it also seems a more natural one when providers are paid through methods such as fixed budgets, capitation, or DRGs.

One Purchaser, Several Plans? If access to care in subsidised basic care clinics and hospitals for all Chinese residents is regarded as a basic form of social health insurance, China’s future system will have four social insurance plans, as discussed earlier: The “basic plan”, meaning access to subsidised care, and the three existing plans (HIS, UR, and CMS) which further reduce patients’ out-of-pocket cost for hospital care. An important feature of the scenario that we have proposed earlier is that SIBs and county HBs would act as purchasers of care from the publicly subsidised providers (basic care clinics and hospitals) on behalf of all citizens, regardless of whichever plan they belong to. This raises the question: should the purchasers negotiate separate contracts with providers for each insurance plan, or should there be only one set of contracts under which providers would be required to treat all citizens on the same terms (and be paid at the same rate), regardless of which plan they belong to? A major advantage of the latter alternative of course is administrative simplicity. On the other hand, it can, in principle, be an advantage to offer patients a choice among contracts under which providers are paid in different ways. For example, some individuals may prefer to be treated by doctors who are paid via fee for service, and therefore do not have the incentive to be conservative in their choice of diagnostic and treatment

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methods, even if this would be more expensive, while others may prefer to be treated by doctors paid via capitation, and ultimately pay less. At the present stage of China’s social insurance system, however, the task of negotiating a single set of provider contracts will be complicated enough, so that the objective of offering consumers a choice between plans that differ in this dimension should probably be left for future years. Thus, the scenario we envisage is one under which a single public purchaser (SIB or county HB) negotiates a single set of provider contracts on behalf of all citizens in a city or county. Differences among the various social insurance plans would then simply consist of different payments by patients to the purchaser when they use health services. For example, those in the basic plan would pay the highest user fees for both primary and hospital care, while those in the HIS would pay lower fees to the purchaser, in accordance with the terms of their respective insurance plans. Conclusion Health system reform has become one of the most actively debated topics in China’s economic and social policy in recent years. A large variety of approaches have been suggested, but the current debate has involved two main “schools of thought” whose views appear to differ quite sharply. On one side are those who advocate a major change in the direction of the health policy, with a return to a substantial role for government subsidies to providers in the financing of health care, and for the state (especially the Ministry of Health) in owning and managing the institutions (basic care clinics and hospitals) that provide care. On the other side are those that advocate more autonomy and decentralised management for health services providers, and an expanded role for the social insurance system (in which a different ministry, that of Human Resources and Social Security, is playing the lead administrative role) in financing health care. Those who favour this approach argue that better control of health care costs and production efficiency can be accomplished through a more active role of the social insurance plans as “purchasers” of care. At first glance, these two approaches seem largely incompatible. In this chapter, however, we have sketched a way forward which incorporates elements of both these basic strategies. We believe that a model along the

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lines that we propose would make the system function better than it would be either with a return to the combination of direct government financing and centralised “command and control” management which prevailed before the 1980s, or a strategy that relies mainly on competitive markets for allocating health care resources. As discussed earlier, the approach we propose would involve substantial government subsidies to providers (basic care clinics and hospitals), but subsidies that would be channelled through local government agencies (SIBs and county HBs) that would act as purchasers of care on contractually specified terms. Indirectly, there would also be increased government management of the provider institutions, but management would take the form of monitoring and enforcement of the contracts that providers would have with these purchasing agencies. Because this form of management can take place regardless of whether providers are owned by government or privately owned, one of its advantages is that it can be designed so as to allow for competition between private and public producers. The expertise that the purchasing agencies would require would consist not only of financial expertise (such as that required to manage conventional social insurance plans), but also medical and health management expertise, so that their staff might have to be drawn from personnel currently working in several different local departments. We believe that for the next several years, the emphasis in China’s health policy reform should be on strengthening the publicly organised system of health care financing and services production by means of increased public funding and training of the personnel for the local purchasing agencies. Over the longer term, however, there is another issue that should be carefully assessed: Whether there should be a major role for private insurance, either as a supplement to the social insurance system, or as an optional substitute for it. Our view is that there should be, and in particular, that employers and individuals should have the right to opt out of the public system and sign up for private plans instead. While the rules for such substitution must be carefully designed to avoid negative side effects on the social insurance system, allowing employers and individuals to elect coverage through private plans instead has the advantage of exposing the managers of the publicly organised social insurance plans to competition, giving them the incentive to manage the public plans

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efficiently and to ensure that those covered by the public system receive high quality care. We briefly discuss ways in which this could be accomplished in Appendix 1. Appendix 2 provides a brief discussion of other countries where models similar to the one we proposed have been used. Appendix 1: Opting Out and the Role of Private Insurance In China as in most Western countries, public funding will form the backbone of the health care financing system for the foreseeable future, and every citizen will be covered, to a greater or lesser degree, by social health insurance. However, this does not rule out a significant role for private health insurance. In systems where private health insurance exists alongside social insurance to a significant extent, it can play several different roles. In the terminology of the OECD,27 it can be supplementary to public insurance, meaning that private plans cover types of costs that are not covered by the public plans. Alternatively, if the public plans have significant costsharing through patient fees, private insurance can be complementary, meaning that it covers the user fees that patients have to pay under the public plans. Finally, private insurance can be a substitute for the public plans, meaning that those with private plan give up the coverage that they otherwise would have under the public plans and rely on the private plan they subscribe to voluntarily instead. Provided that the public insurance plans in China are comprehensive in the sense that most health services that patients may need are eligible for at least partial coverage, the role for supplementary coverage will remain limited, perhaps playing a role for things like dental care, eyeglasses, and the like. With respect to complementary private insurance, there is a case for not allowing patients to sign up for plans that cover the deductibles and co-payments for which patients are responsible under social insurance plans. For example, when private insurance covers patients’ co-payments for eligible services, they may use a larger volume of services, which raises the cost of the public plan because it has to pay for part of 27

Organization for Economic Cooperation and Development (2004). Private Health Insurance in OECD Countries. Paris: The OECD Health Project.

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this extra cost. However, when there are upper limits to the total amount of benefits that the public plans will pay out for a given disease episode or in a given calendar year, complementary private plans that extend the public plan coverage may play a useful role. The question whether citizens covered by social health insurance should be allowed to choose private plans as substitutes for their public coverage is a more controversial one. Some economists oppose the idea of substitute private plans on the grounds that allowing them to exist will give rise to the problem of “adverse selection”, a phenomenon which will be explained in later paragraphs. Others argue that when private substitute plans exist and citizens are allowed to “opt out” of social health insurance and choose a private plan instead, they play a potentially useful role by providing some degree of competition for the social insurance system. In the absence of private plans, purchasing agencies such as SIBs and HBs would have a monopoly in the local markets for health insurance. Even though they would not be expected to exploit their monopoly position in order to increase their profits (since they are public agencies, and not privately owned) some of them might do so to some degree, in response to local government officials’ desire for larger revenue.28 Potential competition from private plans could help prevent this, and might also spur them on to operate more efficiently, and to be more active in helping consumers’ obtain health services of high quality. One form of substitute private insurance with potential to play a significant role in systems with publicly organised and subsidised social insurance is employment-based group insurance. Under such plans, employers negotiate with private plans to provide care to their employees on terms that the plans have negotiated with providers, and perhaps through primary-care facilities serving the firms’ employees only. Effectively, the private plans then substitute for the local SIB or HB in carrying out the purchasing function that the latter would otherwise perform. In China, such a pattern would be especially likely since employers 28

Qian (2008) analyses some problems that may arise for health system reform when local government decision-makers are motivated to manage the health care financing system in such a way as to raise as much money as possible for the government.

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were responsible for organising and paying for their employees’ health care under the earlier system of health care financing. In order for private insurance plans to give effective competition to the publicly organised and subsidised social insurance plans, there has to be a “level playing field”, as the saying goes. That is, if coverage through the competing social insurance plans is subsidised, the private plans must be subsidised as well, and to the same extent. In principle, this could be accomplished by the purchaser (SIB or HB) paying part of the premium for any approved private insurance plan on behalf of each person who would be eligible for one of the social insurance plans. The premium subsidy would be calculated as the expected cost to the purchaser of the benefits covered under the relevant social insurance plan, less the premium of contribution that the person would have had to pay in order to be covered by that plan. As an example, for an urban employee that would be eligible for the HIS, an estimate would have to be made of the expected amounts that the purchaser would have to pay out in benefits for a person in the same age and sex category as the employee, and compare that with the contributions that the employee and his or her employer would make to the purchaser under the HIS. If the employee were to opt out, the premium subsidy payable by the purchaser to the substitute private plan would equal the difference between the two. (Note that this difference might be negative for employees with low expected expenditure, for example, the young. For them, the incentive to opt out would simply consist of a reduction in the amount they otherwise would have to contribute to the [compulsory] HIS.) Similarly, for persons eligible to belong to the UR or NCMS plans, estimates would have to be made of the expected expenditures that the purchaser would incur for average people in given age/sex categories, and the premium subsidy for an approved substitute private plan would equal the difference between that expected cost and the premium that each person would have to pay in order to belong to the UR or the NCMS plan. Clearly, administering a system of this kind would not be easy, as relatively sophisticated actuarial calculations of expected health care costs for people in different categories would have to be made, and clear rules would have to be established regarding the conditions that substitute private

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plans would have to meet in order to be eligible for premium subsidies. Moreover, problems of adverse selection might arise, in the sense that opting out would be especially attractive for employees at relatively low risk of illness (even if the premium subsidies have been adjusted for risk differences associated with factors such as age and sex). Nevertheless, the advantage of exposing the publicly organised social insurance plans to some degree of competition from private plans may be sufficiently great to justify at least some forms of opting out. Appendix 2: Models of Purchasing in Publicly Funded Health Insurance In this Appendix, we briefly sketch the basic principle adopted by countries where public funding of health insurance has been channelled to providers through agencies that have functioned (explicitly or implicitly) as “purchasers”, along the lines we have proposed earlier for the case of China. The discussion focuses on the cases of the UK and the US, but versions of the model have been used in other countries as well, such as Holland and Sweden. The model of purchasing agencies in publicly funded plans can be thought of either as an outgrowth of private insurance plans using the principle of managed care in the US, or as arising out of the attempts that have been made to streamline the operation of the UK National Health Service since the 1980s.29

The US: Private managed care and the Medicare/Medicaid plans The development of managed-care plans in the US can be seen as a response to the tendency for health care costs to become very high when independent providers (doctors and hospitals) are paid on the basis of fee for service, and insurance passively reimburses the insured for all or part of the fees they have paid providers. The basic principle underlying managed-care plans, as opposed to conventional passive reimbursement insurance, is that the insured can only receive services from providers that have entered into some form of contract or agreement with the plan 29

A more detailed discussion of these and other cases can be found in Blomqvist (2002).

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concerning the way care can be given, and how they will be paid for their services. Generally, the payment methods and other contract provisions are intended to promote less costly patterns of care than under conventional insurance plans. For example, they specify prospective methods of payment that give providers an incentive to keep costs down (supply-side incentives), or require an independent second opinion before a patient can be referred to certain types of surgery. Under managed-care plans, which now account for a large share of private health insurance in the US, the insurance companies do not just pay for their clients’ health services, they actively negotiate contracts with providers in order to obtain more cost-effective patterns of care. Although various forms of managed care developed first in the private sector, in the US elements of managed care have become increasingly important in the publicly funded insurance programmes that cover the elderly (Medicare) and those with low income (Medicaid). In the 1980s, the Medicare plan developed a system of Diagnosis-Related Groups to pay for hospital services that its clients receive. Under this system, versions of which are now widely used throughout the world, the hospital receives a prospectively determined amount for treating a patient in a given diagnostic category, regardless of what specific services are actually used in his or her treatment. Since 1997, clients insured under Medicare have been given the option to choose either the basic Medicare plan (under which doctors are paid via fee for service) or an approved private insurance plan (which typically is a managed-care plan). When someone chooses the latter option, Medicare transfers to the private plan an amount equivalent to what the expected cost to Medicare would have been if the patient had stayed with the basic plan. In this case, Medicare subcontracts with the substitute managed-care plan to act as a purchaser of services. Similarly, under the state-administered Medicaid plans that provide publicly funded health insurance for those with low income, patients in many states are required to enrol in a managed-care plan, with the Medicaid paying a risk-adjusted premium. This can also be interpreted as an arrangement under which the Medicaid plan subcontracts the service purchasing function to the managed-care plans that contract with providers (doctors and hospitals) to deliver the care needed by the insured population.

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UK: The National Health Service and the purchaser-provider split In the UK, the current system of purchasing services evolved from the earlier version of the National Health Service (NHS) that was founded in 1948. The NHS has used the service-purchase model for primary care ever since, where such services have been delivered by general practitioners under contract, within a system which paid them through a model with a substantial element of capitation. However, until the 1980s, all hospital services were delivered through a network of publicly-owned and administered hospitals that were funded on the basis of negotiated annual budgets. Under the Thatcher government, hospitals continued to be owned by the NHS, but were given more managerial autonomy, and the funding system was changed to one in which resources would be given on the basis of service contracts negotiated with District Health Authorities (DHA). DHAs, in turn, were given fixed budgets with which to “purchase” hospital services for the population in their districts. This “purchaserprovider split” was one of the two cornerstones of the Thatcher reforms; the second was the system of fundholding under which GPs were given the option to receive an enhanced capitation amount for each person enroled in their practice, in return for agreeing to pay for a portion of the cost of the drugs or hospital care that their patients received on prescription or referral, respectively. Reform of the NHS continued after the Labour government came to power in 1997. Although the management of the NHS has been rearranged in a number of ways, the system continues to be based on a set of agencies acting as service purchasers (currently, this role is performed by Primary Care Trusts which have replaced the DHAs that previously had this function), and while the system of GP fundholding has been abolished, a new version of it appears to be emerging (under the name of “practice-based commissioning”). Thus in the UK too, the system of publicly-funded health insurance now is based on the principle of paying service providers through contracts with purchasing agencies (the Primary Care Trusts). These contracts are similar to the rules applying to hospitals paid via DRGs in the US Medicare system, or to doctors and hospitals that provide care under contracts with managed-care plans to

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those insured through Medicare’s managed-care option or through the Medicaid plans in many states.

Common principles and differences The Medicare and Medicaid plans and the NHS in the UK are all examples of publicly-funded health insurance systems, either for specific population groups (Medicare, Medicaid) or for all citizens (NHS). All of them differ from earlier forms of conventional health insurance in that they require providers to abide by certain rules regarding how they should treat insured patients, or how they will be paid. Under the basic Medicare plan, doctors must accept limits on how much they charge patients for different services, and hospitals must accept payment in accordance with the plan’s DRG schedule. Both Medicare and Medicaid also contract out insurance for some patients to private managed-care plans; these private plans typically restrict their members to treatment by providers with which they have agreements regarding treatment patterns and compensation methods. In this sense, therefore, both the Medicare and Medicaid plans act not only as insurers that pay for a part of their members’ health care costs, but also as purchasers who (directly or indirectly) negotiate with providers regarding the terms according to which care will be provided. In the UK, the Primary Care Trusts act as purchasers, entering into contracts with GP practices and hospitals regarding the terms on which primary and secondary care will be provided. While the contractual terms vary, a common way to compensate primary-care providers (at least partially) is through capitation (in subcontracted managed-care plans under Medicare and Medicaid, and in the NHS), and hospitals on the basis of some form of prospective DRG system (in the basic Medicare plan as well as in many subcontracted managed-care plans, and in many contracts between Primary Care Trusts and hospitals in the NHS). The three systems are similar in that public insurance funding is channelled through purchasing agencies that negotiate with providers regarding the terms of care. However, they differ in some important respects. Patients covered by Medicare, and those covered by Medicaid in some states, can choose among several versions of coverage (the basic plan or a managed-care option in Medicare, one of several approved

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managed-care plans in the Medicaid case). In the NHS, in contrast, there is only one plan version. The systems also differ in some degree with respect to the freedom of the insured to choose among providers. In the basic Medicare plan, patients can choose to go to essentially any outpatient doctor or hospital (most doctors and hospitals in the US have agreed to provide care in accordance with the fees allowed under the basic Medicare plan). However, those with coverage through a private managed-care plan may be restricted to seeking care only from providers on the plan’s list, and to get primary care only from their designated family doctor for the duration of a given contract period; they may also have to have their primary-care doctor’s referral before getting specialist and hospital care. Patients in the UK system face restrictions similar to those in US managed-care plans: They can only get their primary care from the GP practice with which they have registered at a given time, and they have to have the GP’s referral in order to obtain specialist and primary care. Additional References Culyer, A. J. and Newhouse, J. P. (eds.) (2000). Handbook of Health Economics, 1A and 1B Amsterdam: North-Holland. Development Research Center of the State Council, Beijing (2005). Evaluations and suggestions on Healthcare reform in China. Chinese version downloadable from http://down.cenet.org.cn/view.asp?id=58268. Hjortsberg, C. and Ghatnekar, O. (2001). Health Care Systems in Transition: Sweden. European Observatory on Health Systems and Policies. Available at www.euro.who.int/observatory/Hits/ Hainan Province Government (2007). Document 148. http://hi.lss.gov.cn/web/ content.jsp?id=144 Qian, J. (2008). An Essay on Chinese Health Reform and Local Government. Unpublished manuscript, National University of Singapore. Robinson, R. and Dixon, A. (1999). Health Care Systems in Transition: United Kingdom. European Observatory on Health Systems and Policies. Available at www.euro.who.int/observatory/Hits/

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CHAPTER 4

China’s Higher Education: Growth and Problems Zhao Litao and Sheng Sixin

China’s higher education has expanded rapidly since the late 1990s. The decision for expansion was made by the central government, and driven by non-government resources. The shift from government revenues to non-government resources in financing higher education reflects a fundamental change in the decade-long practice of favouring higher education over basic education. This is in line with the World Bank’s advice that public educational investment should be focused on primary education and, to some extent, secondary education. China’s higher education expansion has global parallels. The postWorld War II period has seen developing countries expanding higher education enrolment, proliferating higher education institutions and diversifying financial provisions for higher education development.1 In China, the gross enrolment ratio increased from 9.1 percent in 1997 to 15 percent in 2002, marking China’s transition from elite to mass higher education. In 2007, the gross enrolment ratio increased to 23 percent.2 It is truly remarkable that such a rapid expansion has occurred at a time when the share of government contribution to higher education is on the decline. This chapter will describe the growth of tertiary student enrolment, the changing pattern of financing, and the problems associated with the pace of expansion and the mechanisms of financing. 1

The number of adults in developing countries with some tertiary education increased by a factor of 2.5 between 1975 and 1990; meanwhile traditional research universities have been joined by polytechnics, professional schools and community colleges, some of which are operated by private providers. See World Bank (2000), Higher Education in Developing Countries: Peril and Promise. 2 http://edu.chinanews.cn/edu/zcdt/news/2007/09-12/1024818.shtml.

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Reviving Higher Education after the Cultural Revolution China’s higher education has been expanding since 1977 when the National College Entrance Examination was reinstituted. Paramount leader Deng Xiaoping emphasised that priority should be given to education if China was to modernise and catch up with the developed countries.3 In the Deng era, China’s effort to reform and expand higher education has undergone several phases. In the period of 1978–1984, the focus was on reopening higher education institutions,4 reinstituting merit-based entrance examination, and reintroducing degree programmes. There was little change in the structure of higher education, with one system undertaking teaching and another conducting research. At that time, China’s higher education suffered a number of problems, including rigid planning and centralised control, separation of teaching, research and production, duplication of programmes in small universities, narrow range of studies, low enrolment rates and insulation from international universities. From 1985 to 1992, the government began the first wave of higher education reform in order to provide the mix of skills for economic development. Universities were given new functions as centres of both teaching and research, and new freedom to enrol students outside the state plan if they are financed by stateowned enterprises or themselves. Up to 1994, enterprise-financed and self-financed students made up nearly 30 percent of the student body.5 A second wave of reform began in 1993, which devolved financial responsibility from ministries to provincial and lower levels of governments, and raised tuition fees across the board for state-sponsored, enterprise-financed and self-financed students. The state also loosened its grip on the founding and operation of higher education institutions. Another change was a shift from a unified national job assignment system to a two-way selection system, whereby students were allowed to select employers. 3

Deng, X. (1994). Selected Works of Deng Xiaoping: Volume II, p. 48. Beijing: The People’s Press. 4 The number of higher education institutions was 598 in 1978, while it increased to 1,016 in 1985. Please see Table 1. 5 World Bank (1996). China: Higher Education Reform, p. 3.

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Table 1: Number of Higher Education Institutions and Graduates 1978–1998. Year

Number of Higher Education Institutions

Number of Graduates (1,000 Persons)

1978 1985 1992 1993 1994 1995 1996 1997 1998

598 1,016 1,053 1,065 1,080 1,054 1,032 1,020 1,022

165 316 604 571 637 805 839 829 830

Source: China Statistical Yearbook, 2007.

Nevertheless, from an international perspective, China’s higher education expansion was still quite limited in the 1980s and 1990s. Only a small number of students received higher education every year before 1999 (see Table 1). In 1995, the gross tertiary enrolment ratio was as low as 5 percent, putting China in the same rank as Bangladesh (6 percent), Botswana (5 percent), and Cameroon (4 percent). Even India had a higher enrolment ratio of 7 percent. Compared with other East Asian economies, China had a large gap to close off. South Korea (52 percent) and Japan (41 percent) were far ahead of China. Singapore (34 percent) and Hong Kong (26 percent) also had considerable advantage. Up to the mid-1990s, China’s effort to catch up with industrial societies in educational development was hindered by the slow pace of higher education expansion.6 Part of the problem lay in the low level of public spending on education. While public expenditure on education as a percentage of total government expenditure was on the rise, public expenditure on education as a percentage of GDP did not change much and remained as low as 2.2 percent in 1994, lower than the average for least-developed countries (2.8 percent), developing countries (4.1 percent) and developed countries (5.3 percent).7 6

See World Bank (2000). Higher Education in Developing Countries: Peril and Promise, pp. 104–107. 7 World Bank (1996). China: Higher Education Reform, p. XVI.

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The slow pace of expansion was also due to the high level of public spending per-student but low level of total government expenditure in higher education. A World Bank study found that in 1990, public spending per student in China was 193 percent of GDP per capita, substantially higher than the 1990 average of 98 percent for East Asian countries.8 In the 1990s, public expenditure on higher education constituted around 20 percent of total public spending on education, and this rate is comparatively higher than other countries.9 However, the ratio of education expenditure to GDP was below 3 percent (except for a high of 3.1 percent in 1989) from 1978 to 1998, lower than the average of developing countries (4.1 percent).10 Although government spending on education grew substantially faster than government revenue between 1978 and 1998 (11.9 percent versus 5.4 percent),11 the pace of higher education expansion was moderate at best. It became clear that the problem lay in the way higher education was financed. There was too much reliance on government resources as compared to non-government resources including student fees. The Rapid Expansion of Higher Education Since 1999 By the end of the 20th century, the demand for higher education was on the rise, because China’s rapidly growing economy has created a strong demand for engineers and professionals. However, the supply side was constrained by the slow expansion of higher education and affecting China’s long-term competitiveness when the world is shifting to a knowledge-driven economy. Against this background, in 1999 the State Council approved The Plan of Revitalising Education in the 21st Century proposed by the Ministry of Education in 1998, setting the stage for an unprecedented expansion of higher education from 1999 to 2006. To a large extent, Jiang Zemin and Hu Jintao toed Deng Xiaoping’s line of placing emphasis on science/technology and education in China’s 8

Ibid, p. XVII. Refer to World Bank (1996). China Higher Education Reform. Report No. 15573-CHA, p. 49. 10 Ibid, p. 48. 11 The numbers are calculated according to China Social Statistical Yearbook 2007. 9

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development programme. The booming higher education between 1999 and 2006 was made possible in part to China’s strategy of revitalising China through science and education under Jiang Zemin, which emphasised the role of higher education and knowledge-centred technology in promoting economic development. At the same time the strategy of revitalising China through science and education created a favourable policy environment for expanding higher education. Between 1999 and 2006, however, the unprecedented pace of expansion was driven by a more immediate concern that had little to do with the long-term plan of revitalisation but rather to provide an alternative for unemployed graduates. This concern was exemplified by the 1997 Asian financial crisis, which slowed down China’s economy. The situation did not improve in 1998 despite the government’s pro-active policy. Unemployment was aggravated by the central restructuring of state enterprises and the over three million high school graduates flooding the job market each year. As a partial solution, some scholars, including Tang Min from the Asian Development Bank and Hu Angang from Tsinghua University, proposed the expansion of higher education. In early 1999, a plan was introduced to increase enrolment in higher education by 20 percent. The target was raised to 47 percent a few months later after policymakers felt that an increase of 20 percent was not enough.12 The Plan of Revitalising Education in the 21st Century set a target for China to reach the tertiary enrolment ratio of 15 percent by 2010.13 However, the new proposal in 1999 was more radical than the original plan. The number of newly enrolled tertiary students increased by about 50 percent in the first year, from about 1.1 million in 1998 to 1.6 million in 1999. In subsequent years up to 2006, there was an increase of about half a million every year. As a result, there were about 5.5 million students in higher education in 2006 compared to about one million in 1997 (see Figure 1). The dramatic pace allowed China to increase its tertiary student 12

Bai, L. (2006). Graduate Unemployment: Dilemmas and Challenges in China’s Move to Mass Higher Education. The China Quarterly, 185, 128–144. 13 For the full-text of this plan, please refer to http://www.linhaiedu.cn/dzzw/ShowArticle. asp?ArticleID=1350.

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6.00 5.461 5.045 5.00 4.473

4.00

3.822

3.205 3.00 2.683 2.206 2.00 1.597

1.00

1

1.084

0.00 1997

Figure 1:

1998

1999

2000

2001

2002

2003

2004

2005

2006

Student Enrolment in Higher Education 1997 to 2006.

Source: China Statistical Yearbook, 2007.

enrolment ratio from below 10 percent in 1998 to 23 percent in 2007, and reach the target of 15 percent — the benchmark for mass higher education — in 2002, well ahead of the target year of 2010. The rapid expansion of student enrolment was closely associated with the growing number of regular higher education institutions14 from 2000 to 2006, which was the second period of high growth for higher education institutions. The first period was between 1978 and 1985 (from 598 to 1,016) when higher education was recovering from the turmoil of the Cultural Revolution. During the second period (2000–2006), many specialised vocational schools were upgraded to professional colleges which constituted a substantial part of the newly established higher education institutions (see Figure 2). The actual increase in new institutions should 14

This category excludes adult higher educational institutions, private higher education institutions, and independent colleges. What constitutes an independent college will be explained in later sections.

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12000

10000

8849 7802

7402

6843

6478

6423

6100

1552

1731

1792

1867

8000

6000

4000

2000

0

1041

2000

1225

2001

1396

2002

2003

2004

2005

2006

Regular Vocational Secondary Schools Regular Institutions of Higher Education

Figure 2: Number of Higher Education Institutions and Specialised Vocational Schools 2000–2006. Source: China Educational Yearbook, 2007.

be even more remarkable than what Figure 2 reveals as a number of higher education institutions have been merged since the 1990s.15 Funding Higher Education’s Expansion China’s growing economy has necessitated large-scale investment in higher education, from both government and non-government sources. In absolute terms, total expenditure on higher education increased six-fold from 1997 to 2005 (see Table 2). In relative terms, total expenditure on higher education nearly doubled its share in total expenditure on education from 17.2 percent in 1997 to 31.6 percent in 2005, and more than doubled as a percentage of GDP. 15

The mergers were to improve the administration and efficiency of the higher education in China; many higher education institutions which were run by different authorities (Ministerial, Provincial, or Municipal authorities) had been localised in terms of finance and control. There were over 431 cases of higher education institutional mergers in China from 1990 to 2006. For the merger cases, please refer to: http://www.moe.edu.cn/edoas/ website18/level3.jsp?tablename=621&infoid=19558.

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Total Spending on Higher Education 1997–2005.

Year

Total Spending on Higher Education (Billion Yuan)

% of Total Spending on All Levels of Education

% of GDP

1997 1998 1999 2000 2001 2002 2003 2004 2005

43.6 59.8 76.5 98.3 124.8 158.3 187.4 225.8 265.8

17.2 20.3 22.8 25.5 26.9 28.9 30.2 31.2 31.6

0.6 0.7 0.8 1.0 1.1 1.3 1.4 1.4 1.5

Source: China Social Statistical Yearbooks, 1999–2007. Note: Total spending on higher education includes government expenditures, tuition fees, investments by organisations and individuals running schools; donations and fundraising for schools.

Diversifying sources of funding was a definitive feature of China’s higher education expansion between 1999 and 2006. The government — from the central level to provincial and city level — remains an important source, but innovative and entrepreneurial ways to finance the unprecedented expansion have emerged, from a wide range of sources that include private providers, bank loans, social donations and tuition fees.

Government Spending Government spending on higher education nearly tripled from 1998 to 2005, thanks to the booming economy and the rapidly increasing government revenue. It accounted for an increasingly higher share of government spending on education. In sharp contrast to the 1980s and the early 1990s when the government was financially constrained to expand higher education, China was in a much better position to finance higher education in the new millennium. Despite the rapidly growing government spending on higher education, as a percentage of GDP or a percentage of total government expenditure, there was little change from 1998 (see Table 3). From a comparative perspective, government

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Government Expenditures on China’s Higher Education 1998–2005.

Year

1998 1999 2000 2001 2002 2003 2004 2005

Government spending on higher education

Amount (Billion Yuan)

% of Government Spending on All Levels of Education

% of GDP

% of Total Government Expenditure

38.8 47.3 56.4 66.6 78.8 87.7 101.0 112.9

18.9 20.7 22.0 21.8 22.6 22.8 22.6 21.9

0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6

3.6 3.6 3.5 3.5 3.6 3.6 3.5 3.3

— — — —

14.0 13.0 32.0 23.0

0.5 0.6 1.3 0.9

1.4 2.4 7.4 —

For comparison Japan (2002–05) Korea (2002–05) Hong Kong (2002–05) Singapore (2002–05)

Source: China Social Statistical Yearbook, 2000–2007. Data for Japan, Korea, Hong Kong and Singapore refer to the most recent year available during 2002–05; see Human Development Report 2007/2008.

spending on higher education — in relative terms — is higher in Hong Kong and Singapore than it is in Japan and South Korea; China is in between, suggesting that funding for higher education is more diversified in Japan and South Korea.

Private Higher Education Institutions The government has loosened its grip on the founding of private universities by individuals or social organisations without government financing. It is called sili daxue (private university) if the university is established by individuals, but most are sili minban daxue (private enterprise-run university) founded by social organisations. Most are not officially recognised, but 295 qualified to be accredited by the Ministry of Education as

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of May 2007,16 and they have played a part in the expansion of Chinese higher education since 1999.

Bank Loans Banks have been deeply involved in the expansion of Chinese higher education. In general, banks believe that loans to higher education institutions are relatively safe because the government as the ultimate guarantor would not close down public universities. On the part of public universities, they also believe that the government would eventually come to their rescue if they are in debt. A report by the Chinese Academy of Social Sciences estimated that public universities borrowed 150–200 billion yuan as of 2006.17

Independent Colleges Since 1999 many public universities have been allowed to establish independent colleges, which operate like private universities.18 An independent college is founded by its parent public university and/or other entities (such as municipal government, and public or private companies). Independent colleges often share faculty and facilities such as libraries with their parent universities, but they have to pay for using their parent universities’ resources. Because independent colleges cannot enjoy government subsidy for higher education, they charge higher tuition fees while lowering the admission requirements.19 Independent colleges have developed rapidly since 1999, totaling 318 as of 2007 and accounting for 30 percent of undergraduate admission quota.20 16

For the full list of these private higher educational institutions, please refer to: http:// www.moe.edu.cn/edoas/website18/level3.jsp?tablename=322&infoid=28372. 17 Ru, X., Lu, X. and Li, P. (2005). Analysis and Forecast on China’s Social Development: 2006. Beijing: Social Sciences Academic Press. 18 The first independent college in China, City College of Zhejiang University ( ), was founded by Hangzhou Municipal Government, Zhejiang University and Zhejiang Telecom Industry Group in 1999. 19 In most cases, independent colleges’ tuition fee is around 15,000 RMB, triple that of public universities. 20 For the full list of these independent college, please refer to: http://www.moe.edu.cn/ edoas/website18/level3.jsp?tablename=577&infoid=7067.

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University Town University town is another form of expansion of higher education. In 2000, Eastern University Town located in Langfang of Hebei was constructed as the first university town in China.21 From 2000 to 2006, these university towns which could be found in almost every province numbered over 70.22 The university town was initially designed to accommodate the increased intake. But local governments soon saw the potential of boosting local real estate and service industries in the development of university towns. They were therefore very supportive of providing cheap land and favourable policies.23

Tuition Fees The government spending on higher education has increased steadily, but contributions from non-government sources have grown even more rapidly. Official statistics identified the three sources of non-government education funds as: (1) investments by organisations and individuals running schools; (2) donations and fundraising for running schools; and (3) tuition and miscellaneous fees. Table 4 shows that government contribution as a percentage of higher education expenditure shrank nearly 20 percentage points from 61.8 percent in 1999 to 42.5 percent in 2005, while tuition fees increased more than 13 percentage points in the same period. The rapid expansion of enrolment and the rising level of tuition fees have made tuition fees the second largest source of higher education expenditure behind government spending. To sum up, Chinese universities are now in a better position to accommodate more students as they could seek funding from a variety of financial sources. To a large extent, this fuelled the expansion of higher education. From 2002 to 2006, higher education institutions doubled the size of the campus (from 0.75 to 1.42 billion square metres), and more 21

Zhang, X. et al. (2006). The Sustaining Development of University Town. Chinese Higher Education Research, 1, 34–36. 22 Zhang, L. (2006). University Town is “Policy Mistake” or “Value Deviation from Construction and Management”. Modern Urban Study, 9, 72–80. 23 The biggest university town is Guangzhou University Town ( ). It invested more than 30 billion yuan, and occupies an area of 43.3 square kilometres.

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Expenditure on Higher Education in China 1998–2005.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1998

1999

2000

2001

Government expenditures

2002 Tuition fees

2003

2004

2005

Other sources

Source: China Social Statistical Yearbook, 2000–2007.

than doubled the floor space (from 0.12 to 0.27 billion square metres). Meanwhile, the value of equipment for teaching and research reached 142.4 billion yuan in 2006,24 up from 32.6 billion yuan in 2000.25 Developing World-Class Universities Since the 1990s Expansion of student enrolment is only part of China’s catch-up effort. Another goal is to improve the quality of higher education, create a number of world-class universities and ensure that China will not lose out in the transition to the knowledge economy where high technology drives economic growth and wealth creation. Chinese leaders believe that developing world-class higher education and internationally competitive universities is important for China’s sustainable development and innovation capability. According to the Academic Ranking of World Universities issued by Shanghai Jiaotong University,26 China’s definition of world-class 24

http://news.xinhuanet.com/edu/2007-10/15/content_6884967.htm. Educational Statistics Yearbook of China (2000), p. 358. 26 Please refer to: http://ed.sjtu.edu.cn/ranking.htm. 25

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universities mainly focuses on the quantity and quality of research output, especially in the fields of science and technology which have direct impact on economic development. In order to develop high quality research universities in China, the government initiated two important projects in the 1990s: Project 211 and Project 985. Universities which make the list can enjoy a set of priorities and extra funding from the government. Project 211 has been carried out since 1995, with around 100 universities on the list.27 From 1995 to 2000, different levels of government had invested approximately US$20 billion in these universities to improve their facilities and curricula.28 Out of the total 602 specialisations which received the government’s 211 fund, 119 (20 percent) are in humanities and social sciences, while the other 483 (80 percent) are in engineering sciences, fundamental sciences and other sciences. After 2000, Project 211 ceased to invest in most listed universities. In 1999, the government implemented another important development plan, Project 985. Thirty-eight universities from Project 211 universities received money from this project.29 For example, two of the best universities in China, Peking University and Tsinghua University, each received US$225 million from 1999 to 2003. Meanwhile, many Project 985 universities are also given more freedom in recruiting students and opening new programmes. Project 985 particularly encourages universities to establish connections with foreign universities through holding international conferences, attracting world-renowned scholars and founding joint-degree or cooperative research programmes with top foreign universities and institutes. In order to prevent expansion from diluting the quality of higher education, the Ministry of Education started undergraduate teaching evaluation in 2003. This evaluation is designed to run every five years in all universities which have undergraduate programmes. For those which are assessed as incompetent, their quota for student enrolment will be reduced. In addition, the Chinese government has initiated a series of 27

For the full list of 211 project’s universities, please refer to: http://www.eol.cn/article/20030911/3090736.shtml. 28 Please refer to: http://www.moe.edu.cn/edoas/website18/level3.jsp?tablename=724& infoid=5610. 29 For the full list of 985 project’s universities, please refer to: http://edu.people.com.cn/ GB/8216/31559/31603/4363859.html.

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programmes to attract and cultivate talents for higher education institutions. One of the most famous programmes is the Changjiang Scholars Programme of the Ministry of Education. From 1998 to 2006, around 800 renowned professors were recruited in Chinese higher education institutions under this programme, and 94 percent of them had international work or study experience.30 Another influential plan is the scholarship programme under China Scholarship Council which provides financial assistance to thousands of Chinese citizens to study abroad every year. Upon completion of their study, these people are obliged to return to China. In sum, in the past decade China has expanded tertiary student enrolment at an unprecedented pace, moving its higher education from the stage of elite education to mass education. In this process, both the structure of higher education and the source of educational expenditures have been diversified. For the first time, higher education expansion is primarily driven by non-government sources. Meanwhile, the government has beefed up its effort to build world-class universities by investing heavily in a few select universities. Problems of Higher Education Expansion in China Although the opportunities for higher education had greatly expanded for China’s high school graduates in the past decade, the explosive expansion has generated many short-term problems, including educated unemployment, tuition fee increase, higher education’s diluted quality and financial issue. The first problem is educated unemployment. After the government decided to rapidly expand higher education in 1999, some scholars anticipated educated unemployment as an imminent problem. The reason is simple: the job market is unlikely to expand as quickly as higher education. The problem would loom large as early as 2003, when the 1999 cohort began to enter the job market. To a large extent such a concern has become a reality. In 2003, as many as 750,000 college/university graduates (college graduates hereafter) could not find a job upon graduation; the 30

Please refer to: http://www.cksp.edu.cn/news/16/16-20070319-136.htm.

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number soared to 1.2 million in 2005. In 2007, 1 million out of 5 million college graduates were unemployed throughout the year after graduation.31 A mismatch between labour supply and demand is the root cause of the educated unemployment problem. The number of humanities and social sciences graduates has increased considerably since 1999. They accounted for about half of college graduates in 2006. However, some estimated that as low as 24.8 percent of jobs offered through job fairs are for college graduates in humanities and social sciences.32 Many of them have to seek jobs in the public sector or are forced to pursue postgraduate studies only to find the same dire situation years later. In addition, an oversupply of college graduates has reportedly brought down the wage levels of many fresh graduates. A survey done in Hunan found that half of fresh graduates are paid less than 1,500 yuan per month, not much higher than rural migrant workers.33 This depreciation of higher education has been dubbed as a new phenomenon of manual labour earning more than mental labour, to be distinguished from another earlier phenomenon of manual labour in the market sector earning more than mental labour in the unreformed state sector. The rise of educated unemployment reflects profound changes in China’s labour market. With the shortage of rural migrant workers in south China since 2004, and with millions of laid-off workers reemployed or retired, job shortage is now shifting to the higher end of the labour market. Creation of jobs for college graduates has succeeded creation of jobs for rural migrants and urban laidoff workers as a top concern for the government.34 Besides the educated unemployment issue, another significant problem is the soaring cost of higher education. From 1999 to 2005, the average annual tuition fee paid by college students increased from 3,335 yuan to 5,365 yuan. In many independent colleges which are primarily funded by tuition fees, the annual tuition fees hit a high of 15,000 yuan. Taking 31

See http://news.xinhuanet.com/employment/2007-03/04/content_5797779.htm. See http://news.xinhuanet.com/employment/2008-01/16/content_7429672.htm. 33 See http://news.sina.com.cn/c/edu/2006-04-17/03109635715.shtml. 34 On 13 June 2008, the Chinese Communist Party held a high-level meeting in Beijing to assess political and socioeconomic challenges facing the party and government in 2008. Hu Jintao highlighted that finding jobs for college graduates remained one of the major concerns for 2008. For the news report, see http://www.zaobao.com/special/china/cnpol/ pages1/cnpol080614.shtml. 32

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living expenses into account, the minimum cost for an average college student is well above 10,000 yuan a year, a financial burden for rural and ordinary urban households. The upsurge in tuition fees is due in part to the rapid expansion of higher education, and in part to the earlier reform that increased userfee in higher education. While government spending remains the single most important financial source for higher education, its share in total expenditure on higher education has declined sharply from 76.5 percent in 1997 to 42.5 percent in 2005. To partly make up for the shortfall, the contribution of tuition and miscellaneous fee has increased steadily since the mid-1990s. It made up 16.3 percent of total expenditure on higher education in 1997, but nearly doubled to 31.5 percent in 2005. Expansion of higher education has led to a drop in government spending for each undergraduate student to about 2,000 yuan from about 6,000 yuan prior to the expansion. As a result, affordability is increasingly an issue for low income families, and education has become one of the three most singled out financial burdens, with the other two being soaring housing and healthcare costs. There has been rising concern that students from poor families may choose to work rather than study in anticipation of the prohibitively high cost of higher education. While rapid expansion since 1999 has widened access to higher education and likely to have an equalising effect on educational attainment in an increasingly stratified society, the soaring tuition fees can offset the equalising effect of expansion by forcing children from poor families to enter the labour market without receiving higher education, thereby exacerbating the already large socioeconomic divide. It is understandable that the transition from free education to fee-based education will encounter major resistance, as has occurred in other developing countries. The solution, however, lies not in a return to the past, but in a combination of scholarship, bank loans, and various forms of aid to students in need of financial assistance. Another concern is the dilution of higher education as a result of expansion, as evidenced by the much more rapid increase in student numbers than the number of faculty. Prior to the expansion in 1998, there was a full-time teacher to every eight students; in 2006, the studentteacher ratio doubled to 16:1. As the number of postgraduate students has

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increased more dramatically than undergraduate students, the quality of postgraduate education becomes an even more pressing issue. As tuition fees become an increasingly important financial resource for colleges and universities, the expansion of enrolment is given priority over the creation of a good teaching and learning environment. To expand enrolment, the priority is given to independent colleges that charge higher tuition fees for lower entrance requirements. The problem also stems from the priority given to the expansion of office buildings over laboratory and library facilities, to the creation of profitable programmes over the improvement of academic programmes, and to the creation of large, “comprehensive” universities through merger and acquisition over the restructuring and consolidating of merged schools for a more efficient use of educational resources. Furthermore, in competition for professionals, executives and government officials as fee-paying students, it is not uncommon for a university to have two or three MBA or MPA programmes in different schools and institutes, raising the issue of waste and inefficiency, resulting in the dilution of the quality of higher education. From a longer perspective, a more fundamental problem is the lack of differentiation among Chinese universities. Public universities resemble private universities in their emphasis on for-profit function over the public-interest function; smaller colleges attempt to model the structure of large and comprehensive universities and vocational schools wish to evolve into research institutions. With a shift in priority from the expansion of enrolment to the improvement of quality, China has to avoid narrowly defining quality as being large, comprehensive and elitist. An increasingly specialised economy and a more differentiated society call for a mix of skills and a differentiated higher education system. Finally, one urgent problem for the expanding universities is the funding of facilities still under construction and the paying of large bank loans and their interest. Many Chinese universities have borrowed from commercial banks; some of them such as Jilin University now have difficulty paying the interest of bank loans.35 The mode of “co-operation between universities and banks”, which was encouraged by the government during 35

http://news.xinhuanet.com/focus/2007-03/16/content_5840837.htm.

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the expansion, has contributed to this debt crisis.36 The overheated investment on the university town in many cities is also a serious problem. In some cities such as Zhengzhou, the developer of the university town project ended in a financial crisis because the real revenue of the project is much less than expected. As for the solution to the debt problem, higher education institutions are turning short-term loans into longterm ones to solve the problem. They also turn to selling university land to real estate developers as a solution. But selling student hostels or converting university land into commercial land lacks a sound legal basis because university land is acquired at low prices from the government under the condition that the land is used for educational purposes. It still remains to be seen what actions the government will take to solve the problem of university debt. It is very likely that the government will eventually come to the rescue because the last thing it wants to see is the closure of public universities and the sending of university students to the streets. Meanwhile, the government should learn not to mismanage higher education expansion which could result in many structural and financial strains and stress. Looking Ahead Generally speaking, two factors led to the higher education expansion: an increase in the number of secondary school graduates and an increase in the proportion of secondary school graduates progressing to higher education. The explosive expansion of higher education during 1999–2006 was strongly driven by both factors. By comparison, the first factor played a small role in expanding higher education during 1985–1998, while the second factor played a big role in the expansion during 1992–1998, but not as big a role as between 1999 and 2006 (see Table 5). Looking into the future, the role of the second factor will diminish because the progression rate is already very high at above 80 percent. In fact, it has not increased since 2002. As the government had decided in 2006 to slow down the pace of higher education,37 it can be expected 36

Bao, W. (2007). Chinese Higher Education Institutions’ Financing Behavior Since Expansion. Economics of Education Research, 5(2). 37 http://news.xinhuanet.com/edu/2007-07/23/content_6414770.htm.

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Educational Expansion in China 1978–2006.

Year

No. of Higher Education Institutions

No. of Enrolment in Higher Education (1,000 Persons)

No. of Graduates from Senior High Schools (1,000 Persons)

Progression Rate of Senior High School Graduates (%)

1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

598 675 1,016 1,075 1,075 1,053 1,065 1,080 1,054 1,032 1,020 1,022 1,071 1,041 1,225 1,396 1,552 1,731 1,792 1,867

402 281 619 609 620 754 924 900 926 966 1,000 1,084 1,597 2,206 2,683 3,205 3,822 4,473 5,045 5,461

6,827 6,162 1,966 2,330 2,229 2,261 2,317 2,093 2,016 2,049 2,217 2,518 2,629 3,015 3,405 3,838 4,581 5,469 6,616 7,271

5.9 4.6 31.5 27.3 28.7 34.9 43.3 46.7 49.9 51.0 48.6 46.1 63.8 73.2 78.8 83.5 83.4 81.8 76.3 75.1

Source: China Statistical Yearbook, 2007.

that in the long run, the enrolment expansion will mainly come from the first factor, the growing number of secondary school graduates. The first factor can be further decomposed into two factors: changes in the population structure which determine the number of people at the traditional ages for attending higher education, and the expansion of compulsory education which sends more students to senior secondary education. The demographic factor has been working since the mid-1990s to expand higher education, but around 2010 the size of the 18–22 age group will begin to decline. By that time, further expansion of higher education will primarily depend on the prior expansion of primary education and junior secondary education, which was the focus of China’s educational development for much of the 1990s. Considering that China’s

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tertiary enrolment ratio is below 25 percent while the proportion of secondary school graduates progressing to high education is above 80 percent, China’s effort to universalise compulsory education in the 1990s will go a long way to boost China’s educational attainment. Overall, the rapid expansion of higher education since 1999 has pushed China into a stage of mass higher education along with various short-term problems to be dealt with. Since then, finding jobs for millions of college graduates has been a big challenge as well as a top priority for the Chinese government. The 2008 global financial crisis has made the problem much worse, which was unforeseen when China’s policymakers used higher education expansion to partially solve the problem caused by the 1997 Asian financial crisis. Into 2009, China was more careful in following the same path. The Ministry of Education decided to expand enrolment again, but in a more cautious and selective manner. Instead of across-the-board expansion, the plan was to expand enrolment into engineering, which produces graduates that are still high in demand. The Ministry of Education also decided to substantially increase the number of full-time master students as a means to postpone labour market entry of hundreds and thousands of college graduates. From a long-term perspective, while enrolment into China’s higher education will continue to grow, the quality issue will become a bigger challenge. Developing world-class universities and nurturing top-notch talents will prove to be much more difficult than expanding enrolment and building facilities. Additional References Cheng, K. (2004). Expansion of Higher Education in China: Then What? Harvard China Review, 5(1), 82–86. Quan, X. and Litao, Z. (2007). China’s Booming Higher Education. In Interpreting China’s Development, Wang, G. and Wong, J. (eds.), 194–197. Singapore: World Scientific.

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CHAPTER 5

China’s New Public Housing Policy: The Case of Xiamen Liang Ruobing

It was in the 1980s when economic reforms started in the urban areas that China began to reform its public housing system. By the end of the 1990s, the previous housing system had been replaced by a market-based one. However, this reform has resulted in one serious problem for the central government — which is to provide affordable housing to the lowerincome families. Although the Chinese government has always been aware of the problem, it did not introduce any substantial measures to tackle it. This changed, however, when a hike in property price from 2003 to 2008 amplified the magnitude of the problem by making housing unattainable even to middle-income families in the urban areas. In order to prevent the housing problem from spiraling out of control, the central government began issuing several directives in 2007 to increase the supply of affordable public housing to the population, including providing lowrental housing. The origins of these new housing directives could be traced back to early 2006 in Xiamen City when the central government introduced a new public housing system to solve the city’s housing woes. The success of the project prompted the government to implement it at the national level. This paper studies China’s public housing reform with Xiamen as a case study. The paper is divided into eight sections. Sections One and Two review the market-oriented reform of the housing system in the 1980s and the 1990s, and highlight the negative impact of these reforms. Sections Three and Four discuss the factors leading to the property boom before the 2008 global financial crisis, the central government’s response and the main aspects of the new public housing policy. Sections Five, Six

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and Seven examine Xiamen’s housing system and highlight some unresolved problems of the system, including the difficulties implementing it at the national level. Section Eight concludes this paper by giving some perspectives of China’s urban public housing system. Market-Oriented Reform in the 1980s and 1990s Before the 1990s, China’s urban housing system was implemented in a planned economy. Housing provision, in particular for state employees, was the responsibility of the state. Between 1949 and 1990, according to official statistics, 1.98 billion square metres of housing were built in Chinese cities and towns, among which 1.73 billion square metres or 87 percent were provided by the state. The remaining 13 percent were built by individual families.1 Under the old social welfare system, state employees earned very low salaries but enjoyed many benefits, including housing, education, healthcare and retirement pension. For instance, housing benefits came in the form of rental subsidy. It significantly reduced rental cost, making housing affordable to state employees despite their low salaries. Theoretically, this arrangement meant that the ownership of these housing belonged to the state. But this was rarely exercised. Usually, state employees could simply pass the tenure to their children, even though the latter might not be state employees. After adopting the economic reform and open door policy, the state government began to introduce measures to liberalise the housing market in a handful of cities in 1984. These measures included the removal of rental subsidy and the selling of public housing in the open market. In 1988, the central government decided to enforce these new housing measures at the national level. This started the “socialisation of housing” reform process which effectively shifted the responsibility of housing provision from the government to the market.2 To oversee the process, the 1

Wang, Y.P. and Murie, A. (1996). The Process of Commercialisation of Urban Housing in China. Urban Studies, 33(6), 971–989. 2 Lee, J. (2000). From Welfare Housing to Home Ownership: The Dilemma of China’s Housing Reform. Housing Studies, 15(1), 61–67.

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State Council passed two important directives to strengthen the housing reform.3 They are the “State Council’s Decision on the Deepening of City and Township Housing Reform” of 1994 and the “State Council’s Notification on the Further Deepening of City and Township Housing Reform and Speeding of Housing Construction” of 1998. The 1994 and 1998 housing directives were very comprehensive, covering many important aspects of urban housing. These include the introduction of a market-based housing rental system and the establishment of a housing provident fund (HPF, ). They also seek to replace in-kind housing subsidies with cash and encourage existing tenants to purchase their public-owned housing (POH, ) (Appendix I). More importantly, they also called for a three-tier housing supply system to ensure equality in housing provision. First-tier housing, which was mainly for the high and upper middle income households, would be provided by the private housing market. Economical and Affordable Housing (EAH, ), which was second-tier housing, would be developed by private developers with some subsidies from the local governments. They are mostly for the middle and lower-middle income households. The lowest tier, low-rental housing (LRH, ), was constructed and heavily subsidised by local governments. This kind of housing would be provided to lower-income households.4 3

State Council’s Decision on the Deepening of City and Township Housing Reform (guowuyuan guanyu shenhua chengzhen zhufang zhidu gaige de jueding), State Council, No. 43, 18 July 1994; State Council’s Notification on the Further Deepening of City and Township Housing Reform and Speeding of Housing Construction (guowuyuan guanyu jinyibu shenhua chengzhen zhufang zhidu gaige jiakuai zhufang jianshe de tongzhi), State Council, No. 23, 3 July 1998. 4 LRH application criteria differ in different cities. In Xiamen, for instance, the monthly household income of applicants should not be more than the local guaranteed minimum income (GMI, ) set by the city and the per capita living area should not be more than eight square metres. Furthermore, at least one applicant of the household should be holding Xiamen hukou for no less than five years. If the applicant is single, the minimum age is 30 for male and 28 for female. For married applicants, the minimum age for the male applicant should be 25 and 23 for female. See Administrative Measures on Application, Approval and Exit of Low-Rental Housing for Guaranteed Minimum Income Household (chengzhen zuidi shouru jiating lianzufang guanlibanfa), Municipal bureau of construction and management of Xiamen, September 2005.

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Impact of the Housing Reform of the 1990s The housing reforms of the 1990s, particularly the 1994 and 1998 directives, had to a certain extent helped the establishment of a market-based housing system in China. Not only has the market replaced the government in dictating housing supply, but the number of privately-owned housing has increased quite significantly. However, due to the lack of complementing measures, especially in helping the establishment of the aforementioned three-tier housing supply system, the housing reforms have created the critical problems of affordability and housing provision for lower-income households.5 For instance, based on the EAH scheme, private developers were supposed to construct housing under favourable arrangements such as lowered land-use fee and tax reduction or exemption from the local government. This is to help reduce cost so that housing prices would be within the affordability range of middle and lower-middle income households. However, the EAH scheme limits the profit margin of private developers to only three percent and reduces the level of subsidies from the local government. This conflicting arrangement repelled private developers from developing housing under the EAH scheme, which led to a lack of supply of EAH housing for urban residents. The supply of housing under the LRH scheme was also facing problems. As mentioned earlier, the construction of LRH housing is the responsibility of the local governments. However, due to the extra fiscal burden that it posed, local governments were reluctant to provide LRH housing. In fact, by the end of 2006, 145 of 667 Chinese cities had not adopted the LRH housing scheme.6 Even in cities which have adopted the LRH scheme, construction was kept to a minimum. In fact, it was reported that local governments had only used two billion Yuan of the total ten billion Yuan of housing provident fund provided by the central 5

Wang, Y. P., Wang, Y. and Bramley, G. (2005). Chinese Housing Reform in State-owned Enterprises and Its Impacts on Different Social Groups. Urban Studies 42(10), 1859–78; Lee, J. (2000). From Welfare Housing to Home Ownership. 6 Ministry of Construction: All Cities and Counties Have to Provide Low-rental Housing in this Year and 145 Cities do not Have Such Policy. Xinhua News Net, http://news. xinhuanet.com/politics/2007-02/15/content_5741227.htm.

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government and 300 million Yuan of the total 13.5 billion Yuan of land transfer fee for the construction of LRH housing. Besides, many constructed LRH were “show-off projects” ( ) to boost the reputation of local governments.7 This neglect resulted in an undersupply of LRH housing for lower-income families. Official statistics showed that only 268,000 families or 2.7 percent of lower-income families were living in LRH housing.8 The allocation of EAH and LRH housing is another problem. For example, in an EAH housing district in Beijing, owners of these subsidised housing are driving premium cars that were clearly beyond their income level.9 This observation highlighted that households belonging to the higher-income group are gaining access to the subsidised housing, which could well explain the irregularities in the present housing supply system. EAH housing applicants only need certification of their income level, which is usually provided by their employers, to qualify. Hence, companies could simply forge payslips to certify themselves or their employees for a subsidised house. Property Boom and Reasons Behind When housing prices rise slowly, affordability is not perceived as a pervasive and serious problem because it only influences a relatively small group of urban residents. Since 2003, however, skyrocketing housing

7

An extreme case happened in Mingdemen ( ) district, the only low-rental housing district in Xi’an city. The district has six blocks of low-rental housing and a total of 246 units. Although the district has been constructed in 2001, five blocks were still unoccupied by the end of 2007. Why Xi’an’s Low-rental Housing was not Allocated Six Years after the construction (weishenme xi’an lianzufang jiancheng hou liunian reng wei fenpei). China Youth Daily (Zhongguo qingnian bao), 8 February 2007. 8 Ministry of Construction: Low-rental Housing Will Secure Urban Low Income Households. Xinhua News Net, http://news.xinhuanet.com/video/2007-08/31/content_ 6639737.htm, (accessed on 2 September 2007). 9 48 percent Economic and Affordable Housing was Rented out, Departure from the Original Intention of the Policy (Jingji shiyong fang chuzu lv gaoda 48 percent yu zhengce chuzhong nanyuanbeizhe). China Youth Daily (Zhongguo qingnian bao), 28 November 2006.

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98

60 2000-02

50

2003-05

Percent

40 30 20 10 0

Urumqi

Xining

Yinchuan

Xi'an

Lanzhou

Chongqing

Guiyang

Kunming

Haikou

Chengdu

Nanning

Shenzhen

Guangzhou

Wuhan

Changsha

Zhengzhou

Jinan

Qingdao

Xiamen

Nanchang

Hefei

Fuzhou

Ningbo

Nanjing

Hangzhou

Harbin

Shanghai

Dalian

Changchun

Huhhot

Shenyang

Taiyuan

Tianjin

Shijiazhuang

Total

Chart 1:

Beijing

-10

Growth Rate of Housing Prices in 35 Chinese Cities 2000–05.

Source: National Statistics Bureau, Chinese Statistics Yearbook, Chinese Statistics Press, 2003, 2004, 2006.

prices in many Chinese cities have exposed this underlying crisis. Against the moderation of local per capita income, housing prices in many cities doubled, creating a large group of urban residents in the “sandwich stratum ( )” who are neither able to afford private housing nor qualified to apply for public housing.10 As Chart 1 illustrates, housing prices in most Chinese cities have experienced significant growth especially after 2003. The slower growth prior to 2003 was due to a number of reasons including the negative impact of the financial crisis of 1997, the collapse of the US dot-com industry in 2001 and the outbreak of SARs in 2003. However, following China’s and the region’s recovery from these developments after 2003, China’s property prices have begun to experience an accelerated boom (Appendix II). Besides macroeconomic factors and the liberalisation of the housing market, China’s property boom was propelled by a number of

10

There is a big difference between public housing (PH, ) and publicly-owned housing (POH, ). Publicly-owned housing is usually allocated to state workers by state units whereas public housing is often provided as social welfare to low-income households by the local governments.

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governmental measures, including the introduction of an open tender system for land sales. In April 2002, the Ministry of Land and Resources (MLR, ) implemented a new ruling that places the sale of land for residential and commercial use through an open tender system.11 This replaced the old system where ownership of lands was transferred to developers based on a state distribution system ( ).12 Under the new open tender system, local governments are given more fiscal power as they can collect more funds by selling land. This process could work to the advantage of the local population as local governments would be able to use the extra revenue to provide more public services. The flip side is, it could also lead to the emergence of a Leviathan-type local government, as they would use the lucrative tender system to expand revenues at the expense of the public. According to Tiebout (1956) and Brennan and Buchannan (1977), local residents could prevent the emergence of a Leviathan government if they were allowed to vote with not only their hands, but also their feet through freedom to migrate. Unfortunately, China did not have such an electoral system in place.13 Without proper checks and balances, local governments began to abuse the tender system to generate higher returns by favouring the sale of lands to private instead of public residential developers. These actions were also driven by the local governments’ desire to perform. The evaluating system of local officials used by the central government was not based on socioeconomic indicators but growth rates of local Gross Domestic Product (GDP) and local fiscal revenue. As a result, to register higher revenue, local governments provided the climate to allow speculators to drive property price upwards. Some municipal governments even

11

Regulation on Use of Right Transfer of State-Owned Land with Bidding, Auction and Public Tender (Zhaobiao guapai paibai churang guoyou tudi shiyongquan de guiding), Ministry of Land and Resources, No. 11, May 2002. 12 Under the agreed transfer system, the local government usually transfers land use right to private developers using non-marketing measures. This causes inefficiency of land use and loss of revenue. 13 At provincial and municipal levels, local residents have no channel to express their preference for the provision of local public goods by ways of voting or migration.

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tried to suppress land supply to increase demand.14 In order to maintain high revenues, the local governments also reduced their spending on the construction of public housing. Evidently, the property boom revealed an ethical crisis for local officials as they are no longer behaving like responsible civil servants but shrewd businessmen. But more importantly, the property boom has created a problem where there is not only an under-supply of public housing, but housing cost is accelerating beyond the reach of both middle and lower-income households. New Public Housing Policy in Urban China The unaffordability of housing is in conflict with Hu–Wen’s new concept of “scientific development ( )” and “harmonious society ( ).” Presently, the Hu–Wen administration is facing mounting socioeconomic problems despite maintaining strong economic growth. In fact, the Gini coefficient, which shows the level of income inequality, has increased from below 0.30 in 1978 to nearly 0.50 in 2007. To make matters worse, the central government has yet to establish any efficient social security and insurance networks. However, the Hu–Wen administration is beginning to introduce several “pro-people” policies to address the socioeconomic problems. These include the removal of the agricultural tax and extending urban social welfare benefits to migrant workers.15 The central government is also tackling the country’s worsening housing problem by passing a set of recommendations to make housing more affordable

14

This was the case in Qingdao, where the housing price increased from 3,922 yuan per square metre in 2000 to 6,370 yuan in 2006. Such practices were even given a term “Starvation land supply ( )”. See The End of Du Shicheng’s Pattern of ‘Managing City’ (dushicheng jingying chengshi moshi de zhongjie). (12 February 2007). Sanlian Life Weekly (Sanlian Shenghuo Zhoukan), No. 421. 15 Apparently, due to the differences in interests between central government and local governments, the central government’s policies are hardly enforced by the latter. See Zhao, L. (2006). Labor Market Reforms under the Hu–Wen Administration. In China into the Hu–Wen Era: Policy Initiatives and Challenges, Wong, J. and Lai, H. (eds.), Singapore: World Scientific Press.

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and increase the supply of public housing to the lower income.16 The recommendations which were passed by the State Council in 2007 could be seen as the framework for the new public housing system. One of the highlights of the State Council’s recommendations is the specification of how the supply of public housing should be financed by local governments. It stated that local governments could raise funds from the local budgetary, rental of lower-rental housing, social contributions, income from HPF investment, and land sales. The recommendations also noted that all net income of investment using HPF and 10 percent revenue from land sales have to be used for the construction of LRH or low-rental housing. The central government has also introduced a number of fiscal and monetary policies to cool the property market. These include taxing the transaction of resale housing, increasing the interest rate of mortgage loan and restricting bank loans to housing developers. It is likely that the central government will introduce more measures to control the property market. In fact, one of the highlights of President Hu Jintao’s speech during the 17th CCP congress was to resolve the housing difficulties of low-income families.17 It is clear that the main priority of the new public housing policy is to provide LRH or low-rental housing to the lower-income families. The central government could have felt that the housing problem has become so severe that it is beyond their capacity to tackle the problem immediately but rather to do it gradually, and in this case, to provide housing to the most needy group, which is the lower-income families. The government is also aware that the introduction of drastic housing regulations could affect the current market-based housing system. These initial actions indicate that the central government may take some time to completely solve China’s housing problem. However, it shows that the central government is aware of the problem and taking appropriate steps to address it. 16

Recommendations on Solving Housing Problem of Urban Low income Household (Guanyu jiejue chengshi dishouru jiating zhufang kunnan de ruogan yijian), State Council, No. 24, (7 August 2007). 17 Full text of Hu Jintao’s report at 17th Party Congress, Xinhua News net, http://news.xinhuanet.com/english/2007-10/24/content_6938749_7.htm, (24 October 2007).

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Although the central government has already paid attention to this important issue, it has yet to constitute a concrete and operable measure to direct China’s more than 600 municipal governments. Even if a directive has been formulated, it would most probably be a general framework because housing markets and living conditions vary greatly from city to city. Much is left to the discretion of local governments which may either adopt a wait-and-see strategy or take the lead to implement changes. The local government in Xiamen city is one of the few that is reforming its public housing system. Its measures were so effective that the central government decided to implement them at the national level.18 Xiamen’s Public Housing Project A year before the State Council released the recommendations to improve the country’s public housing system, Xiamen municipal government had already initiated a large-scale, low-price housing project for the urban poor. In October 2006, the Urban Planning Bureau of Xiamen came up with a five-year plan to provide public housing or social security housing (SSH, ) to the lower-middle and lower-income households.19 The plan aims to provide an additional 6.82 million square metres of public housing or 41.2 percent of total private housing supply by 2010 (Table 1). This would then provide housing to some 34,000 lower-middle and lower-income urban families. Xiamen’s housing project was triggered by the sharp increase in housing prices in recent years. During the period from January 2006 to June 2007, average housing price in Xiamen increased more than 100 percent from 5,419 yuan per square metre to 10,957 yuan per square metre. In the 18

As a matter of fact, some cities are beginning to use Xiamen’s public housing system to solve their housing problems. In September 2007, for instance, Beijing municipal government used a lottery system to allocate LRH. See The Construction of SSH in Xiamen will be the Origin Version of Housing Reform Nationwide (xiamen shehui baozhangfang jianshe jiangcheng quanguo fanggai lanben), (15 October 2007). Straits News (Haixia daobao). 19 Short-term Plan for Housing Development in Xiamen, 2006–2010 (Xiamenshi zhufang jianshe jinqi guihua, 2006–2010 nian). Urban Planning Bureau of Xiamen, (30 September 2006). http://www.xmtfj.gov.cn/ywjx/tzgs/t20060930_10149.html.

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Table 1: Construction Plan for Public Housing 2006–2010. Planned Areas of Housing Construction (1000 m2)

Location Share (%)

Siming Huli Haicang Jimei Tong’an Xiang’an Year

Xiamen Core Peripheral

2006 2007 2008 2009 2010

170 0 50 50 0

350 320 120 90 60

50 200 150 150 170

260 180 200 240 260

330 400 380 200 320

350 190 150 150 220

1,860 1,480 1,200 1,030 1,250

34.4 24.8 16.2 15.9 5.8

65.6 75.2 83.8 84.1 94.2

Total

270

970

720

1,140

1,630

1,060

6,820

21.4

78.6

Source: Short-term Plan for Housing Development in Xiamen, 2006–2010 (Xiamenshi zhufang jianshe jinqi guihua, 2006–2010 nian). Urban Planning Bureau of Xiamen, 30 September 2006.

core region or Xiamen Island, housing prices increased by nearly 115 percent from 5,690 yuan per square metre to 12,161 per square metre, while prices in the peripheral districts increased about 85 percent from 3,787 yuan per square metre to 6,993 yuan per square metre during the same period (Chart 2 and Appendix III). In order to stabilise rising property prices, the municipal government decided to slow down the construction of private housing. The recent property price hike has put housing beyond the reach of lower-income families and prompted the city’s government to increase the supply of public housing. According to the city’s five-year housing plan, the local government would be adding about one million square metres of public housing to the city each year. In terms of distribution, about 80 percent of the new public housing would be located in the peripheral districts (Table 1 and Appendix IV) while the share of public housing in the core districts of Siming and Huli would be reduced from the current 34.4 percent to only 5.8 percent by 2010 (Table 1). In other words, districts outside Xiamen Island would be demarcated more for public housing development. The Xiamen Municipal government also introduced a number of regulations to facilitate the construction, allocation and management of new public housing projects. For example, the regulations determine the qualifications of applicants and set the price and rent of the housing.

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13000 12000

average

core area

peripheral area

yuan/square meter

11000 10000 9000 8000 7000 6000 5000

Chart 2:

Jun 2007

May 2007

Apr 2007

Mar 2007

Feb 2007

Jan 2007

Dec 2006

Nov 2006

Oct 2006

Sep 2006

Aug 2006

Jul 2006

Jun 2006

May 2006

Apr 2006

Mar 2006

Feb 2006

3000

Jan 2006

4000

Rapid Growth of Housing Prices in Xiamen Jan 2006–Jan 2007.

Source: Website of Xiamen Real Estate, http://xm.focus.cn. (accessed on 30th July 2007). Note: Core area includes two districts of Xiamen Island: Siming and Huli District; peripheral area includes four districts outside Xiamen Island: Haicang, Jimei, Tong’an and Xiang’an District.

Social security rental housing (SSRH, ) or public rental housing (PRH) and social security commodity housing (SSCH, ) or public commodity housing (PCH) have been identified as the housing types that are eligible for receiving subsidies from the government (Appendix V). The regulations also set the maximum size of each type of housing at 70 square metres and specify that the three types of housing, namely “1+1”, “2+1” and “3+1”, would be allocated to singles, couples with one child, and households with more than three members, respectively. It is interesting to note that the “2+1” housing type made up the majority of LRH, SSRH and SSCH, accounting for about 70, 60 and 60 per cent of total supply of public housing, respectively (Table 2). One of the most notable characteristics of Xiamen’s public housing is that the municipal government takes full charge of the whole procedure of financing, construction, allocation and management of the public housing projects. In 2007, the Social Security Commodity Housing was renamed Social Security Economical and Affordable Housing (SSEAH, ). In the old EAH system, local governments were not involved in the construction, allocation and management of public

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Table 2: Type and Composition of Public Housing. 1+1

2+1

3+1

Type

m2

%

m2

%

m2

%

Total %

LRH SSRH (PRH) SSCH (PCH)

35 40

10 30

50 60 60

70 60 60

60 70 70

20 10 40

100 100 100

Source: Short-term Plan for Housing Development in Xiamen, 2006–2010 (Xiamenshi zhufang jianshe jinqi guihua, 2006–2010 nian). Urban Planning Bureau of Xiamen, 30 September 2006. Notes: 1+1, 2+1 and 3+1 indicate one, two or three bedrooms and one living room, respectively.

housing. Xiamen’s housing project reveals that the local government has the capacity to address China’s housing problem if it decides to play the role as a responsible administrator. In fact, Xiamen took its city’s housing problem into its own hands without any directive from the central government. Indeed, the city’s public housing initiative was so impressive that the central government decided to use it as the foundation of the new housing system. Unresolved Issues and Problems As a city of experimental public housing reform, Xiamen’s experiences are extremely valuable. At the time of printing of this book, the construction and allocation of public housing have been working well except for a few problems, prompting the local government to re-evaluate the city’s public housing reform. Xiamen’s five-year housing programme allocated some four million square metres or 60 percent of the total public housing supply as public commodity housing. The remaining 40 percent or three million square metres are reserved for the construction of public rental housing. The sale of these housing units was released to the public in December 2006. By the end of July 2007, the government has received a total of 14,573 housing applications from the lower-middle and the lower-income households. Unexpectedly, over 86 percent applications in the first half of the year were for SSRH while less than 14 percent were for SSCH.

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Specifically, 14,573 lower-middle and low-income households had submitted their applications; of these, 12,549 applied for SSRH and only 2024 applied for SSCH.20 The statistics show that the lower-middle and lower-income households in Xiamen were unable to afford the public housing even with government subsidies. Although the average selling price of a SSCH is about 4,000 yuan per square metre, which is significantly lower than the average price of 12,000 yuan for private housing, these households were still unable to afford them because of their low monthly income. It proves that the municipal government had hastily launched the new housing project without proper calculation. The government was too preoccupied with pacifying the housing market that it failed to devise a sustainable policy. In this regard, several problems related to Xiamen’s public housing policy should be taken into account. The first is the bureaucracy involved in the housing allocation and management. On the surface, the allocation and management of public commodity housing and public rental housing was the responsibility of two government offices under the charge of two different bureaus (Table 2). However, by taking into account the procedures and jurisdiction that they have to go through, the process actually involved more than 15 government offices. The complex administrative structure not only slowed the procedures, but increased the production cost of the housing. As a result, it is necessary for the local authority to introduce a better way to manage the housing project. The second problem is the tradeoff between the central and peripheral districts in terms of the locational distribution of public housing development. In light of the five-year plan, the share of public housing projects in peripheral districts would increase while the central districts would decrease. However, it is a challenge for the government to encourage the people to move out from the central districts, especially when

20

Xiamen Construct Housing Security System, Solving Housing Problem of Low and Mid-income Household (Xiamen goujian zhufang baozhang tixi jiejue zhongdishouru jiating zhufang kunnan), (11 September 2007) Economic Daily (Jingji ribao).

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the peripheral districts are usually short of public facilities such as transportation, schools and food markets. The local authority can overcome this problem by learning from the experiences of unsuccessful public housing projects in other countries such as the Pruitt-Igoe Housing Complex in Saint Louis and Robert Taylor Homes in Chicago.21 Finally, Xiamen’s public housing system has yet to address the problem of providing urban residents outside the hukou system with access to public housing.22 However, overcoming this problem is no easy task. For example, cities with migrant-friendly housing policy would attract more rural migrants, thus increasing the fiscal burden of the local government. To the local government, it thus makes more financial sense to leave migrant workers out of its housing plan. To rectify the problem, the new housing policy will have to define the housing rights of migrant workers so that they would not be left out of the system, especially when migrant workers are likely to continue to flock to the cities from the countryside. Promoting Xiamen’s Pattern: Difficulties Faced Implementing Xiamen’s public housing system at the national level is not without its problems. Firstly, there is a need to formulate a more practical mechanism to finance the public housing projects. According to Xiamen’s housing system, funds come from revenues generated from HPF investments and land sales. However, to make the mechanism more sustainable and applicable to cities without much fiscal revenue or low land

21

In these examples, urban poor families were moved into several public housing districts constructed by local governments. Decades later, these communities became a hotbed for social ills. This prompted higher-income residents to move out from the area. The communities were soon characterised by poverty, crime and more social problems. Finally, these communities were dismantled by the local government. See Keel, R.O. (1998). Pruitt-Igoe and the End of Modernity: Chicago’s Public Housing Projects. The Economist, http://www.umsl.edu/~rkeel/pruitt-igoe.html. 22 Wang, Y.P. (2000). Housing Reform and Its Impacts on the Urban Poor in China. Housing Studies 15(6), 845–64. The Xiamen municipal government has indicated its intention to provide public housing for migrant workers. The detailed arrangement is still under consideration.

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values, it should also stipulate how funds could be raised from other sources.23 Secondly, the central government should provide more incentives to encourage local officials to establish an efficient public housing system. This could be achieved if it introduced a more balanced evaluation system to measure the performance of local officials. Instead of focusing on economic achievements, the system should also evaluate how efficient local officials are addressing socioeconomic problems such as providing enough public housing to the lower-income families. Presently, the central government has yet to enforce this type of evaluation system. Thirdly, the central government should also introduce proper measures to prevent local governments from deliberately misallocating public housing to higher-income groups. For example, reports revealed that the Haidian District of Beijing is using public housing to attract and retain the services of talents from the private sector, overseas graduates, civil servants and teachers.24 This is a case of not only misusing local revenue, but also depriving lower-income households of their housing benefits. Some critics even perceived this as “robbing the needy to aid the wealthy ( )”. Finally, housing authorities in other cities cannot adopt Xiamen’s housing system without evaluating their own economic and socioeconomic conditions. A municipal government has many ways to subsidise low-income housing. For example, it could be through the construction of public housing, distribution of housing voucher and enforcing rent control. It can also choose to offer different amounts of subsidies. 23

According to official statistics, Xiamen municipal government collected a total land revenue of 11 billion yuan in the first eight months of 2007, accounting for 40 percent of its total fiscal revenue of 2006. Land Price of Floor Area in Xiamen Island Approaching Ten Thousand yuan (Daonei loumian dijia bijin wanyuan daguan. (16 August, 2007), Southeast Express (dongnan kuaibao). http://www.dnkb.com.cn/news/20070815/234648.html (accessed on 2 September 2007). 24 On 15 January 2008, China Youth Daily and Sina website conducted an online survey on public opinion in terms of LRH provision to high-level talents. Over 80 percent of the responses were against this policy, see Taotao, 80 percent of Responses Think it is Unnecessary to Supply LRH to High-level Talents (bacheng ren renwei mei biyao wei gaoduan qunti jian lianzufang). (21 January 2008) China Youth Daily (Zhongguo qingnian bao).

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As a result, local government should consider the performance of the city’s property market or the income gap before deciding to offer the type of subsidy to the people. Generally, the local government should offer higher housing subsidy to help the lower-income families if the city’s housing price is very high. On the contrary, in cities where property prices are more balanced, the local government should offer smaller housing subsidies to the people. This is to prevent the local government from straining their local budget so that sufficient funds could be allocated to construct more public housing. Conclusion After more than a decade of reforms, China has replaced its old housing system with a new market-based one. However, the recent property boom across the country revealed that the new system has deprived the lowerincome groups of their housing opportunities. Initially, the central government was slow to respond to this mounting problem, but it eventually introduced a set of recommendations in 2007 to establish a new public housing system that would be guided by the principle of achieving a “harmonious society”. This system would be largely based upon Xiamen’s public housing system initiated in 2006. Although Xiamen’s system was quite effective in providing housing for the lower-income, it still needs to be modified if it is to be adopted at the national level. This includes formulating a mechanism to finance public housing projects in cities with different levels of development and provide incentives to encourage local officials to establish an efficient public housing system. The system should also include proper measures to prevent local governments from deliberately misallocating public housing for their own economic ends and define how subsidies should be awarded to applicants of public housing.

Use Right

Remark

State ownership No transferability to urban land and tenure. for residential use.

Experiments of use right transfer of urban land were conducted in several Chinese cities, such as Shenzhen and Shanghai in the 1980s. EAH provided by State ownership With transferability After 2002, all use private to urban land and tenure right for developers for residential (up to residential land with subsidies use. 70 percent should be from government; for residential transferred low-rent housing uses). through marketing supplied by measures, such local government. as bidding, auction and public tender.

(Continued )

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1990s–2006 Privatisation (commercialisation) of POH: marketisation of housing provision and monetisation of in-kind subsidy; construction of HPF; affordable housing of EAH and LRH for lower-middle and low-income households.

Property Right

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1949–1990s Publicly-owned housing (POH) system: state and work units allocated publiclyowned housing to their employees with low rent and without tenure.

Remark

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Housing Policy

110

Appendix I: Evolution and Reformation of Urban Housing and Land Policy 1949–2007.

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Appendix I: (Continued ) Housing Policy

2006–

Primary Contents

Remark

Use Right

Remark

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State ownership With transferability After 2002, all use to urban land and tenure (up right for for residential to 70 percent residential land use. for residential should be uses). transferred with marketing measures, such as bidding, auction and public tender.

China’s New Public Housing Policy

Dual track system: housing Xiamen is the first market provides private large city that housing to upper-middle supplies largeand high-income scale public households- and local housing to its government provides low-income affordable public households. To housing to lower-middle date, no other and low-income Chinese cities households. have adopted such practices.

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Period

Land Policy

111

13.3

28.8

Hangzhou

9 July 2007

N.A.

1.78

36.1

15.7

Dongguan

12 July 2007

0.65

2.68

350

15.2

Chengdu Changsha

21 July 2007 24 July 2007

N.A. 4.56

4.14 9.20

205.1 3800

3.4 3.5

Chongqing Shanghai

30 July 2007 24 Aug 2007

1.25 1.72

4.18 4.40

244.4 13.7

1.9 66.9

Nanjing Shenghe Technological Ltd. ( ) Ningbo Youngor Real Estate Ltd. ( ) Dongguan Xinwan Real Estate Development Ltd. ( ) Sino Land (HK) ( ) Beijing North Star Co Ltd. and Beijing Urban Development Group Co. Ltd. ( ) ) Sino Land (HK) ( ) Nanjing Suning Real Estate Development Ltd. ( )

Source: Caijing (Finance and Economy) website, http://www.caijing.com.cn (accessed on 2 September 2007).

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0.39

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Nanjing

Buyer

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Last Recorded Price (Billion Yuan)

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Date of Auction

Base Auction Value (Billion Yuan)

City

Total Area (Thousand Square Metres)

Land Price Adjusted with Floor Area Ratio or FAR (Thousand Yuan/Square Metre)

112

Appendix II: Cases of Landmark Prices in Urban Land Transaction in 2007.

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Appendix III: Geographical and Demographical Features of Xiamen. Districts of Xiamen City 2006.

Core area Peripheral area

Code

District

Areas (Km2)

Population (Thousand)

5 6 1 2 3 4

Huli Siming Tong’an Xiang’an Jimei Haicang

65.8 75.3 649.7 356.1 255.9 170.4

172.8 555.5 303.4 273.4 198.0 100.7

Source: Xiamen Statistics Yearbook, China Statistics Bureau, 2007. Notes: The data of areas and population was collected at the end of 2006.

Xiamen City composes six districts, among which Siming ( ) and Huli ( ) districts are located in Xiamen Island and the other four, namely Tong’an ( ), Xiang’an ( ), Jimei ( ) and Haicang ( ) districts, are located on the mainland surrounding the Island. Total areas of Siming and Huli districts are 141.1 square kilometres or nine percent of Xiamen’s total whereas the other four districts have 1,432.1 square kilometres of land or 91 percent of total. In contrast, the population in the core area was 728.3 thousand or 45.4 percent of Xiamen’s total while the peripheral districts had 875.5 thousand or 54.6 percent. The population density in Xiamen Island was 5,161.6 per square metre, nearly 10 times that of peripheral area’s 611.3 (see Table above). The special geographical structure determines the decisive role of location in Xiamen’s housing provision. The majority of its residents are residing on the island while most of the peripheral area is left idle or for agricultural uses. As a result, the housing price for the core areas of Siming and Huli districts is nearly two times that of districts outside the island.

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Appendix IV: First Phase of Planned Construction Projects of Xiamen’s Public Housing 2006.

Source: Short-term Plan for Housing Development in Xiamen 2006–2010 (Xiamenshi zhufang jianshe jinqi guihua 2006–2010 nian). Urban Planning Bureau of Xiamen, 30 September 2006. Notes: PCH: Public Commodity Housing; PRH: Public Rental Housing; AMW: Apartment for Migrant Workers.

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Appendix V: Regulations on Allocation and Management of SSCH and SSRH in Xiamen.

Administrative and executive departments

Social Security Rental Housing (SSRH)

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Housing development office of Xiamen Administrative centre of public housing (HDO, ) under the Municipal of Xiamen (ACPH, ) bureau of construction and management under the Municipal bureau of land, of Xiamen (MBCM, ); resources and real estate management of Xiamen (MBLRR,

);

(Continued )

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1. Applicants and their family members should have hukou of Xiamen as well as be living or working in Xiamen; at least one member of the family has held that hukou for no less than three years; 2. Household income accords with the standard of lower-middle and low-income household; 3. Household assets are below fourfold of the standard; 4. Household without housing or with housing problem.

China’s New Public Housing Policy

Qualifications of applicant 1. Applicants and their family members should have hukou of Xiamen as well as be living or working in Xiamen; at least one member of the family has held that hukou for no less than three years; 2. Household income accords with the standard of lower-middle and low-income household1; 3. Household assets2 are below sixfold of the standard; 4. Household without housing or with housing problem3.

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Social Security Rental Housing (SSRH)

Price of SSCH includes two parts: cost of construction and benchmark land price. The average price of SSCH will be 50 per cent cheaper than surrounding private housing.

Rent of SSRH is determined by the leasehold market and applicants will be subsidised according to their income level.

Calculation of score for Applicants will be given a higher score if they Applicants will enjoy more subsidies if they are in the lower-income group. Rental subsidy SSCH and rental subsidy live in poor housing conditions, hold hukou for SSRH of Xiamen for a longer time, live with parents will be 70 per cent of housing rent as applied or grandparents, married for a longer time household income is more than half of upper and on the waiting list for a longer time. limits of lower-middle and low-income In principle, applicants with a higher score standard; 80 per cent subsidy as income will be given priority in the waiting list. below the half of upper limits; 90 per cent subsidy when applicants enjoy guaranteed minimum income (GMI)4. (Continued )

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Price of SSCH and rent of SSRH

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Application → preliminary verification by neighbourhood committee → verification by subdistrict office → rental subsidy calculated by district bureau of civil affairs (DBCA, ) → checked by ACPH → approval by MBLRR → signing rental contract with ACPH → signing rental subsidy contract with DBCA → allocation and rental.

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Social Security Commodity Housing (SSCH)

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Appendix V: (Continued ).

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Appendix V: (Continued ). Social Security Commodity Housing (SSCH) Management of housing

Social Security Rental Housing (SSRH)

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117

Notes : 1. Standard of lower-middle and low-income household: annual income is below 50000, 60000, and 70000 yuan for households with three members or below, four or five members, and six members or above, respectively. 2. Household assets include real estate, automobiles, securities, investment (including shares) and savings (including cash and credit). 3. Housing problem indicates that per capita living space of household is below 12 square metres. 4. In 2007, guaranteed minimum income standard were 315, 290 and 265 yuan of monthly per capita income of households with single, two and three members or above, respectively.

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* The government will give a score to the applicants according to their income, current housing conditions and so on. The better their housing conditions, the lower their score. Their position on the waiting list depends on the score earned.

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Sources : Provisional Regulations on Construction and Management of Social Security Housing in Xiamen (Xiamenshi shehuibaozhangxing zhufang jianshe yu guanli zanxing guiding), Municipal Government of Xiamen, 21 November 2006; Regulations on Rationing and Management of Social Security Commodity Housing of Xiamen (Preliminary Version) (Xiamenshi shehuibaozhangxing shangpinfang peishou guanli banfa (shixing)) MBCM, 29 November 2006; Regulations on Management of Social Security Rental Housing in Xiamen (Preliminary Version) (Xiamenshi shehuibaozhangxing zulinfang guanli bangfa (shixing)), MBLRR, 29 November 2006.

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1. Applicants cannot resell or lease the 1. Applicants cannot sell, sublease, exchange or dwelling units but can apply for redemption leave idle the dwelling unit for more than six of HDO; months without warrant; ACPH has the right to cancel the contract and recall the units; 2. Applicants who falsify their income reports 2. Applicants who falsify their income reports or or housing condition cannot apply for SSCH housing condition will be disqualified from within five years; applicants who have renting SSRH and cannot apply for SSRH already bought SSCH should move out of within five years; their dwelling units can be dwelling units or make up the difference recalled by ACPH; between market and purchasing price; 3. Falsifiers could be investigated by the 3. Falsifiers could be investigated by the authority or legal department. authority or legal department.

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CHAPTER 6

Land Market Development in China’s Central-Local Relations Su Fubing

Visitors to China can hardly miss endless new highways, rows of factory buildings, brand-new apartment complexes and upscale shopping malls across the country. These impressive achievements underscore the rapid development of the land market in the country. Not surprisingly, land has become a hotly debated topic among government officials, private businesses, policy analysts, and common people in recent years. Overall, China’s emerging land market has improved economic efficiency and facilitated the country’s goal of modernisation. Local governments’ heavy meddling in the market, however, has received criticism from both the central government and the society. Moreover, excessive land acquisitions by local governments have “robbed” millions of farmers of their land. Enraged by forced relocation and inadequate compensation, many farmers have taken to the streets, besieged local government offices and even clashed with local authorities. Addressing these problems is crucial as rural instability undermines the legitimacy of the state. Indeed, the Chinese leadership is stepping up efforts to tighten central regulations over land policies. These include increasing the transparency of land use rights transactions, introducing a farmland preservation quota system and establishing a State Land Supervision Bureau. On the issue of land ownership reform, policymakers and local governments are encouraged to implement gradual changes through experimental projects rather than carrying out radical changes. Land market development is a good reflection of central-local relations in a transitional China. Ever since China began its economic reform, scholars have been fascinated by the dynamic relations between the central government and the sub-national or local governments. One of

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the key questions asked is whether the influence of the central government over the local governments is diminishing. A quick survey of past literature reviewed that in terms of fiscal operations, early scholars argued that the central government had indeed lost a lot of power with the number of concessions made to improve the local governments’ control over their resources.1 These scholars attributed this shift to the liberalisation process brought about by the country’s economic reform. This assertion was however challenged by other scholars who pointed out that the central government’s recentralisation efforts in 1994 led Beijing to reclaim its control over the local government’s fiscal revenues.2 In terms of appraising the performance of local officials, scholars agreed that Beijing has actually strengthened its control over the local level. In fact, the performance of local cadres is measured against a list of quantified targets set by the central government. Furthermore, the central party has the final say in the promotion or demotion of local officials.3 The debate on the influence of the central government over local officials on the land market suggests a more complicated relationship. At one end, scholars argued that the central government did decentralise a certain amount of power to local officials in land-related issues. They also pointed out that local governments have also innovated and improvised many 1

Oi, J. (1992). Fiscal Reform and the Economic Foundations of Local State Corporatism in China. World Politics 45(1), 99–126. Qian, Y., Ying, Y. and Weingast, R. (1997). Federalism As a Commitment to Preserving Market Incentives. Journal of Economic Perspectives, 11(4), 83–92. 2 Wong, C. and Bird, R. (2005). China’s Fiscal System: A Work in Progress. Working Papers, No. 0515, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto. Naughton, B. and Yang, D. (2004). Holding China Together. Cambridge University Press. Yang, D. (2006). Economic Transformation and its Political Discontents in China: Unequal Growth, and the Dilemmas of Political Development. Annual Review of Political Science, 9, 143–64. 3 Edin, M. (2003). State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective. China Quarterly, 173, 35–52. Blanchard, O. and Shleifer, A. (2001). Federalism with and without Political Centralization: China vs. Russia. IMF Staff Papers, 48, 171–179. Li, H. and Zhou, L. (2005). Political Turnover and Economic Performance: The Incentive Role of Personnel Control in China. Journal of Public Economics, 89, 1743–1762.

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institutions and practices to consolidate their control over this issue. This contributed to efficiency gains and fast growth of the economy. At the other end, however, some scholars noted that the central government’s influence on land-related issues at the local level is still strong as it is still able to overwrite the implementation of a number of poor land policies by local governments. Either way, it is clear that Chinese central and local governments have developed a more dynamic relationship. This paper discusses the development of China’s land market in the context of the relationship between the central and local governments. It first studies the rapid development of the country’s land market in the past decades before highlighting some positive and negative implications of the changes. The paper then examines several contentious issues that policymakers and analysts are currently debating to show the multifaceted central-local interactions. Land Market and State Regulations in China: Some Institutional Background

Implications on the Liberalisation of China’s Land Market During the planning period, the land market did not exist in China. All land was considered state property and private-owned land was requisited by the state. Distribution of land was centrally planned and allocated to state units or state-owned enterprises free of charge or with some symbolic fees for state construction purposes.4 Although this system impeded the efficiency of land distribution, it was not revised until 1987 when the

4

Wong, J. and Liang, R. (2006). Changing Land Policies: Ideology and Realities. In China into the Hu–Wen Era: Policy Initiatives and Challenges, Wong, J. and Lai, H. (eds.) (World Scientific). Cartier, C. (2001). Zone Fever, The Arable Land Debate, and Real Estate Speculation: China’s Evolving Land Use Regime and Its Geographical Contradictions. Journal of Contemporary China, 10(28), 445–469. Ho, P. Who Owns China’s Land? Property Rights and Deliberate Institutional Ambiguity. The China Quarterly, 166, 394–421. Qu, F., Herrink, N. and Wang, W. (1995). Land Administration in China: Its Impact on Land Allocation and Economic Development. Land Use Policy, 12(3), 193–203.

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Commercial Use Land Leasing Market

black market

Non-commercial Use State Allocation

Local Governments urban state-owned land black market

State Acquisition rural collective-owned land

Collectives Farmers’ houses

TVE constructions

Figure 1:

Land Market in China.

Source: Adapted from Lin, G. C. and Ho, S. P. (2005). The State, Land System, and Land Development Processes in Contemporary China. Annals of the Association of American Geographers, 95(2), 411–436.

central government adopted the concept of land use rights tenure system to develop the SEZ (Special Economic Zone) in Shenzhen.5 This move effectively legitimised land transfer for commercial use. Figure 1 sketches the structure of the current land management system in urban China. Under this system, land is still publicly owned and private ownership is not allowed. The system is also similar in the countryside where lands are owned by rural collectives which have the power to requisite land for local public projects. In urban areas, land belongs to the state. Land for non-commercial uses such as school construction or the building of highways and railroads is allocated by the local governments. At the 5

Zhu, J. (1994). Changing Land Policy and Its Impact on Local Growth: The Experience of the Shenzhen Special Economic Zone, China, in the 1980s. Urban Studies, 31(10), 1611–23.

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same time, they may lease land for other commercial uses. Depending on how land is used, the tenure for a plot of land may vary. For residential land use, the lease is 70 years. The lease is shorter for industrial and commercial usages (50 and 40 years, respectively). As industrialisation and urbanisation took off in the early 1990s, the demand for commercial land use skyrocketed. With a limited supply of urban land, local governments had to turn to neighbouring villages to acquire more lands which, in most cases, are farmlands. In terms of ownership, rural and urban land belongs to two different realms. According to the 1998 Land Administration Law, local governments can acquire land from rural collectives on the basis of “public interests”.6 This concept is hard to define but the ambiguity allows local governments to bend the rules easily and convert rural land for commercial development. In fact, under the system, local state acquisition is the only legitimate means for crossing the urban/rural land divide. Naturally, local governments have turned this monopolistic power into a revenue-generating business. The secret lies in the huge gap between land acquisition costs and leasing prices. The Land Administration Law stipulates that local governments must compensate rural collectives and peasants for land acquisitions: a) land (six to 10 times the average annual output value of the land; b) land productivity (resettlement funds that are four to six times the land productivity); and c) lost crops. A policy by the Ministry of Land Resources further requires that the maximum compensation cannot exceed 30 times the deprived land productivity and that amount must receive explicit approval from the provincial authorities. Even the law allowed these moderate compensations to be lowered through negotiation, apart from the many schemes used by the local governments to underpay the peasants including undervaluing land yield and opting for a lower multiplier. Furthermore, as de facto monopolists in local land markets, officials can collect exorbitant revenues. In Fujian province, for example, one local government paid 10,000 Yuan per mu to farmers and collected 200,000 Yuan per mu from industrial users and 250,000 Yuan from residential developers (1 mu = 1/15 hectare). Systematic data are hard to 6 Land Administration Law of the People’s Republic of China was originally adopted in 1986 and revised in 1988 and 1998.

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come by but, according to some statistics available for 1998, China collected 49.95 billion Yuan (US$98.31 million dollars) from both domestic and international land developers. Some scholars estimated that 49 percent of the total amount was conveyance fees. In general, local governments can lease out land through three mechanisms. They may negotiate with investors in one-on-one sessions (xieyi) and come up with prices and other conditions. Alternatively, land leases may be awarded in more open processes, such as public tenders (zhaobiao) and auctions (paimai). The central government has been encouraging the utilisation of the latter two mechanisms but, until recently, local governments showed strong preference for less transparent negotiations (Figure 2).

Boom in China’s Land Market There are three major reasons behind the boom of China’s land market. First, China was following the East Asian model of building an export-oriented economy. However, in order to do so, it had to attract foreign enterprises and

Negotiations

Public Tenders or Auctions

100%

80%

60%

40%

20%

0% 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Figure 2: Land Leases by Negotiations and Public Tenders/Auctions: 1995 to 2006 (%). Source: Annual reports by the Ministry of Land and Resources; Lin, G. C. and Ho, S. P. (2005). The State, Land System, and Land Development Processes in Contemporary China. Annals of the Association of American Geographers, 95(2), 411–436. Note: Due to limited data. The percentages are based on number of cases before 2002 and on total land areas after that year.

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one of the ways was to make large amount of cheap land available. It was not surprising that the land fervour first started in some coastal provinces such as Guangdong, Zhejiang, Fujian, Shanghai and Shandong. Once the land prices in these provinces took off, the land fervour spread to other parts of the country. Moreover, the increase in industrial wealth also brought about a second round of impact. When workers got richer, they began to demand for more services such as bigger and better apartments, shopping centres, restaurants, entertainment, transportation, etc. As the development required huge amount of land space, it further induced growth to the country’s land market. Second, local governments were driven by the strong financial returns from leasing land for commercial use. One of the reasons that led local governments to pursue this was because of the huge amount they had to contribute to the tax-sharing system which was implemented by the central government in 1994. The system was introduced because Beijing wanted to reinstall its control over the fiscal operations at the local level. After adopting the reform and open up policy, the central government gave local officials greater control over their fiscal operations in the 1980s as a measure to help induce growth at the local levels.7 However, after realising that the decentralisation process was depriving the central government of fresh funds, it decided to introduce a tax-sharing system with the local governments.8 This system stipulated that of the three major taxes, local governments could only fully claim the revenue generated from business tax. They had to contribute a portion of the Value-Added Tax (VAT) and the enterprise income tax to the central government. 7 Lin, J. Y. and Liu, Z. (2000). Fiscal Decentralization and Economic Growth in China. Economic Development and Cultural Change, 49(1), 1–23. Wong, C. (1992). Fiscal Reform and Local Industrialisation: The Problematic Sequencing of Reform in Post-Mao China. Modern China, 18(2), 197–227. Qian, Y., Ying, Y. and Weingast, R. (1997). Federalism As a Commitment to Preserving Market Incentives. Journal of Economic Perspectives, 11(4), 83–92. 8 Bahl, R. (1998). Central-Provincial-Local Fiscal Relations: The Revenue Side. In Taxation in Modern China. Brean, D.J.S. (ed.), New York; London, Routledge. Huang, X. (2007). Exploring the Institutional Foundations of Land Issues in China. (In Chinese) China Taxation, 2, 46–47. Wong, C. (1997). Financing Local Government in the People’s Republic of China. Hong Kong; New York: Oxford University Press.

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The contribution was so high, 75 percent and 60 percent, respectively, that most local governments were facing serious financial difficulties by the second half of the 1990s and early 2000s. As a result, they turned to the land market to find new sources of revenue growth.9 Third, local officials were also driven by political reasons to convert land for commercial use as they were largely related to their performance appraisal by the central government. Although Beijing had substantially reduced its influence over the affairs of local governments, it still asserted huge control over the performance appraisal of local officials. In fact, the performance of local officials was measured according to a list of targets set by Beijing. These targets could range from increasing school enrolment rate to the supply of clean tap water or improvement in transportation to expansion of telecommunication.10 Key economic indicators such as Gross Domestic Product (GDP) growth, increase in budgetary revenues and the flow of foreign direct investment also constitute a huge part of the appraisal exercise. As a result, local officials were forced to take extreme measures to bring growth in these categories without funding from the central government. They had to rely on local economies to raise the extra funds to finance these projects and one of the ways was through the land market. Land Development: Some Positive and Negative Consequences For economic, fiscal and political reasons, local cadres have promoted the development of land markets with great enthusiasm in recent decades. According to the Ministry of Land and Resources the total area of land lease increased more than five-fold from about 43,000 hectares in 1995 to over 232,000 hectares in 2006 (Figure 3). Undoubtedly, the rapid growth of China’s land market has both positive and negative effects on China’s economy, society and politics. 9

Huang, X. (2007). Exploring the Institutional Foundations of Land Issues in China. (In Chinese) China Taxation, 2, 46–47. 10 Edin, M. (2003). State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective. China Quarterly, 173, 35–52.

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250000

200000

Hectare

150000

100000

50000

0 1995

Figure 3:

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Total Land Lease in the Market: 1995 to 2006 (Hectare).

Source: Annual reports by the Ministry of Land and Resource; Lin, G. C. and Ho, S. P. (2005). The State, Land System, and Land Development Processes in Contemporary China. Annals of the Association of American Geographers, 95(2), 411–438.

Positive Effects of China’s Growing Land Market On the positive side, the development of China’s land market has contributed many important changes to the urban areas. Firstly, it literally provided a platform for the growth of its industry and service sectors in the cities. By freeing up land from rural collective control, land could be used for more productive purposes, particularly in expanding the industry and service sectors. As shown in Figure 4, after 1978, the more productive sectors in China was not the primary (predominantly agriculture) sector but the industry and service sectors. In fact, the contribution of the industry and service sector to China’s GDP was quite substantial especially after 1990 while the primary sector remained relatively unchanged (Figure 5). Therefore, making more land available for the industry and service sectors to develop is important for the sustainability of the country’s economic growth. Secondly, the increased availability of land provided cities with the space they needed for their expansion. China is currently witnessing an unprecedented growth of its urban population. This process was brought about by the rapid growth of its industries in the urban areas which drew

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25

Industry

20

GDP 15

Tertiary

10 Primary 5

0

Figure 4:

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

-5

Growth of Different Sectors in China’s Economy: 1978–2006 (%).

Source: State Statistical Bureau Website.

Primary

Industry

Tertiary

100%

80%

60%

40%

20%

0% 1991

Figure 5:

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

GDP Share by Different Sectors: 1991–2006 (%).

Source: State Statistical Bureau Website.

2003

2004

2005

2006

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Primary

Secondary

129

Tertiary

100%

80%

60%

40%

20%

Figure 6:

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

0%

Employment by Sectors: 1978–2006 (%).

Source: State Statistical Bureau Website.

millions of workers from the countryside. This trend is illustrated in Figure 6 which shows that the percentage of the country’s labour force in the primary sector was reduced from 70 percent in 1978 to around 40 percent in 2006 while both the industry and service sectors registered a significant increase from around 10 percent to more than 30 percent during the same period. The relaxation of the hukou or household registration system in major Chinese cities such as Shanghai and Beijing also contributed to the rapid growth of the urban population. Having been granted access to some of the basic rights enjoyed by the urban population such as housing and education, migrant workers are encouraged to settle down permanently in the cities. In fact, urban residency increased from 18 percent to 44 percent from 1978 to 2006 (Figure 7). Thirdly, the development of the land market provided channels for the local government to improve their financial accounts. Although there are

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Urban

Rural

100%

80%

60%

40%

20%

0% 1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 7:

Urban and Rural Residents in China: 1978–2006 (%).

Source: State Statistical Bureau Website.

no official data about local governments’ revenues from land transactions, scholars believed that land related revenues could account for up to 60 percent of local government income. Some scholars estimated the figure to be between 30 and 50 percent for all sub-provincial governments and around 50 and 60 percent for city-level governments. Gaining this extra financial source is important for the local governments as they could use it to fund various projects such as building new infrastructure or providing more public services for the rapidly growing urban population.

Negative Effects of China’s Growing Land Market On the other hand, the growing land market has also resulted in a number of negative effects. Firstly, it caused many distortions in the land market. This is largely attributed to the fact that the state is still the owner of both urban and rural land in China. This means that it still has the authority to release land or convert land from rural to urban uses. This arrangement gave local governments the monopolistic influence in the supply of land and allowed them to create their own jurisdictions in land-related issues.

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For example, they could limit the total supply of land in times of high demand to raise leasing prices or do the opposite to attract foreign enterprises.11 Although the distortions may increase the revenue of local governments or even bring growth and development, they may potentially disrupt China’s progress as a market economy. Furthermore, the distortions may affect the long-term development of the cities or create socioeconomic problems and fuel corruption at the local level. For example, the artificial lowering of land prices had led to over-investment in the manufacturing sector of many cities. This has resulted in serious pollution or the worsening of the power shortage problems in the cities. At the same time, local governments’ decision to limit land supply has caused housing prices to reach unprecedented heights. Not only did this deprive the urban population of affordable housing, it has also led to an increase in illegal transactions in the land market. In fact, some researchers estimated that between 1996 and 2002, the area of illegally occupied or transferred land from the local governments to dwellers or developers was more than the total area transferred through legal channels.12 These illegal activities not only undermined the land market progress towards the market economy but also provided ample opportunities for corruption. According to the World Bank, almost all major corruption cases at the local levels were associated with land transactions.13 A report by the Ministry of Land and Resources also revealed a similar finding. In fact, it reported that there were nearly 8,700 land-related corruption cases in the first half of 2008.14 Secondly, the development of the land market has prompted local governments to find ways to maximise financial returns from leasing rural lands. Normally, they are carried out at the expense of the land owner and one of the common methods is to under-compensate them for their land. 11

Gao, L. and Cao, Y. (2003). Low-Pricing in Land Transfers Won’t Work: Investigations and Reflections on Land Leasing. China Land, (In Chinese) 2. 12 Lin, G. C. and Ho, S. P. (2005). The State, Land System, and Land Development Processes in Contemporary China. Annals of the Association of American Geographers, 95(2), 411–436. 13 World Bank, (2005). China: Land Policy Reform for Sustainable Economic and Social Development. Washington D.C. 14 News-maker, Yin Guoyuan, was Brought to Court, Sounding an Alarm Bell of Land Corruption. (28 April 2008) China Real Estate News.

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Local governments are at liberty to repossess the lands as they are still considered the owner of rural land.15 Taking Hangzhou for example, farmers in the rural areas were given about 12,000 to 30,000 yuan for their relocation. This amount is clearly too little as each person in Hangzhou has to pay at least 60,000 yuan to the Social Welfare Department in order to receive their social security payment when they retire. In the less developed cities, the compensation farmers received for their land is even lower than Hangzhou’s rate. Facing this kind of unfair treatment, disgruntled farmers are taking their complaints to the government. In fact, a research conducted by the Chinese Academy of Social Science (CASS) revealed that 73 percent of 720 petitions filed by farmers in 2004 were related to land.16 However, these formal channels were often ineffective, leaving them with no choice but to resort to other measures such as sit-ins, road-blockages and protests. The CASS research highlighted that out of the 130 mass incidents reported by the government in 2004, 87 of them were clashes between farmers and local authorities due to land acquisitions.17 Reports also showed that these clashes usually ended up in violence. For example, in March 2008, a major fight broke out between farmers and local authorities in Foshan after the latter hired 200 thugs to beat up the farmers who were protesting against the low compensation received for their land. In the end, one protester was killed and 10 seriously injured.18 These incidents revealed that the unfair practice of the local government to repossess rural lands for maximum returns often resulted in protests and violence. According to some studies, land development has forced two to three million farmers to relocate every year and the total number of farmers who have lost their land in the past few decades is estimated to be around 40 to 50 million. Thirdly, the increased allocation of rural land for commercial use is at the expense of land available for agriculture purpose. In fact, the area 15

Zhou, F. (2007). Making Good Money: Governments and Peasants in Land Development and Transfers. Sociological Studies, (In Chinese) 1. 16 Farmers’ Rights Protests Concentrated in Land Disputes. Land has Become the Top Issue in the Rural Area. (3 November 2005) Xiamen Agriculture Net. 17 Ibid. 18 Investigation of Land Disputes and Bloody Incidents in China. Network News (4 April 2008).

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132

130

128

Hectare

126

124

122

120

118

116 1996

Figure 8:

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Total Farm Land in China: 1996 to 2006 (Million Hectare).

Source: Calculated from annual reports by the Ministry of Land and Resources.

of farmland in China has dropped by 6.4 percent between 1995 and 2005 (Figure 8). On its own, the rate might not look significant; however, when taken against the country’s huge population, the rate is alarming and could potentially undermine China’s food security. In 2007, the central government announced a set of measures to stabilise the area of farmland to around 120 million hectares by minimising the encroachment of rural land.19 This move has triggered a number of debates at the local level. Worried about losing their control over the land market, local governments argued that increasing farmland would not safeguard the country’s food security. Instead, they proposed the central government should invest more on farming technology to increase agriculture production. Either way it is clear that the allocation of land and the decrease of rural land are evolving into a political issue. 19

Farmland Protection Investigation Team (1997). Protection of our Cultivated Land Faces Grim Circumstances and Some Policy Recommendations. China Land Science, (In Chinese) 11(1), 4–5.

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Building an Efficient Land Market: Central Policies and Local Experiments The changes in China’s unique land market were directly related to the country’s modernisation process as it helped improve the efficiency in land distribution for commercial uses which facilitated the industrialisation and urbanisation process. But these changes also caused many problems due to several major institutional weaknesses. As the sole arbiters between rural land owners and urban land users, local governments failed to act as honest and neutral brokers. Their revenue motives systematically distorted the land market and created various imbalances mainly by institutionally excluding farmers from the negotiation process. Therefore, it is necessary for the central government to redefine local governments’ influence over the land market to ensure its healthy development. In fact, this was precisely what the central government has been doing in the past few years. Given the huge stakes involved, the central government has been taking a cautious approach by choosing not to make any sudden fundamental changes. On the issue of land ownership reform, the central government encouraged local governments to experiment with different solutions and intervened only when necessary. This was to provide local governments with the flexibility of responding to these changes. The following section discusses key challenges that both the central and local governments have to address before the right measures to reform the country’s land market could be introduced.

Increasing Transparency in the Sale of Land Use Rights The local governments’ monopoly of the land market has created ample opportunities for abuses and corruption as government officials are able to repossess and redistribute land without any consultation. In order to put an end to this, the Ministry of Land and Resources issued several policies during the late 1990s to increase transparency of land transactions. This included the 1999 directive which required all localities to list the sale of land use rights on open markets. However, because the directive did not specify which type of land use rights the directive is applicable to, its effectiveness was compromised. In fact, according to a report by the Ministry of Land and Resources, only about 10 to 20 percent of land

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use rights were awarded through the open market during the period 1999 to 2002. In 2002, the Ministry revised the 1999 directive and specified that “in principle, all commercial land for commerce, tourism, entertainment, and luxury houses must be leased through public auctions or public tenders.”20 This revision had some impact as the percentage of the sale of land rights increased to around 30 percent from 2003. However, the majority of the sale of land rights was still not conducted in an open market. For example, it was reported that more than 95 percent of leasehold land sold to manufacturing enterprises was not awarded through more open channels.21 To address this, the Ministry of Land and Resources introduced the No. 39 directive in September 2007 to ensure more transparency in the allocation of land for industrial use. In November 2007, the government issued another directive to stipulate that public auctions or public tenders as the only channels for the leasing of commercial land.22 The new directives triggered fierce opposition from the local governments. They argued that it was short-sighted and could potentially affect their revenues as well as the pace of development. Nonetheless, this move was necessary for China to increase transparency of its land market.

Farmland Preservation Quota and Cross-Region Land Purchasing The central government introduced a quota system in the late 1990s to limit the amount of farmland for commercial use. However, the local governments sidestepped this regulation by conducting cross-region purchase of land (yidi daibao). As developed regions have higher demand for rural land for industrial use and urban expansion than less developed regions, it is more common to see the former purchasing land from the latter. A case in point is Zhejiang.23 The province is one of the fastest 20

The Ministry of Land and Resources explains Rules for Leasing State Land Use Rights through Public Auctions and Public Tenders. (1 July 2002) Nanfang Network. 21 Chinese Land and Resources Statistical Yearbook, 2004. 22 The Ministry of Land and Resources Signed the No. 39 Directive. (10 October 2007) Focus Real Estate Net. 23 Skinner, M., Kuhn, R. and Joseph, A. (2001). Agricultural Land Protection in China: A Case Study of Local Governance in Zhejiang Province. Land Use Policy, 18, 329–340.

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growing regions in the country and its cities needed a great amount of land to accommodate their growth. However, their expansion was hampered by the quota system set by the central government. As a result, Hangzhou, the capital city of Zhejiang, began buying rural land from smaller neighbouring cities such as Shangyu and Shaoxing. Cross-region land purchases continued even after Zhejiang Provincial People’s Congress passed a local law to sanction this practice in October 2002. According to the provincial Land and Resources Administration, the total area of land acquired through yidi daibao reached 1.2 million mu in Zhejiang by the end of 2004.24 The report also revealed similar practices in provinces such as Jiangsu, Guangdong, Anhui and Jiangxi. Startled by the growing popularity of this method of land transaction, the central government began to take action.25 In 2004, the Land and Resources Ministry officially banned the practice and called for the strengthening of the farmland preservation system. It also held local officials personally accountable for the lost farmland through yidi daibao and incorporated the fulfillment of the farmland preservation quota into the cadre evaluation system.26 Local officials, however, resisted the changes and continued to carry out yidi daibao transactions.27 Hangzhou was reported to have purchased 10,000 mu of rural land from Huzhou with the approval of the Zhejiang provincial government in April 2008.28 In another report, the Shenzhen municipal government admitted that it relocated 30,000 mu of land to Heyuan city with the help of the provincial government.29 Clearly, these transactions highlighted the central government’s weakness in its policy enforcement. 24

Farmland Yidi Daibao was Called Off. (17 June 2004) China News Agency. Jiang, X., Liu, S. and Li, Q. (2007). Land System Reform and Economic Growth. Management World, (Guanli Shijie) 9. 26 Implement Accountability System and Protect Farmland. (26 June 2007) Shenzhen Special District News. 27 The Land and Resource Ministry is Proposing Macro-management by Zoning. (12 June 2006) 21st Century Economic Report. 28 Jiangdong Development Zone Office. Jiangdong Farmland Yidi Daibao Has Achieved Periodic Success. (12 May 2008) Xiasha Net. 29 Develop Metropolitan Agriculture and Harmonize Bio-environment. (26 June 2007) Jin Bao. 25

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General Supervisor (Xu Shaoshi) Deputy supervisors (Gan Zangchun) Beijing Bureau (Fan Zhiquan) Beijing Tianjin Hebei Shanxi Inner Mongolia

Figure 9:

Shenyang Bureau (Cui Yan) Liaoning Jilin Heilongjiang Dalian

Shanghai Bureau (Zhang Naigui) Shanghai Zhejiang Fujian Ningbo Xiamen

Nanjing Bureau (Liu Tianzeng) Jiangsu Anhui Jiangxi

Jinan Bureau (Li Yongjie) Shandong Henan Qingdao

Guangzhou Bureau (Su Weixing) Guangdong Guangxi Hainan Shenzhen

Wuhan Bureau (Chang Jiaxing) Hubei Hunan Guizhou

Chengdu Bureau (Dong Zuoji) Chongqing Sichuan Yunan Tibet

Xi’an Bureau (Hou Haisheng) Shaanxi Gansu Qinghai Ningxia Xingjiang Xinjiang Army Corp.

Organisational Structure of the State Land Supervision System: 2007.

Source: No.1 notice issued by the State Land General Supervisor.

National Land Supervision System

.

In 2006, the central government established a National Land Supervision System (NLSS) to tighten control over the land market. Headed by a general supervisor and deputy supervisor (Figure 9), the NLSS has nine regional offices under it. These offices are independent of the Ministry of Land and Resources, thus allowing them to exert more control over both introducing and implementing their policies. The NLSS has two main purposes. First, it is to enforce the farmland protection quota system to prevent the local governments from circumventing the system. Second, the NLSS is to ensure that land use rights are sold in the open market to increase transparency of land transactions. The NLSS has been effective in its functions. In 2007, it annulled 63 development zones, reclaimed 167 hectares of illegally occupied land, issued 506 million yuan in fines, and brought criminal charges against 256 officials and party disciplinary actions against 436 officials. Its first report publicised 13 major land-related violations by local officials from cities such as Meishan in Sichuan, Jiaozuo in Henan and Qujing in Yunnan.30

30

State Land General Supervisor, (2008). State Land Supervision Notice (No.1). Available at State Land General Supervisor official site.

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Defining Land Rights to Farmers Although private ownership of land is not allowed in China, the central government has introduced a number of initiatives that give occupants some rights or consultative power over the land they reside on. This is to reduce the control of the local governments over the land market. One of the initiatives was to require local governments to allow farmers to list their leasehold land for sale in the market via the rural collectives. This ruling started off as an experiment in Suzhou city before it was adopted by the central government when the Ministry of Land and Resources passed Document No. 52.31 Essentially, the ruling turned land into assets of rural collectives with farmers as the shareholders.32 The collectives could then lease the land to developers, sharing the revenue collected from the rent among the shareholders. In some places, part of the funds goes to the shareholders’ social security account. Another initiative was to allow rural house owners to sell their houses in the market. This is a controversial move as this would require the state to privatize rural land. However, during the boom in housing prices, many farmers tried to circumvent the law by renting out their own houses to people working in the cities. In some cases, more entrepreneurial farmers and villages built new houses on their housing lots and sold them to urban dwellers. The prices of these houses were usually significantly lower that those in the market as the sellers do not have to pay conveyance fees and other property-related taxes. Realizing this development, the Ministry of Construction issued a directive in June 2007 to stop these deals. Interestingly, the Beijing municipal government is currently considering to reverse the directive by allowing farmers to sell their lands on 31

Han, J. (2003). Change Collective Land Ownership into Shareholder Ownership. China Economic Times (In Chinese) 11 November. Henderson, V. (2007). Urbanisation in China: Policy Issues and Options. Working paper, Brown University. Ding, C. (2003). Land Policy Reform in China: Assessment and Prospects. Land Use Policy, 20(2), 109–120. Ding, C. (2005). Land Acquisition in China: Reform and Assessment. Working Paper WP05CD1, Lincoln Institute of Land Policy. 32 Jiang, X., Liu, S. and Li, Q. (2007). Land Institution Reform and Economic Growth. Management World, (Guanli Shijie) 9.

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the market on an experimental basis. The government believed that the privatisation of land would prevent land grabs and improve land rights. Though none of these initiatives or experiments restored land ownership rights to individual farmers, they legitimised farmers’ land use rights and institutionalised farmers’ participation in the development process. Many Chinese policy analysts are proposing more reforms to further develop the land market, including some innovative concepts like land tickets (di piao), land rights-welfare package swap (tu di-fu li bao zhi huan) and even land privatisation.33 Although the approaches are different, the general goal stays the same which is to enhance the efficiency of land distribution and to protect the interests of farmers. However, in order to achieve these objectives, the central government must also take the local governments’ concerns into consideration. By giving more rights and power to farmers or adopt a more marketoriented approach, it may undermine the local governments’ ability to raise revenues through the selling of land use rights. A win-win situation is to introduce property tax and/or land appreciation tax. Once local governments are able to develop a reliable source of revenue, they may comply with land-related directives issued by the central government which could help lessen the tension between local governments and farmers in the rural areas.

33

Zhu, K. and Prosterman, R. (2007). Securing Land Rights for Chinese Farmers: A Leap Forward for Stability and Growth. Cato Development Policy Analysis Series, 3. Tao, R. and Xu, Z. (2007). Urbanisation, Rural Land System and Social Security for Migrants in China. Journal of Development Studies, 43(7), 1301–1320. Unirule Institute of Economics, (2007). Protection of Land Property Rights in China’s Urbanisation. Beijing.

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CHAPTER 7

A Long Way to Go Green: Rethinking China’s Environmental Policy, Laws and Governance Chen Gang

China’s phenomenal growth has imposed huge pressure on the country’s environment and scant resources. Water and air pollution, together with desertification and other environmental degradation, are now so severe that they not only threaten the sustainability of the economy and people’s health and their lifestyle, they also pose an acute political challenge to the governance of the Chinese Communist Party (CCP). In fact, China is home to 16 of the world’s 20 most polluted cities,1 and only one percent of the country’s 560 million city dwellers breathe air that is considered safe by international standards.2 Furthermore, according to the International Energy Agency (IEA), China became the world’s largest emitter of greenhouse gases in 2007, bringing the country under closer international scrutiny. Besides, China is unable to provide clean water even though it has the world’s fourth largest freshwater reserves. Increasing demand, over-usage, inefficiencies, pollution and unequal distribution are causing severe water shortages in 110 of the country’s 660 cities and straining water supplies in two-third of the remaining cities.3 In addition, desertification is adding about 2,500 square kilometres of desert to the country each year. A task force led by the Ministry of Science and Technology reveals that desertification is costing Beijing about 1

Economy, E. C. (2007). The Great Leap Backward: The Costs of China’s Environmental Crisis. Foreign Affairs, 86(5), pp. 38–59. 2 As China Roars, Pollution Reaches Deadly Extremes. (26 August, 2007) The New York Times. 3 Ibid.

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US$3 billion annually, while thousands of kilometers of railways and roads are blocked by sedimentation.4 The report also estimated that 110 million people are suffering from the impact of desertification.5 The damaging impact of China’s worsening environmental problems was seen in a number of incidents in 2007. For example, in May 2007, a severe blue-green algae outbreak in Taihu Lake, China’s third largest freshwater lake, caused a five-day cut in drinking water supply for half of the 2.3 million residents in Wuxi city in Jiangsu Province. This water crisis triggered panic buying of bottled water and even caused some schools to suspend their classes. The blue-green algae outbreak in Taihu Lake was the result of nitrogen and phosphorus pollution which originated from chemical plants located around the 2,400 square kilometre lake. Apart from Taihu Lake, blue-green algae outbreaks were also reported in Chaohu Lake and southwestern Dianchi Lake in 2007, making water undrinkable. The blue-green algae outbreak in China’s lakes was only one example of China’s deteriorating environment and eco-systems in recent years but it is enough to prompt local residents to stage peaceful demonstrations against the inefficiency of local officials in dealing with the mounting pollution problems. For example, in Xiamen City, hundreds of residents wary of their health took to the streets to stop the construction of a planned chemical plant by Tenglong Aromatic PX Co. Water crisis, air pollution, climate change as well as growing protests triggered by these environmental problems are testing Beijing’s wisdom of balancing economic growth with environmental problems. It is becoming clear to the CCP that it has to address environmental issues properly and in a timely manner if it wants to consolidate its rule. Examples from Eastern Europe and the Soviet Union show that growing environmental discontent often served as a catalyst for broader opposition to the communist regime. A notorious accident at the Chernobyl nuclear power plant in Ukraine in 1986, for example, undermined faith in the Soviet authorities and helped accelerate the break-up of the Soviet Union. Nonetheless, it seemed that environmental conservation has been 4

Gluckman, R. (October 12, 2000). Beijing’s Desert Storm. Asia Week. http://www. gluckman.com/ChinaDesert.html. 5 Ibid.

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elevated to the highest platform in the CCP when President Hu Jintao floated the notion of “conservation culture” ( ) within the context of the need to “build a comprehensive, well-off society” in his political report to the 17th Party Congress in 2007. Environmental pollution is a global issue that both industrialised and industrialising economies have to address. However, tackling this problem is no easy task as it affects the country’s economic structure, technological advancement, governance and institutional capacity. The government must also be active in promoting public awareness and encourage social participation. The mounting environmental problems are a reflection of a weak government. But if dealt with swiftly and effectively, it could greatly enhance the legitimacy of the CCP’s leadership and help the country’s progress towards building a “harmonious society”. China’s current environmental policy, regulations, related enforcement issue and bureaucratic politics concerning environmental protection reveal that the government should improve its governance structure first rather than simply increasing funding and enhancing technology investment to improve the environment. China’s Environmental Laws and Regulations

Basic Environmental Law China’s environmental law was promulgated after the central government passed an environmental protection law and added environmental protection and conservation as one of the responsibilities of the state in the country’s Constitution. This was at about the same time when the country officially adopted the reform and opening-up policy in 1978.6 Prior to that, there were hardly any discussions pertaining to the environment in China’s legal system. Articles 9 and 26 of China’s 1982 Constitution stated that the state is to ensure the rational use of natural resources, conserve rare animals and plants, protect and improve people’s living and the ecological environment, and eliminate pollution and public health hazards.

6

Beyer, S. (2006). Environmental Law and Policy in the People’s Republic of China. China Journal of International Law, 5(1), 192.

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In 1979, a tentative version of China’s basic environmental law, the PRC Environmental Protection Law for Trial Implementation, was promulgated by the National People’s Congress Standing Committee. China’s top legislature removed the trial implementation status of the basic environmental law by enacting the PRC Environmental Protection Law in 1989. Before this law was enacted, the State Environmental Protection Administration (SEPA) was responsible for preventing pollution. But with the introduction of the 1989 law, governments at the national, provincial, city, and county levels were all given explicit environmental protection responsibilities.7 China’s basic environmental law contains the following four guiding principles8: 1. Coordination of environmental protection and economic development. National environmental protection plans must be integrated into national economic development plans; in addition, the state should adopt economic and technical measures that are environmentally beneficial (Article 4). 2. Pollution prevention. While measures to reduce existing waste discharges are being undertaken, future waste releases should be prevented, mainly by using enhanced environmental management at new pollution sources (Articles 13, 15, and 26). 3. Polluter responsibility. Waste dischargers should bear the costs of cleaning up the environment, such as paying discharge fees on waste releases that exceed discharge standards, and investing in waste treatment facilities (Articles 24, 27, 28, 29 and 31). 4. Strengthening environmental management. Because reducing pollution by investing in new waste treatment facilities is expensive, the preliminary measure is to cut waste releases by improving management procedures (Articles 9 through 15). The Environmental Protection Law established a system for environmental management, monitoring, liability and enforcement to address water, air, waste and noise pollution. These include levying pollution fees, 7

Ma, X. and Ortolano, L. (2000). Environmental Regulation in China: Institutions, Enforcement, and Compliance, p. 16. Oxford: Rowman & Littlefield Publishers. 8 Ibid.

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environmental impact assessments as well as measures for the control and elimination of pollution supplemented by provisions for legal liability.9 The Environmental Protection Law also stipulates the basic principles and guidelines concerning environmental protection in China.

Specialised Environmental Laws and Regulations Besides the basic environmental protection law, China has also enacted many special environmental laws that cover almost all fields related to environmental protection (see Table 1). These include the Law on Environmental

Table 1:

Major Special Environmental Laws in China.

Special Environmental Law Law on Radioactive Pollution Prevention and Control. Law on the Environmental Impact Assessment. Law on the Promotion of Clean Production. Law on the Administration of Sea Areas. Law on Desert Prevention and Transformation. Law on Conserving Energy. Law on Prevention and Control of Pollution From Environmental Noise. Law on the Prevention and Control of Environmental Pollution by Solid Waste. Law on the Prevention and Control of Atmospheric Pollution. Law on Water and Soil Conservation. Law on the Protection of Wildlife. Water Law. Land Administration Law. Mineral Resources Law. Fisheries Law. Forestry Law. Grassland Law. Law on Prevention and Control of Water Pollution. Marine Environment Protection Law.

9

Year of Issuance 2003 2002 2002 2001 2001 1997 1996 1995 1995 1991 1988 1988 1986 1986 1986 1985 1985 1984 1982

Beyer, S. (2006). Environmental Law and Policy in the People’s Republic of China. China Journal of International Law, 5(1), 193.

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Impact Assessment (2002), Law on Conserving Energy (1997), Law on Prevention and Control of Pollution From Environmental Noise (1996), Law on the Prevention and Control of Environmental Pollution by Solid Waste (1995), Law on the Prevention and Control of Atmospheric Pollution (1995), Law on the Protection of Wildlife (1988), Water Law (1988), and Law on Prevention and Control of Water Pollution (1984). China’s chief executive organ, the State Council, and its ministries, commissions and departments such as the SEPA have issued numerous administrative edicts to implement environmental policies stipulated in the basic and special environmental laws.10 Some of these include the Regulations on the Administration of Medical Wastes (2003), the Implementation of the Law on the Water Pollution Prevention and Control (2000), the Interim Regulations on the Prevention of Water Pollution in the Huai River Valley (1995) and the Regulations on the Control of Dumping Wastes into the Sea Waters (1985). Local legislature, the people’s congresses and their respective standing committees have the right to enact local environmental regulations ( ) while local governments are entitled to issue local administrative rules ( ) implementing national environmental laws and regulations. Bureaucratic Structure Concerning Environmental Governance The fruitless efforts by the local government to curb the outbreak of the blue-green algae in Taihu Lake is one example showing China’s inefficiency in solving local ecological problems. The multi-layered and multi-sectioned governmental structure is hampering the country’s effort to address its environmental problems.

Central-Level Administrative System on Environmental Protection China’s governmental structure is highly hierarchical. Each government unit above the village level has an administrative rank (or bureaucratic 10

The State Council enacts administrative regulations ( commissions and departments issue administrative rules. (

) while its ministries, )

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rank), which is an important reflection of power and status.11 The Chinese government is made up of a number of functional units (ministries, commissions, administration, bureaus and departments), which are in charge of various issues such as foreign affairs, trade, education, public health, finance, land resources, economic projects, and most importantly, environmental conservation and protection. A ministry or a commission has the same administrative rank (buji) as a provincial-level government. These functional units exist at successively lower levels of the government. Individual functional units within this system receive administrative guidance from their parent units above them; they are also subject to the leadership of the local governments to which they belong though communication between functional units at the same territorial level has traditionally been very limited.12 At the central level, the State Environmental Protection Administration (SEPA) takes charge of the nation’s environmental protection issues with its sub-branches (Environmental Protection Bureaus [EPBs] or Offices [EPOs]) established at provincial, municipal, county and even township levels. The predecessor of the SEPA used to be part of the Ministry of Construction in 1980s before it was promoted to the ministerial level in 1998 as environmental problems received increasing attention in China. The SEPA receives most of its funding from the State Council, and is supported in its efforts to formulate national policy by the Committee on Natural Resources and Environmental Protection under China’s top legislature, National People’s Congress. Despite being labelled as a ministry, SEPA is actually recognised as an “organisation directly under the State Council”, ( ) rather than as a full-fledged ministry or commission under the State Council. This makes SEPA a weak unit inside the State Council as compared with other ministries or commissions such as the powerful Ministry of Foreign Affairs, National Development and Reform Commission (NDRC), Ministry of 11

Ma, X. and Ortolano, L. (2000). Environmental Regulation in China: Institutions, Enforcement, and Compliance, p. 34. 12 Jahiel, A.R. (1998). The Organization of Environmental Protection in China. In Managing The Chinese Environment, Edmonds, R.L. (ed.), p. 34. Oxford: Oxford University Press.

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Commerce or Ministry of Agriculture. China’s “development first” strategy also allows the economic departments in the government to play a dominant role in inter-agency and decision-making processes. This further undermines the influence of SEPA and other “non-economic” government organisations such as the China Meteorological Administration (CMA). SEPA’s influence in the decision-making process was also affected after NDRC Director Ma Kai was appointed Chairman of the National Coordination Committee on Climate Change, an inter-agency organisation established in 1998 that includes representatives from the NDRC, Foreign Ministry, Ministry of Science and Technology, CMA, SEPA and other 10 ministerial-level departments. Ma Kai’s appointment effectively gave the NDRC more control over the affairs in the Committee and a more overpowering position in the decision-making process. As the NDRC is oriented towards the “development first” strategy, it is likely to overwrite SEPA’s proposals in the Committee which are normally geared towards an “environment first” doctrine. This may cause potential conflicts which could further delay the country’s efforts in dealing with its environmental problems. In fact, the inter-agency conflict between the NDRC and SEPA was recently being played out during China’s attempt to pass a new car fuel policy in 2007. Vigorously pushed by SEPA, the central government agreed to introduce a new fuel standard for cars on 1 July 2007. Known as Euro III, this standard would considerably reduce the emission of carbon monoxide and other harmful gases from cars. However, the proposed introduction of Euro III was met with strong resistance from the NDRC. Arguing that Chinese car engines are not compatible with the new fuel, the NDRC proposed to delay Euro III’s introduction for up to two years. With the backing of the Foreign Ministry and the Ministry of Science and Technology, which both believed that SEPA’s proposal would slow development and even undermine the country’s sovereignty as China would be importing technology from overseas, the introduction of Euro III was delayed. The spat between NDRC and SEPA over Euro III illustrates that China needs to revise the bureaucratic structure of its political system to address the conflict of interests.

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Weakness of Local Environmental Protection Departments Besides the central level, environmental protection bureaus at various local levels are also in a disadvantageous position when performing their duties as it is the local government, not the higher levels of the environmental protection apparatus, that provides them with their annual budgetary funds. The local governments also approve the agencies’ institutional advancements in rank and other administrative arrangements ranging from the location of their offices to the employees’ housing.13 Like the bigger ministries in the State Councils, local leaders, including the party bosses and administrative chiefs, all put economic growth as their top priority and are unwilling to see local economy and investment hampered by the implementation of strict environmental regulations. This is because high-speed economic growth serves as an important index to measure local officials’ performances and determine their future promotion. It also increases local fiscal revenues and the materialistic benefits of local officialdom. In other words, China’s maintenance of double-digit economic growth, which is much higher than expected by the government in its 11th five-year programme, is imposing huge pressure upon natural resources and the ecological environment. The recent scrapping of the “Green GDP” index in 2007 is a clear example of China’s development-oriented mentality. The “Green-GDP” index was a new method to measure the gross domestic product of the country and provinces by including the cost of environmental damages and rate of resources consumption. It was proposed by the central government to encourage local officials to pay more attention to environmental protection and conservation. However, this promising proposal failed to materialise. Although the central government’s explanation for the withdrawal of the index was because “there is no internationally accepted standard for calculating green GDP”, it is generally believed that the government is bowing to the strong resistance of local officials who felt that the index would greatly affect their 13

Ibid., p. 35.

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performance.14 This, in turn, highlights that many local officials are making light of their responsibility of protecting the environment and are not confident of their environment record. It also shows that the central government is powerless in enforcing directives related to environmental protection. The result of this incompetency could clearly be the reason for the outbreak of the blue-green algae in Taihu Lake. The Taihu Lake is located in Jiangsu Province which is one of the fastest growing and richest provinces in China. It is thus unlikely that the province lacks the funds to implement measures or introduce technologies to protect and improve its environment. The blue-green algae outbreak in Taihu Lake, however, shows that the province’s environmental policies were not effective. To make matters worse, although officials at all levels were aware of the seriousness of the Taihu Lake problem, local officials were too preoccupied with their goal of achieving high GDP growth to divert resources to clean up the lake. This substantially slowed the cleaning-up process and worsened the water shortage problem in Wuxi. The outbreak of the blue-green algae in Taihu Lake could be avoided if local officials took proper environmental measures to prevent its pollution by the huge chemical industry surrounding the lake. In fact, Jiangsu province has an environmental protection bureau to see to such a responsibility. However, due to its heavy dependence on the local governments, the agency had to adhere to the province’s development-oriented targets. Nonetheless, the environmental protection bureau in the province did introduce some measures to cut down the level of pollution of the chemical industry in the region. For example, in 2005, the agency banned construction of new chemical plants in Zhoutie Town. Located at the western shore of the Taihu Lake, Zhoutie Town was nicknamed “hometown of chemical plants” because of its huge chemical industry. However, these measures were often not enough because they were not complemented by other regulations such as forcing the chemical plants to install nitrogen and phosphorus removal facilities, setting emission standards or building an efficient water treatment plant in the area. 14

China scraps Green GDP report. (17 July 2007) Wall Street Journal.

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All said, even if these additional regulations were put in place, it is likely they would not be implemented because local governments still place development over environment protection. For instance, Chen Qingfeng, a member of the propaganda department in Zhoutie Town, argued that the stricter environmental regulations introduced in 2005 had forced the closing down of about 80 chemical plants in the town and a transfer of investment worth one billion yuan (US$ 133 million) from Zhoutie Town to other places; the move resulted in a mere relocation of chemical plants which does nothing to halt pollution. To Chen, this amount would have contributed to about four billion yuan of annual sales which are about 60 percent of the town’s total annual sales income.15 Therefore, in order for China to combat its environmental problems, it has to not only start making changes at the local levels, but also introduce a national environmental protection strategy. This would include spending more on constructing the infrastructure for waste water treatment, create public awareness, introduce stricter punishment, and most of all enhance efforts to push for a “scientific concept of development” by including environment protection in the country’s development strategy. Having studied how China’s bureaucratic political system is affecting the country’s efforts to address its mounting environmental problems, the following section identifies some of the leading environmental problems that Beijing needs to resolve urgently (Table 2). Table 2: • • • • • • •

15

China’s Priority Environmental Problems.16

Water pollution, especially contamination by organic waste. Water shortages, particularly in northern China. Urban air pollution, as measured by particulates and sulphur dioxide. Hazardous and toxic solid waste in urban areas. Soil erosion. Loss of forests and grasslands. Loss of species and habitats, especially wetlands.

Ibid. Ma, X. and Ortolano, L. (2000). Environmental Regulation in China: Institutions, Enforcement, and Compliance, p. 2. 16

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China’s Major Environmental Problem

Water Pollution and Water Shortage China’s water pollution and water shortage problems are of the highest concern among all environmental problems. Although China has the world’s fourth largest freshwater reserves after Brazil, Russia and Canada, increased demand, over-usage, inefficiencies, pollution, and unequal distribution are causing water shortage problems in most of its cities.17 According to Ma Jun, a leading Chinese water expert, several cities in the northeastern region of the country could run out of water in five to seven years’ time.18 China’s water shortage is also closely related to its water pollution problem. In many parts of China, surface waters are severely polluted as a result of untreated agricultural, industrial and domestic discharges. A SEPA– World Bank study revealed that one-third of all the country’s river water and vast sections of China’s great lakes (Taihu, Chaohu and Dianchi) have Grade V water (Table 3).19 This means that they are at the most degraded level which is not even suitable for industrial or agricultural use.20 In 2004, about 25,000 km of Chinese rivers failed to meet the water quality standards for aquatic life and about 90 percent of sections of rivers around the urban areas were seriously polluted.21 Many of these polluted rivers and lakes have been void of fish for years. The study also showed that among the 412 sections of the seven major rivers monitored in 2004, only 42 percent were in the Grade I–III surface water quality category (that is, water that is safe for human consumption), 30 percent were in the Grade IV–V standards, while the remaining 28 percent failed to meet even the Grade V standard.22 17

Economy, E.C. (2007). The Great Leap Backward? Foreign Affairs, 86(5), 42. Ibid. 19 China’s lake and river water quality are classified from Grade I to Grade V, indicating good, fairly good, slightly polluted, poor and hazardous water quality and based on concentrations of 30 substances,. Water quality is monitored by the State Environmental Protection Administration in about 500 river sections and by the Ministry of Water Resources in more than 2,000 sections across the main rivers. 20 As China Roars, Pollution Reaches Deadly Extremes. (26 August 2007) The New York Times. 21 World Bank and SEPA’s Joint Report (2007). Cost of Pollution in China: Economic Estimates of Physical Damages, p. 4. www.worldbank.org/eapenvironment 22 Ibid. 18

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Taihu Lake’s Water Quality Comparison between 2004 and 2005.

Lake Section

2005

Wuli Lake Meiliang Lake Western Part Near The Bank Eastern Part Near The Bank Middle Area Of Taihu Lake Whole Taihu Lake’s Average

Sub-Level Sub-Level Sub-Level Sub-Level Level V Sub-Level

2004 V V V V V

Sub-Level Sub-Level Sub-Level Level V Level V Sub-Level

V V V

V

Source: SEPA (2005). Gazette of China’s Environmental Situation, p. 11.

Pollution is also endangering China’s ground water, which provides 70 percent of the country’s total drinking water. According to another report by Xinhua News Agency, the aquifers in 90 percent of Chinese cities are polluted.23 This means that nearly 700 million people are drinking water that is contaminated with animal and human waste.24 In recent years, there is an increase in water-related incidents in many parts of China, which triggered public panic and international attention. For example, in November 2005, a blast in a Jilin Petrochemical company owned by China National Petroleum Corporation sent an 80-kilometre long slick of benzene into the Songhua River, which flows through Jilin and Heilongjiang. The accident forced Harbin, the capital city of Heilongjiang, to suspend water supply for nearly a week because of contamination. During that period, 29 industrial enterprises in the city had to stop production and another 23 reduced production. This production halt led to a daily loss of nearly 100 million yuan of output value. Following this incident, Xie Zhenhua, then director of SEPA, was pressured to resign after the crisis, making him the highest-ranking official to resign for an environmental incident in China. Other water-related incidents were the blue-green algae outbreaks in eastern Taihu Lake, Chaohu Lake and southwestern Dianchi Lake in 2007. These water-related incidents could be avoided. China has a comprehensive legal framework for water resource and pollution management which laid out clear objectives on how to maintain the water quality in 23 24

Economy, E.C. (2007). The Great Leap Backward? Foreign Affairs, 86(5), 43. Ibid.

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China. Known as the Water Law of 2002, the law also aims to reform the country’s water sector by setting the course for integrated river basin management. Besides, the law also identifies the stakeholders and lays out the usage of market mechanisms in water management.25 However, the contamination of Songhua River and the blue-green algae outbreak shows that the implementation of the Water Law is weak and ineffective to address the deteriorating water pollution caused by the country’s rapid industrialisation and urbanisation process.26

Air Pollution Despite China’s persistent efforts in cleaning its air, the air quality in many Chinese cities remains among the worst in the world. Chinese cities often seem wrapped in a toxic gray shroud and ambient air pollution alone is blamed for hundreds of thousands of deaths each year.27 Only one percent of the country’s 560 million city dwellers breathe air considered safe by international standards and about 60 percent of cities have grade II ambient air quality standard in 2005. Furthermore, the sulphur dioxide (SO2) concentration in urban air, after dropping steadily since the early 1990s, has begun climbing again after 2002.28 Fossil fuel burning, especially using coal, is the main source of air pollutants such as SO2, nitrogen dioxide (NO2), and carbon monoxide (CO) in most cities of China.29 As the primary energy source, coal provides 69 percent of China’s energy needs, while oil accounts for 21 percent and natural gas, hydro, nuclear, wind power and solar energy altogether, 10 percent.30 25

OECD Working Party on Environmental Performance (2007). Environmental Performance Review of China — Conclusions and Recommendations, p. 5, http://www.oecd.org/dataoecd/ 58/23/37657409.pdf 26 World Bank and SEPA’s Joint Report (2007). Cost of Pollution in China: Economic Estimates of Physical Damages, p. 8, www.worldbank.org/eapenvironment 27 As China Roars, Pollution Reaches Deadly Extremes. (26 August 2007) The New York Times. 28 OECD Working Party on Environmental Performance (2007). Environmental Performance Review of China — Conclusions and Recommendations, p. 5, http://www.oecd.org/dataoecd/ 58/23/37657409.pdf 29 World Bank and SEPA’s Joint Report (2007). Cost of Pollution in China: Economic Estimates of Physical Damages, p. 19, www.worldbank.org/eapenvironment 30 NDRC (2007). China’s National Climate Change Programme.

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China is home to 16 of the world’s 20 most polluted cities and four of them are located in the coal-rich province of Shanxi in northwestern China.31 Moreover, as much as 90 percent of China’s SO2 emissions and 50 percent of its particulate emissions are the result of coal use. As the international community is becoming more aware of the issue of climate change, China’s rocketing CO2 emission has caught the international spotlight. According to the IEA, China replaced the United States to become the world’s largest emitter of greenhouse gases in 2007. The Chinese public is now beginning to question the country’s industrialisation strategy, especially in the development of the automobile industry. In 2006, China became the world’s second largest car market and the third largest car producer after the US and Japan. More than 1,000 new private cars hit the roads every day in Beijing, where transport already accounted for 20 percent of the country’s total energy consumption. Frequent traffic congestion exacerbates China’s air pollution problem.

Solid Waste Pollution China has made remarkable progress in recycling its waste materials and improving its safe disposal in landfills. In 2003, China implemented a more environment-friendly industrial production law and revised its 1995 waste law in 2004, building up a complicated legal framework for modern waste management. The concepts of the “3Rs” (reduce, reuse, recycle) and of the “circular economy” ( ) have become an important component of China’s 11th Five-Year Programme (2006–2010). Nevertheless, the increasing amount of urban, industrial and hazardous waste is overwhelming China’s existing storage and disposal capacity.32 Furthermore, methods to dispose of the waste are still not effective. This is causing landfills to overflow, polluting the land and 31

Economy, E.C. (2007). The Great Leap Backward? Foreign Affairs, 86(5), 40. OECD Working Party on Environmental Performance (2007). Environmental Performance Review of China — Conclusions and Recommendations, p. 7, http://www.oecd. org/dataoecd/58/23/37657409.pdf

32

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contaminating groundwater aquifers and rivers around them.33 Several factors have contributed to the poor management of landfills in China. These include a lack of information on the location and condition of waste disposal facilities, poor environmental regulations and lack of waste management training.34 Furthermore, the country failed to achieve the 10th Five-Year Plan target of increasing the capacity of municipal landfills to 150kt/day. These management failures are threatening people’s health and putting the environment at a greater risk.35

Protecting the Ecosystem China has an adequate legal framework to protect its ecological system and biodiversity. It adheres to international commitments and publishes annual reports on works related to protecting the ecosystem. More conservation areas have also been demarcated at the national, provincial, prefecture and county levels and the country has received international recognition for its wetland, biosphere reserve, and natural and cultural heritage preservation programmes.36 However, there is still much to be done to conserve forests, protect biodiversity and promote farm forestry on land prone to soil erosion. Furthermore, the various environmental protection programmes to protect endangered wildlife still needs sufficient monitoring and evaluation.37 Although China has a relatively large conservation area, they are still subject to pollution, habitat alteration and exploitation. In addition, little has been done to promote biodiversity protection on forestland and to tailor payments to forest owners for the provision of forest ecosystem services. Lastly, China has yet to ratify the Bonn Convention on migratory species even though it is active in regional cooperation on protecting migratory waterbirds.38 33

Ma, X. and Ortolano, L. (2000). Environmental Regulation in China: Institutions, Enforcement, and Compliance, p. 4. 34 Vermeer, E.B. (1998). Industrial Pollution in China and Remedial Politics. The China Quarterly, 156, 981. 35 OECD Working Party on Environmental Performance (2007). Environmental Performance Review of China — Conclusions and Recommendations, p. 7, http://www.oecd.org/dataoecd/ 58/23/37657409.pdf 36 Ibid., p. 8. 37 Ibid. 38 Ibid.

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New Environment Policy and Programmes With mounting environmental problems across the country, the central government is incorporating a so-called “conservation culture” ( ) in its political strategy of “building a comprehensive well-off society” ( ). During the 17th Party Congress, President Hu Jintao explicitly highlighted the importance of addressing environmental problems in order to sustain economic growth. These changes showed that environmental protection and conservation, once marginalised in China’s upmost decision-making process, has become an important issue. In fact, new stringent policies and programmes, economic incentives and disincentives as well as institutional changes are already under way to punish violators of environmental rules and encourage more environment-friendly actions. This section discusses some of these new environment policies and programmes.

Banning Industrial Projects Along Major River Systems (

)

In July 2007, SEPA announced that new industrial projects would be banned along four major river systems to prevent further contamination. The ban will not be lifted until proper water treatment facilities are installed and leakages of untreated water fixed. Given SEPA’s limited authority, this announcement is largely regarded as one of the toughest measures introduced by the agency to fight pollution. Furthermore, SEPA indicted six cities, two counties and five industrial zones for polluting the Yangtze, Yellow, Huaihe and Haihe rivers. The cities are Chaohu and Bengbu in Anhui, Baiyin in Ningxia, Bayannur in Inner Mongolia, Weinan in Shaanxi and Zhoukou in Henan; the two counties are Hejin and Xiangfen in Shanxi and the industrial parks are Wuhu in Anhui, Lanzhou in Gansu, Handan in Hebei, Puyang in Henan and Shenxian County in Shandong.

Usage of Clean Energy In September 2007, the State Electricity Regulatory Commission (SERC) passed a new regulation requiring all power grid companies in China to purchase the maximum amount of electricity generated from renewable sources such as hydropower, wind power, biomass, solar power, tidal power,

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and geothermal energy in the areas that they are located. It is a move to encourage the usage of renewable energy and to facilitate the integration of renewable energy into the country’s power systems. Although the usage of renewable energy in China could be traced back to 2005 when the central government introduced the first renewable energy law, its usage still accounts for only a very small portion of its domestic power supply due to the high costs involved. The cost of electricity generated from solar power, for example, is about 3 yuan (40 US cents) per KWh. This is substantially higher than electricity generated from traditional coal-fired power plants which is only about 0.22 yuan (2.8 US cents) per KWh. In order to reduce the cost of using renewable energy, the NDRC introduced a cost-sharing supplementary regulation requiring power suppliers on the grid to purchase renewable electricity at either a government-fixed or a government-directed price with the additional cost of renewable energy borne by electricity users.

“Green-Credit Policy” (

)

In July 2007, SEPA, the People’s Bank of China (PBC) and the China Banking Regulatory Commission (CBRC) jointly issued a “green-credit policy”, which required SEPA to hand over lists of heavy polluters to the central bank and the regulatory commission. Companies on the list that failed to pass environmental assessments or did not implement the required environmental protection regulations are disqualified from receiving loans from any bank or financial institution.39 Companies that have been granted loans but are later discovered to have violated environmental protection regulations will have their loans cancelled. By November 2007, 12 heavy polluting enterprises had their crucial bank loans recalled, suspended or rejected under the new “greencredit policy”.40 39

New Policies to Reinforce Environmental Protection. http://english.china.org.cn/ english/environment/224226.htm 40 12 heavy polluters punished under new ‘green-credit’ policy. (16 November 2007) Xinhua News.

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Usage of Green Indexes to Measure Economic Performances On 23 November 2007, the State Council released a circular that featured the environmental-centred green figures on per unit GDP energy consumption and major pollutants reduction to assess provincial officials’ performances.41 This was unprecedented. Since the early 1990s, China’s officialdom has formed a culture that recognises GDP growth as the main indicator of administrative chiefs’ performances. In addition, local officials are incentivised to pursue economic growth as their main source of revenue. With the inclusion of the green indexes, instead of solely relying on economic figures, the Chinese government is trying to measure local officials’ performance through a much more complicated system that also includes environmental indexes. According to the State Council’s “Implementation Plan for Unit GDP Energy Consumption Assessment System”, officials from provincial-level regions as well as those from energy-intensive state-owned enterprises are to be assessed by per unit GDP energy consumption figures calculated through quantified scoring methodology. The Supervision and Management Agency for State Owned Assets is the government agency that oversees the whole process. Provincial governments that failed to meet these environmental targets for the stipulated year will have their officials barred from taking part in annual award competitions or in gaining new honorary titles. The central government will also temporarily suspend energyintensive projects in the region. Similarly, energy-intensive state enterprises that did not meet the environmental targets set by the central government will also be punished. For instance, they will receive a notice of criticism, and will be barred from attending or receiving any awards in annual award competitions. They will also not receive any honorary title or be given any economic incentives. The central government will also suspend any investment projects related to these enterprises. On the other hand, provincial governments and

41

zwgk/2007-11/23/content_813617.htm

. http://www.gov.cn/

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enterprises that fulfilled the environmental targets will be commended and awarded.

Setting Up a Green Fund In November 2007, China launched a Clean Development Mechanism (CDM) Fund42 managed by the Ministry of Finance to promote the usage of clean and renewable energy for power generation. The CDM fund is part of China’s programme for fulfilling its Kyoto Protocol obligation in reducing greenhouse gas emission. NDRC, China’s top economic planner, has so far approved 885 CDM projects that are expected to supply 1.5 billion metric tons of carbon credits. The projects will also generate a revenue of US$15 billion, of which US$3 billion would be re-injected into the fund.43 The fund also receives donations from financial institutions such as the World Bank and the Asian Development Bank.

Eco-City Project China is striving to improve its international image on environmental protection through starting bilateral or multilateral green projects, with the landmark China–Singapore “Eco-City” Project being the most high-profile one. During Singaporean Senior Minister Goh Chok Tong’s meeting with Chinese Premier Wen Jiabao in Beijing in April 2007, Goh proposed a joint-effort to construct an “Eco-City” in China. As the proposal was in line with China’s effort to combat its worsening environmental problems, it was well-received by Beijing. Indeed, when Chinese Vice Premier Wu Yi visited Singapore in July 2007, she placed the Eco-City plan as one of the main agendas in her bilateral discussion with the Singapore government. Therefore, it was not surprising that the two sides finalised the Eco-City project in Tianjin in November 2007 within eight months after it was first proposed. It was agreed that 42

China launches CDM fund to address climate change. http://english.gov.cn/200711/09/content_801221.htm 43 Ibid.

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the Eco-City would be built in the Binhai New Area of Tianjin Municipality, a state-level strategic development area approved by the State Council in 2005 for its huge potential for economic growth. It would comprise a 30-sq km “town”, combining modern living, recreational and business facilities. Tianjin and Singapore would form a joint venture for the project that features the participation of firms from both countries such as Singapore’s Keppel Corporation. The project is expected to use advanced energy-saving and environmental technologies to turn Tianjin into a model “green” city. Singapore’s government officials said the project’s management, technology, and policy aspects will serve as a reference for other Chinese cities.

Discussing Levy of Environmental Tax Levying environmental tax has been explored as another way to promote environmental protection. The Ministry of Finance, State Administration of Taxation and SEPA are all involved in crafting this new tax measure.44 According to a report published by the Ministry of Finance in November 2007, environmental tax would most likely be collected by one of the three methods after the measure is finalised. The first method is based on the principle of “pay according to profits”. This plan suggests that the central government should collect tax from companies in accordance with the profit generated from selling their products. As for the second plan, companies would pay tax according to how much pollutant they produced. This includes the amount of sulphur or sulphide, carbon dioxide, sewage, solid waste and other forms of pollutant. Finally, the third plan would require consumers of potentially polluting products such as fossil fuel, ozoneconsuming commodities, fertiliser and pesticide to pay additional tax.45 A Long Way to Go Green The measures taken by the Chinese government to tackle its environmental problems are beginning to show some positive effects. In the first 44 45

Government mulls tax plan for environmental protection. (7 January 2008) Xinhua News. Ibid.

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nine months of 2007, the two major pollutants, SO2 and COD (chemical oxygen demand), dropped for the first time by 1.81 percent and 0.28 percent respectively on a year-on-year basis, and per unit GDP energy consumption decreased by 1.8 percent. These figures, however, were still far from meeting the requirement set by China’s 11th Five-Year Programme. Under this programme, the Chinese government had set a number of ambitious green targets, including cutting energy consumption per unit GDP by 20 percent, reducing major pollutants discharge by 10 percent, decreasing water consumption per unit industrial output by 30 percent and raising forestry coverage rate to 20 percent. In 2006, the country only managed to cut its energy intensity by 1.23 percent, far below the annual four percent target in the 11th Five-Year Programme. Furthermore, reports from SEPA showed that in the first quarter of 2007, China’s seven major water systems were still polluted with no major change in water quality from the same period of 2006. In fact, the overall water quality of drinking water sources dropped five percent, reducing the quality to only 69.3 percent. In addition, the air quality in Beijing has not improved with more than 1,000 new private cars hitting the roads every day in the capital. In brief, much more needs to be done to protect the environment. Instead of relying on short-term administrative orders such as closing polluting enterprises or blocking pollution sources, China’s leaders could look at introducing economic incentives to curb pollution and ecological destruction. Institutional innovations such as the levy of reasonable discharge fees and environmental taxes would be more effective. There is also a need to generate public awareness on environmental protection. In China’s state-centric society, the influence of environmental NGOs (non-governmental organisations) is still very weak and the media coverage on this topic is limited. Although the central government’s concept of “conservation culture” marks the beginning of its long-term effort at cleaning up the country’s severely polluted environment, China certainly still has a long way to go before it can truly go green.

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Appendix: China’s Environnemental Protection Apparatus

State Council National People’s Congress Committee on Environment and Resources State Environmental Protection Administration

Provincial Government

Municipal Government

Provincial Environmental Protection Bureau

Municipal Environmental Protection Bureau

County Environmental Protection Bureau/Office

County Government District Government

Township Government

Leadership Relationship Advisory Relationship

Township Environmental Protection Bureau

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CHAPTER 8

China’s Looming Water Crisis: Is Beijing Struggling to Overcome It? Yang Mu & Teng Siow Song

China is currently facing many socioeconomic problems and one of them is water shortage. This problem is getting very common in the northern parts of China where unusual prolonged periods of drought are affecting the region’s water supply for irrigation and consumption.1 This is most peculiar as the southern part of the country is frequently battered by serious floods. Nonetheless, the drought in northern China has greatly reduced the water level of major rivers such as the Yangtze River, Xiangjiang River and Lijiang River, thus affecting the area’s water supply.2 The increase in demand for water brought about by rapid economic development is also straining the country’s water supply. Growing at a mere 0.05 percent annually, China’s total water supply was about 580 billion cubic metres in 2006.3 The slow growth is causing water shortages in cities throughout the country. Currently, China’s water shortage is estimated to be about 40 billion cubic metres, but it is likely to increase to 100 billion cubic metres by 2010 before reaching 700 billion cubic metres by 2050 which is about one-quarter of China’s total water reserve of 2,533 billion cubic metres.4 China’s water shortage problem could even be more serious in the future due to a number of factors, in particular poor water management, uneven water distribution and water pollution. 1

200 million mu of cultivated land in drought. http://www.sina.com.cn (16 May 2007). China Daily. 2 Thirsty China, Beijing Review, pp. 20–21 (10 Jan. 2008). 3 China’s Statistical Year Book 2007. 4 www.chinanews.com.cn/news/2006/2006-03-21/8/705920/shtml.

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Fortunately, the central government is beginning to pay more attention to the country’s worsening water shortage problem, as it is aware that a sudden disruption of water supply may trigger social panic or even unrest. In August 2007, Premier Wen Jiabao held a special meeting for the State Council to discuss measures needed to secure safe drinking water in Chinese cities.5 Furthermore, the issue of controlling water pollution was one of the main agenda items of the 11th National People’s Congress (NPC) held in March 2008.6 However, the central government’s effort to solve the country’s water problem could be derailed by existing policies or events such as the Beijing Olympics. The construction of a massive water project in Hubei, one of the country’s driest provinces after a decade-long drought, was not meant for its population but to supply Beijing with 80 percent of the city’s water needs for the Olympic Games.7 This chapter addresses how China seeks to address its water shortage problem. It begins by showing how extensive China’s water problem is before laying out some measures undertaken by the Hu–Wen administration to solve the problem. The chapter also highlights some of the water investment projects and discusses how foreign investments are playing a part in them. Water Shortage in China China’s poor water management is compromising the safety of the country’s drinking water.8 Among 222 water resources for 113 of the largest cities, only 72 percent of the water is safe for consumption. It is estimated that about 300 million people in the countryside are drinking unsafe water every day.9 China’s poor water resource handling abilities is highlighted by the recent Taihu Lake and Songhuajiang River pollution cases (see Appendix Box 1 for a list of water pollution incidents). Although there are strict laws to prevent and punish companies found responsible 5

Drinking Water Polluters to Face Heavy Fines. (23 Nov 2007) China Daily. Water Pollution, Labourers Rights Tops NPC List. (8 March 2008) China Daily. 7 Water for Beijing adds to woes of drought-hit villages. (26 January 2008) The Straits Times, Olympics Threaten Millions, says official. (27 February 2008) Financial Times. 8 Safe Drinking Water. (21 November 2007) China Daily. 9 Wang, Y. and Ren, B. (12 September 2007). Waking Up to China’s Water Crises. Caijing 18, p. 84. 6

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for serious water pollution, they are not forcefully implemented.10 Similar accidents have happened and are constantly reported in newspapers. For example, there was a recent leakage of sulphuric acid from a chemical factory into a village’s water supply in central China, poisoning at least 26 people.11 China’s poor water management is also contributing to the country’s low per-capita water reserve ratio. China has the world’s fourth largest water reserves which amount to 2,800 billion cubic metres or six percent of the world’s total. However, with 1.3 billion people or about 20 percent of the world’s population, the per capita water resources ratio in China is only about 2,200 cubic metres or one quarter of the world’s average, making China among the lowest in terms of its percapita water reserves ratio (Figure 1).12 China’s low per-capita water reserve ratio is partly contributed by the country’s uneven water distribution system. For example, in the south of the Yangtze River, only 54 percent of the population live with 81 percent of the water resources

Canada New Zealand Brazil Russia Australia US Mexico France Japan Italy UK China Germany India Korea

91420 83760 45570 31650 24710 10270 4360 3370 3360 3340 2460 2140 1870 1750 1450

0

20000

40000

60000

80000

100000

Per Capita Cubic Meters

Figure 1:

Per-Capita Water Reserves in Selected Countries in 2005.

Source: UN World Water Resources Development Report 2006. 10

Drinking Water Gets Top Priority in New Plan. (27 November 2007) China Daily. See Table 6 in Appendix for a list of environmental laws in China since 1985. 11 Acid leak lands 26 villagers in hospital. (25 January 2008) The Straits Times. 12 http://www.unesco.org/water

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in the area, while in the north, 46 percent of the population live with only 19 percent of the water. China’s low per-capita water reserves ratio is a reflection of the country’s looming water crisis. According to the World Health Organisation, a human needs a daily supply of about 20 to 50 litres of water that is free from harmful contaminants.13 But by factoring in industrial and agricultural use, daily supply of water should be more than 2000 cubic metres per capita. Any level less than this would signify water scarcity. If the supply is less than 1000 cubic metres per capita, serious water scarcity exists; if there is less than 500 cubic metres, extreme water scarcity exists. As Figure 2 shows, among 30 provinces (municipals) in mainland China in 2005, there were 20 provinces with water scarcity; 13 provinces with serious water scarcity; eight provinces, including Tianjin, Shanghai, Ningxia, Beijing, Hebei, Henan, Shanxi and Shandong, with extreme water scarcity problems. Excessive and Wasteful Water Use

5000 4000 3000 2000 1000

Figure 2:

Zhejiang Jilin Heilongjiang Inner Mongolia Guangdong Chongqing Hubei Shaanxi Anhui Gansu Liaoning Jiangsu Henan Shandong Shanxi Hebei Beijing Ningxia Shanghai Tianjing

China (national average)

0 Xinjiang Yunnan Fujian Hainan Guangxi Sichuan Jiangxi Hunan Guizhou

Per Capita Cubic Metres

China’s agriculture sector is the largest water consumer. In 2006, the sector’s water usage was 366 billion cubic metres or 62 percent of total

China’s Per Capita Water Resource in Provinces (Municipalities) in 2006.

Source: China Social Statistical Yearbook 2007. 13

http://www.unesco.org/water/wwap/facts_figures/basic_needs.shtml

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water usage.14 China’s agriculture by international standards is consuming water excessively. As China’s irrigation index is still low at only 0.45, this shows that the agriculture sector is wasting water through its traditional method of irrigation.15 Furthermore, China’s agriculture is still guided by the traditional policies on grain self-sufficiency, cultivation and irrigation. These tend to encourage consumption of huge amount of water resources, particularly in north-western China, and also underground water in the North China Plain. China’s industrial water usage in 2006 was 134 billion cubic metres, making up 23 percent of total water usage.16 Water wastage in the industrial sector is as high as that of the agricultural sector. A yardstick used in measuring the efficiency of industrial water usage is the per US$10,000 value-added water usage index. In 2000, China’s water usage per US$10,000 value-add worth of industrial output was 2,725 cubic metres, four times the world’s average and five to 10 times that of developed countries. China’s industries are still very water-inefficient because China has many resource-intensive heavy industries such as steel, aluminum and petrochemical-related industries (Figure 3). Excessive and wasteful water use is also common in the residential sector. In 2006, total water consumption of Chinese households was about 69.4 billion cubic metres, or 12 percent of the total water used.17 This level of consumption is higher than other countries and is brought about by the country’s weak water policies which resulted in cheap water prices and a lack of public awareness to conserve water. The high leakage in the country’s water supply system is another factor. According to statistics from the Department of Construction on 408 Chinese cities, the leakage from the potable water supply system is 21.5 percent, 14

The total output of grain (rice, wheat and corn) in China was about 500 million tonnes in 2006. A specialist from FAO estimates that 1,000 to 2,000 litres of water are needed to produce one kilogram of wheat. More water is needed to produce rice. As a big agricultural country with a population of 1.3 billion people to feed, it is hard for China to reduce the demand for water in agriculture. http://www.epochtimes.com/gb/7/3/23/n/654973.htm 15 China Sustainable Development Strategy Report: Water: Governance and Innovation, (2007). 20–32. Beijing: Scientific Publishing House. 16 As in footnote 7. 17 China Social Statistical Yearbook 2007.

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170

2725

Cubic Metres Per USD10,000

3000 2500 2000

1534

1500

1028

1000 500

84

107

212

427

224

489

692

Figure 3:

China

Canada

US

France

Italy

Germany

Australia

UK

Korea

Japan

0

Selected Countries’ Water Usage Per USD10,000 Value-Add in 2000.

Figure 4:

Sichuan

Hubei

Guangdong

Henan

Fujian

Hunan

Shandong

Jiangxi

Jiangsu

Zhejiang

Anhui

Jilin

Helongjiang

Liaoning

Inner Mongolia

Shanxi

Chongqing

Hebei

Tianjin

Beijing

40 35 30 25 20 15 10 5 0 Shanghai

%

Source: Everbright Securities, China.

The Water Supply Leakages in Selected Chinese Cities in 2004.

Source: Evergreen Securities, China.

far higher than developed countries whose leakages are usually less than 10 percent. In 2005, China’s national water leakage stood at 10 billion cubic metres, about 1.7 percent of her water usage in 2005 (Figure 4).18 Water Pollution: A Worsening Problem19 By the end of 2005, among China’s 661 cities, there were still 278 cities without waste water handling capacities and 186 cities with no waste 18

http://finance.sina.com.cn/stock/hyyj/20070216/10193348180.shtml For further information on China’s water pollution, see Cost of Pollution in China, a report by The World Bank & State Environmental Protection Administration, China, February 2007.

19

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water treatment taxes. Waste water treatment capacities in most Chinese cities are less than 50 percent, far below the 80 percent stipulated in the 11th Five-year plan. China is suffering from the consequences of many years of environmental pollution and neglect to its ecosystem. Almost all the major rivers, lakes and water catchment areas in China are polluted and unsafe for human consumption.20 Figure 5 below summarises the level of pollution in China’s surface water quality in 2006. Water quality is monitored in more than 2,000 river sections across the main rivers in China. About 25,000 kilometres of Chinese rivers failed to meet water quality standards for aquatic life and 90 percent of river sections around urban areas were badly polluted.21 The polluted water in these rivers is often used for irrigation purposes, resulting in severe economic losses.22 Figure 6 indicates the level of pollution in China’s top 28 lakes and reservoirs in 2005. Most lakes and reservoirs are badly polluted in China. Only 28 percent of the water in the main lakes and reservoirs is still drinkable. Water quality in China’s Three Gorges reservoir has not improved despite an ambitious, multibillion-dollar effort to clean up the reservoir badly polluted by the construction of the world’s largest dam. A report by China’s top environmental regulatory agency reveals the continuing

3% 28%

Grade I 18%

Grade II Grade III Grade IV

10%

19% 22%

Figure 5:

Grade V Below Grade V

China’s Surface Water Quality 2006.

Source: Evergreen Securities, China.

20

Yangtze Water Worsening, (15 April 2007) China Daily. For a list of potential health problems associated with drinking polluted water, see appendix. 22 For more on economic losses caused by waste water irrigation, see appendix. 21

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M. Yang and S. S. Teng 2 (Good to 1 (Best to Consume) Consume) 6 (Totally Unusable) 7% 0% 43%

5 (Agricultural Use) 18%

Figure 6:

3 (All right to Consume) 21%

4 (Industrial Use) 11%

Pollution in China’s Top 28 Lakes/Reservoirs in 2005.

Source: Evergreen Securities, China.

difficulties China’s leaders face in managing the Three Gorges Dam, a flagship national project that has generated an array of unforeseen consequences from water pollution to landslides along the shores of its massive reservoir. Construction of the dam officially cost about 180 billion Yuan, or $25 billion Yuan at current conversion rates.23 According to another study by the State Environmental Protection Administration, the central government has spent about $2.5 billion Yuan on clean-up projects such as new wastewater treatment and garbage plants since 2000. However, only one-third of the projects have been completed. Furthermore, the report also added that some of the newly built facilities are not running at full capacity. According to Chinese official reports in 2005, about 1.5 billion cubic metres out of a total of 24.3 billion cubic metres or roughly 6 percent of China’s waste water was directly discharged into the sea without treatment.24 Another 41 percent was discharged directly into the Yangtze River, eventually entering the sea.25 The director of the Institute of Ocean Development, the National Ocean Bureau, Gao Zhiguo said that Bohai is the most polluted sea area in China. Among the 53 rivers 23

Three Gorges Water Cleanup Makes no Gains. (21 February 2008) The Wall Street Journal Asia. 24 China Social Statistical Yearbook 2006, p. 414. 25 (28 September 2007) International Herald Tribune.

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China’s Looming Water Crisis Table 1:

Sea

National Total Bohai Sea Yellow Sea East Sea South Sea

173

Sea Water Pollution in China in 2006.28

Clean Area (%)

Lightly Polluted Area (%)

Moderately Polluted Area (%)

Heavily Polluted Area (%)

34 41 40 31 25

35 37 28 34 52

12 9 11 13 13

19 14 21 22 9

Source: China Social Statistics Year Book 2007.

entering Bohai, 43 are seriously polluted.26 Table 1 shows the pollution problem in the seas of China. Further Urbanisation Raises Water Demand and Pollution Over the years, China’s rapid industrialisation and urbanisation are contributing to the increase in the country’s demand for water. At the end of 2006, the national production capacity of tap water supply was 269.6 million cubic metres per day. Total annual volume of water supply was 54,047 million cubic metres, of which 22,204 million cubic metres (41 percent) were for residential use and 25,263 million cubic metres (47 percent) were for industrial and productive use.27 By 2006, 43 percent of people in China were living in the urban areas, lower than the world’s average of 46 percent. According to China’s 11th Five-year Programme, the rate of urban growth will be between one to 1.3 percentage points per year. By 2010 and 2020, the urban population is estimated to reach 48–50 percent and 55–60 percent of China’s total population respectively. China’s annual population growth is estimated to be between 13 and 15 million people. With such large urban and population

26

http://www.txdyt.com/bbs/dispbbs.asp?boardid=128&id=29778&star=1 China Social Statistical Yearbook 2007. 28 Typically, the costal area of a country is defined as within 12 nautical miles away from its coast. 27

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600

50

500

40

400

30

300 20

200

10

100

Discharge(100 million tons)

Figure 7:

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

1991

0

Percentage (%)

M. Yang and S. S. Teng

1990

100 Million Tons

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Urbanization (%)

Rates of Urbanisation and Waste Water Discharge in China.

Per Capita Usage (Litres)

Source: China Environmental Communique 2006.

225 220 215 210 205 200

1996

Figure 8:

1997

1998

1999

2000

2001

2002

2003

2004

China’s Per Capita Water Usage.

Sources: China Statistical Bureau; China Jianyin Investment Securities Report.

growth, Chinese cities are estimated to use about 45 million cubic metres of water per day (Figures 7 and 8), requiring huge investments.29 The increased demand for water will make water shortage more serious in the near future. It would be worse if more waste water pollutes tap water or is diverted to agricultural irrigation. A report from the Ministry of National Land Resources noted that the amount of polluted cultivated land is 150 million metres, almost eight percent of total cultivated land in China. A total of 1.3 million people, typically poor people in the rural areas, die of cancer every year after drinking polluted water. 29

China Jianyin Investment Securities Industry Report (20 November 2006).

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Cancer has been the number one killer in China. There are at least 12 cancer-stricken villages in China’s eastern coastal areas such as in Xititou Town (Tianjin), Feicheng (Shandong), Shuzhou (Anhui), Yancheng (Jiangsu) and Hangzhou (Zhejiang).30 In big cities like Shanghai, Beijing and Guangzhou, most people will only drink bottled water from big water companies, such as Nongfu Shanquan ( ) and Waterman, rather than tap water. China has thus become the world’s third largest bottled water market.31 A scholar from the Academy of International Trade and Economic Cooperation, China Ministry of Commerce, suggested that China should think seriously of moving its capital from Beijing to somewhere in the middle of China where there are affluent water resources.32 However, China does not need such a drastic move. The long-term solution to China’s water problems can be resolved by taking effective measures to control water pollution and encourage people to conserve water by raising water prices and creating public awareness. Dealing with China’s Water Crises The current Chinese leadership under Hu Jintao and Wen Jiabao is very much aware of the enormous water resource-related challenges that China faces in its efforts to sustain economic growth. In fact, the 11th Five-Year Programme (2006–2010) has a package of strategic measures to deal with the water shortage problems. These include big investment projects that deal with water pollution; moving water from the south to the north; increasing water supply capacities in the cities; and encouraging farmers to conserve water by changing irrigation and crops pattern to reduce water consumption.

30

The Cancer Villages in China’s East Coast Line. (6 November 2007) The Apple Daily, Hong Kong. 31 It is estimated to have grown over 30 percent annually in recent years, reaching 30 billion Yuan in sales in 2007, according to a China News Agency report. (28 January 2008) South China Morning Post. 32 China should seriously think to change the location of its capital. The Financial Times Chinese Website, (9 November 2007).

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On the supply side, the government welcomes multinational companies to list on the water market while restructuring and re-engineering the large state-owned companies, making the market more competitive through mergers and acquisitions (M&A).33 With these institutional changes, the equipment and technology, management and efficiency in the water industry were improved. On the demand side, the government tried previously to reform the water price structure to a level so as to encourage consumers to conserve water. However, this effort temporarily stalled due to inflationary pressures from the middle of 2007; the Chinese government continues to face a number of policy dilemmas in its effort to deal with the water shortage problems. Controlling Water Pollution to Increase Supply of Clean Water According to the 11th Five-Year Programme, water pollution should decrease by two percentage points every year in terms of chemical oxygen demand (COD) in every province. In 2006 the pollution target was not met. As a result, in order to guarantee that the target would be met in the future, more local governments introduced huanbao yipiao foujuezhi ( ). It is an initiative which stipulates that if the pollution target is not met, the official at the helm of the respective areas would not be promoted. Industrial parks and banks also introduced similar regulations to reject unqualified investment projects or loan applications.34 In 2007 the SEPA stated that from 2009, all companies that discharge pollutants must obtain environmental permits to operate and heavy fines await the heads of the polluting companies.35 By the end of 2010, tougher standards will be adopted for key drinking water resources and the country will speed up efforts to phase out outdated techniques, equipment and products.36 Performance appraisals for 33

See Table 5 in Appendix for a list of M&A in China’s water industry since 2002. http://www.stockcity.cn/hkstock/ah/200710/228926.html and http://www.cnhubei.com/ 200703/ca1313652.htm 35 Heavy Fines Await Water Polluters. (27 February 2008) China Daily. 36 SEPA Chief Outlines Vision for Clean Drinking Water. (22 November 2007) China Daily. 34

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provincial leaders will be based on pollution curbing efforts and the reduction of energy consumption instead of GDP growth as in the past.37 Besides, SEPA imposed the “river basin project approval restriction” on six cities, two counties and five industrial parks in the Yangtze River, Yellow River, Huai River and Hai River basins for making no significant improvement to curb rampant pollution in their river basins on 3 July 2007.38 Under the 10th Five-Year Plan (2001–2005) China invested 123.4 billion Yuan in 1,590 projects to curb water pollution in the most polluted basins including the three rivers, Huai River, Hai River and Liao River, and three lakes, Taihu Lake, Chao Lake and Dianshi Lake.39 According to the 11th Five-Year Programme (2006–2010) total investment to clean the most polluted basins will be increased by 80 percent compared to the last five years. However, after the May 2007 incident when an algae bloom contaminated Taihu lake and its water supply for several days (affecting more than 2.3 million people in the nearby city of Wuxi), total investment will be increased further to 108.5 billion Yuan.40 Increasing Water Supply in the Drought-Prone North In September 2005, China launched a big investment project of 500 billion Yuan to transfer water from the Yangtze River in the south to the north of China through the Eastern, Central and Western Lines. This is called the Nanshui Beidiao Gongcheng ( ).41 The total project will be completed in 2050 and will transfer 44.8 billion tons of water from the south to the north every year (14.8 billion tons through the Eastern Line, 13 billion tons through the Central Line and 17 billion tons

37

Performance Appraisals Come in Green Forms. (29 November 2007) China Daily. http://www.p5w.net/news/gncj/2007/t1109494.htm 39 http://www.dzwww.com/dazhongribao/shehuizhoukan/200307030097.htm 40 China to Spend S$21b to Clean up Lake. (27 October 2007) The Straits Times. 41 For more on this see Thomson, E. (2002). Nan Shui Bei Diao: China’s Mammoth Water Diversion Project (II). EAI Background Brief No. 141. 38

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through the Western Line). It is almost equal to adding another Yellow River to supply water to northern China.42 The Eastern Line Project was based on the Great Canal and other existing rivers and lakes and will have a total of 33 pump stations in Jiangsu and 51 in Shandong. The main waterway which will start from Jiangdu (Jiangsu) will be 1,156 kilometres long. Total investment for this project is estimated to be about 65 billion Yuan with 39 billion Yuan investment for engineering and construction and 26 billion Yuan for curbing pollution. The line will supply water to Tianjin, Hebei, Shandong, Jiangsu and Anhui. The Central Line starts from Danjiangkou Reservoir (Hubei province), passes through Henan province across the Yellow River to the west of Zhengzhou, to supply water to Hebei, Beijing and Tianjin.43 Beijing, the host of the 2008 Olympics Games, will receive most of its additional water supply from this line.44 Total investment will be about 83 billion Yuan in the first stage; 68 billion Yuan will be channelled to engineering and construction, 1.6 billion Yuan to increase the height of the dam of Danjiangkou Reservoir, 2 billion Yuan for environment protection and 12 billion Yuan for compensating the peasants for their lost land.45 The Western Line starts from Jingsha River (the upstream of Yangtze River), Daduhe River and Yalong River (both of them are branches of the Yangtze River), passes the Qingzang Plateau through many tunnels under mountains before entering the upstream of the Yellow River at a length

42

The idea was initiated by Mao Zedong in 1952 when he commented on a report on Transferring Water from the Yangtze River to the Yellow River. After 50 years of investigation and research and based on hundreds of projects, a special office to evaluate these projects was established in 1996 under the State Council. From 1999 to 2002, after many meetings and arguments, the present projects including Eastern, Central and Western Three Lines were approved. http://www.hbtv.com.cn/misc/2005-09/23/content_522879. htm and http://www.jsnsbd.gov.cn/ WebMain/News.aspx?Id=4 43 Olympics Threaten Millions, says official. (27 February 2008) Financial Times. 44 Quenching Beijing’s Thirst. (7 February 2008) Beijing Review. 45 http://www.china.org.cn/chinese/difang/203708.htm

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of 300 kilometres to supply water to Gansu, Ningxia, Shaanxi and Shanxi (see Map 1).46 The total investment will be 300 billion Yuan, much higher than the other two lines owing to its difficult construction conditions.47 So far, only the eastern and central lines are under construction; the western line is the most controversial due to environmental concerns and is still in the planning stages.48 Increasing Water Supply in the Growing Cities With the looming water crises, opportunities exist for the future development of China’s water industry. In the 11th Five-year Programme (2006–2010), the Chinese government advocated building a water conservation society that is more efficient in water supply and consumption and a waste water treatment industry (with reusable water). Total investment in the water industry will be more than a trillion Yuan in the following three main areas49: 1. Increasing Water Supply Capacity: The water supply capacity in the cities will be increased to support 95 percent of the urban population in 2010, up from 91 percent in 2005, when the population in the cities is estimated to grow from 559 million (43 percent of China’s total population) to 650 million (50 percent of China’s total population). Total investment in the five years will be more than 600 billion Yuan.

46

http://www.xhby.net/xhby/content/2006-08/01/content_1352227.htm Zhuan zhi yi yu shui li jian she: nanshui beidiao gong cheng de nan ti (Monopolistic Ideology and water infrastructure construction: the North-South Water Diversion Project & its Problems). FICS Newsletter 11, (2 February 2008). 48 As Water Vanishes, Chinese City Booms. (28 September 2007) International Herald Tribune. 49 The investments in the water industry do not include costs of cleaning up water, such as those required to clean up China’s third largest freshwater lake, Taihu (which will be 108.5 billion Yuan in these five years). It also does not include costs of transferring water from Yangtze River to the North (Nanshui Beidiao), which is about 500 billion Yuan. (27 October 2007) The Straits Times. 47

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2. Increasing Waste Water Treatment Capacity: Waste water treatment capacity will be increased from 80 million cubic metres of water per day (52 percent of waste water) in 2005 to 100 million cubic metres of water per day (60 percent of waste water) by 2010. Investment in the five years will be about 330 billion Yuan to build up at least 1,000 new waste water treatment plants. 3. Increasing Water Recycling and Renewable Capacity: The capacity to make recyclable or renewable water will be increased from four million cubic metres of water per day (5 percent of waste water) in 2005 to seven million cubic metres per day (7 percent of waste water) in 2010, representing an increase in investment by 10 billion Yuan to build up the new capacities. Water Market Restructuring Increasingly since 2002, more city governments have sold about 50 percent (or less) of their tap water companies’ shares through open market competition. There is a high tendency for M&A in the restructuring of many local domestic water markets. In 2006, French company Suez Environment entered into an agreement worth 601 million yuan with Jiangsu province’s Chang Shu City Construction Property Company. Suez Environment would own 49 percent of Chang Shu Water Company Limited and the Jiangsu Chang Shu City government would own 51 percent of it. Suez also announced plans to further invest US$ 150 billion over the next 10 years in waste water management.50 Suez Environment has already set up its Asia Pacific headquarters in Shanghai in early 2006 in preparation for its strategic presence in China. Back in 2002, Suez Environment already secured a 50-year special franchising contract to manage the water needs of Qing Dao province’s 23 million people from 2003. Suez Environment does not seem to have any new success story until 2006 when it announced that it has a presence in 16 Chinese cities, provinces or municipalities, with 50

Jue Jing Zhong Guo Shui Wu. (20 November 2006) pp. 65–69, Shang Wu Zhou Kan (Business Weekly).

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20 joint-venture companies providing 13.5 million people with potable water services. In 2002, Suez Environment together with Hong Kong’s New Century Holdings Company set up a joint venture, Sino-French Limited Company ( ). Suez Environment also set up Shanghai Xinghuo Development Zone and the world’s largest industrial park, the Shanghai Chemical Industrial Park, in Shanghai. Since the 1970s, Suez Environment has already stationed a water expert in China to set up over 160 water factories to provide potable water services to over 20 percent of China’s population. Moderating the Demand

Figure 9:

6.02

4.35

1.67

0.93

Korea

7.51

Canada

7.94

Australia

8.22

Italy

Portugal

Paris

8.99

China

18

Spain

18.83

Japan

20.78

Auckland

25 20 15 10 5 0

Germany

RMB/ Ton

A free market economy allows prices to be set according to supply and demand. When demand exceeds supply, the higher prices reduce demand and encourage supply. In a planned economy, water prices, together with the prices of all other commodities, were decided by the government and kept very low. After 30 years of reform, most commodities’ prices are decided by the market, but the price of water is still controlled by the government to keep inflation low for the benefit of the low-income group. The water prices in China are thus much lower than those in other countries (Figure 9).51

Prices of Water in Selected Countries /Cities in 2005.

Source: SYWG Research & Consulting, China. Note: Refer to Appendix Table 4 for a comparison with Singapore’s water prices. 51

Air, Water Pollution Decreases. (15 November 2007) China Daily.

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Table 2:

Selected Chinese Cities’ Water Prices in September 2006 (RMB/ ton).53

City

Tariff

Beijing Chongqing Tianjin Taiyuan Dalian Jinan Changchun Kunming Fuzhou Shijiazhuang Hu he hao te Xi’an

2.80 2.80 2.60 2.45 2.30 2.25 2.10 2.05 2.02 2.00 1.95 1.95

City Hefei Shenzhen Harbin Xiamen Qingdao Zhengzhou Haikou Lanzhou Shenyang Urumqi Chengdu Guangzhou

Price 1.90 1.90 1.80 1.80 1.80 1.75 1.55 1.45 1.40 1.36 1.35 1.32

City Nanjing Xining Yinzhou Suzhou Hangzhou Wuhan Nanning Shanghai Changsha Guiyang Nanchang Lhasa

Price 1.30 1.30 1.30 1.23 1.15 1.10 1.08 1.03 1.02 1.00 0.88 0.60

Source: China Prices Information Net; China Jianyin Investments Securities.

In 2006, the National Development and Reform Commission of China (NDRC) indicated that China would reform the costs and prices of oil products, water, electricity, natural gas, coal and land. In China the average price of water in 36 middle and large cities is 1.67 yuan/cubic metres (Table 2). There is a lot of room for increases in water prices in China, including waste water treatment charges.52 The experiences of other countries show that when the water expenses of a family are less than two percent of total family dispensable income, the family will have no incentive to save water. Five percent will be the optimal level to encourage them to conserve and use water rationally. Due to the low water price, the water expenses of a Chinese family are only about 1.2 percent of its income. In 2005, the per capita water used per day in city was 204 litres. At two to five percent of water expenses in a family’s dispensable income, the rational water price could be between 2.82 and 7.05 Yuan per cubic metre in China. Compared to the real prices in 2005, rational water prices could be increased by 24 percent to 210 percent in China. 52 53

21st Century Economic Times, China. Price per ton is the same as price per cubic metre.

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Based on the average annual increase of per capita dispensable income in the last five years of about 10.8 percent, the water price in 2010 could be between 4.54 and 11.34 Yuan per cubic metre. The present water price could be increased further by 100 percent to 400 percent. The potential leeway for large increases in water prices, besides encouraging the conservation of water, also demonstrates that the future is bright for enterprises that invest in China’s water industry. Policy Dilemma China’s economy is still in the midst of a transformation. Any water price hike will have many social implications. The present system has put the government’s efforts to solve the water shortage problem in a dilemma. Due to the recent inflation of 4.8 percent (highest in the past 10 years) in 2007, the government has no other choice but to postpone the price reforms on oil, water, electricity and other resources so as not to disrupt peoples’ daily lives and cause social instability. In 2007, a new problem arose when foreign water companies such as Veolia Water and Suez Environment began seeking a larger share in China’s water industry. As these companies are far more superior to domestic companies in terms of capital and technology, they are in a better position in taking on water projects or to acquire other domestic companies (see Box 1 in Appendix). In May 2007, China’s City & Town Water Association ( ) organised a field study to learn the business strategy of these foreign companies. The study also aims to improve the technological know-how and raise capital for the bigger Chinese water companies such as Shou Chuang Holdings ( ) and Chuangye Huangbao ( ). Water control in China is currently too diversified. For example, rivers entering Taihu lake in Jiangsu province is under the jurisdiction of the Taihu Water Flow Office of the Jiangsu Government; in Zhenjiang, there is a similar organisation under the Zhenjiang government. This diversification is causing problems in management. For instance, when the downstream government in Shanghai is stepping up efforts to curb water pollution, the local governments in upstream regions such as

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Jiangsu or Zhejiang are encouraging industrial development to achieve GDP growth.54 Centralisation of water management is thus essential to coordinate China’s water efforts. A centralised regional water authority, similar to that of the United States’ Mississippi Delta Regional Authority, will be more effective in governing China’s massive waterways.55 The Chinese government is tackling the problem by first increasing the water supply before curbing pollution. The water transfer project from the south to the north via the Eastern Line could be completed within the next two years. However, the people of Tianjin may refuse to drink water from the Yangtze River because it may have been polluted along the way (by the cities and factories throughout the thousands of kilometres). China’s water shortages, pollution and their related crises are deteriorating by the day. Urgent measures have to be taken to contain and improve the water situation in China. China welcomes foreign investors into its water industry to bring in new technology and management. This is where Singapore can come in and create a win-win situation for both countries. Foreign Participation in China’s Water Industry In the past, all water enterprises in China were government public utility companies e.g., the Tap Water Company (zilaishui gongsi). A fundamental 54

Taihu: A Heavy loan Burden. Caijing, 18, (2007), 88–92. In 2000, the US Congress established the Delta Regional Authority to enhance economic development and improve the quality of life for residents of 240 counties in Alabama, Arkansas, Illinois, Kentucky, Louisiana, Mississippi, Missouri and Tennessee. This federal-state partnership provides a unified voice for the region. In the first five years, the Delta Regional Authority’s federal grant programme funded 334 projects using US$48.5 million of authority funds, US$213 million of other federal funds and US$493.4 million of private funds. The investment of more than US$750 million in the region helped to create or retain almost 31,000 jobs while providing drinking water and sewer services to more than 24,000 families. Meanwhile, about 6,000 Delta residents received job training due to this investment. For more information see http:// dra.gov/

55

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problem with this system is that operations were limited to the local market with limited production capacity and market share (the market share of the largest water company was less than three percent of the national market). In China’s 669 cities and 2,000 counties are about 2,700 tap water companies with about 3,000 water factories. As part of the public administration, these companies operate without competition, are subsidised and over employed. Their equipment are outdated, tap networks old and poorly maintained, water leakages serious, utility payment system bureaucratic and poorly managed, etc. Till the end of October 2006, 1,221 of 2,496 existing water enterprises (49 percent) operated with losses. The average profit for the whole industry was only 0.6 percent, much lower than the government’s target of between eight and ten percent. With water shortages and a deteriorating environment that pollutes and over-exploits precious water resources, there is a sense of urgency for alternative water management expertise and business models to assist in creating a sustainable water supply industry in China. In 2002 the Chinese government published the “Direction to Promote the Marketisation of Public Utilities”. Four different kinds of water enterprises have been singled out by the Chinese government for preferential policies. These include firstly, multinational water companies. Multinational water companies which are already in the China market include those from France, US, UK, Germany and Singapore. Examples of French companies are Veolia Water ( ) and Suez 56 Environment. Among these foreign companies, Veolia Water has the strongest presence in China’s water industry. Since its establishment in 1997, Veolia Water has provided drinking water and waste water treatment services to municipal and industrial clients. Its projects cover design and build, operation and maintenance, as well as full services including distribution and customer services. Veolia Water serves approximately 18 million people in China, employs more than 2,000 employees and manages various municipal contracts in 14 provinces of China. In 2002

56

See Box 2 in Appendix for Chinese–French cooperation in Chinese water industry.

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Shanghai Pudong Veolia Water started its operation with a 50-year concession to modernise installations, improve service quality and transfer know-how. Among these success stories are failures, too. These include British Thames Water Limited, a company which withdrew from collaboration with a Shanghai Company after the Chinese government cancelled an agreement to guarantee a 15 percent rate of return to their initial investment. While there exist tremendous business opportunities, there are also numerous pitfalls in China’s water industry. Secondly, home-grown listed holding companies also benefit from the preferential policies. These include Shou Chuang Holdings ( ) and Yuan Shui Holdings ( ) which have been building their new management and technology bases, employing more professionals, reducing residuals, and becoming strong competitors to the foreign companies in the water market. There are now 15 listed water companies (three in HK, nine in Shanghai, three in Shenzhen) (Table 3). Shou Chuang Holdings ( ) is the leading domestic water company. It has water projects in Hebei, Zhejiang, Jiangsu, Anhui, Shaanxi and other provinces. It also has a 50–50 joint venture water company with Evian which holds some shares of Shenzhen Water Group ( ). Shou Chuang Holding’s water treatment capacity is 7.3 million tons per day, a figure which will hit 15 million tons in 2010. Thirdly, large local tap water companies have also been singled out for preferential benefits. Some noteworthy names such as Shenzhen Water Group ( ) and Beijing Water Group ( ) have been restructured and reengineered. They have now grown into large tap water companies in large cities with increased market share and strong assets, after having improved their management, upgraded their technology and tap water supply network, and restructured their supply and service systems; they are now beginning to invest and merge with water companies in other cities or provinces. Fourthly, new domestic private companies such as Shunde Huanbao ( ) and Guozhen Huanbao ( ) are also favoured. These started their business in the environmental protection engineering sector and expanded into the upstream market through merger of the tap water companies. These private enterprises are very aggressive in the market

Source: China Jianyin Investment Securities.

Number of People Serviced (m.)

30 — 17 7 9 — 8 — 2

7.3 10 3.1 2.7 2.5 — 2.7 — —

14 18 10 — — — — — —

— 6

— 0.5

— —

Page 187

— (RMB 54.18 m.)

Potable water, Waste water treatment, management. As above. As above. As above. As above. As above. Waste water treatment. Engineering. Engineering, Waste water treatment. Technical, Equipment. Technical, Equipment, Waste water treatment.

Capacities (m. tons/ day)

China’s Looming Water Crisis

363 — 7.0 8.0 0.5 0.4 — —

Main Services

Water/Waste Treatment Facilities

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8.3

Main Water Companies in China Today: An Overview.

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Company

Total Assets (RMB b.)

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with their very flexible and active business models. However, their operations and market are limited to the middle and smaller cities and towns due to their limited capital resources. Opportunities for Singapore There are three main sub-industries within the water industry: tap water supply, waste water treatment and recyclable or renewable water. All three have different business characteristics and are located at different stages of the business life cycle of the water market (see Figure 10). The new entrants in tap water supply and waste water treatment ought to be large multinational companies with huge capital for project bidding and to cover the high initial investment necessary to sustain the initial losses in the first few years. The only niche area where Singaporean enterprises have an advantage will be in China’s recyclable or renewable water industry which is in its infancy. Renewable water technology has been officially recognised as an important national project in China, as seen in the April 2006 “City Waste Water Renewable Technology Policy”.

Potable Tap Water Waste water Treatment Renewable Water

Initial Stage

Figure 10:

Growth Stage

Product Life Cycle on the Water Industry.57

Source: Author’s presentation.

57

Mature Stage

SYWG Research & Consulting, China.

Decline Stage

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In 2005, the annual usage of renewable water in China was only about two billion cubic metres out of total water consumption of 563 billion cubic metres (or just 0.36 percent). Under the 11th Five-year Programme, China plans to increase renewable water usage to 20 percent of total water usage in Chinese cities which face water shortages. With Singapore recently winning the Stockholm Industry Water Award, the equivalent of the water industry’s Nobel Prize,58 the technology and management of the Republic’s water industry is internationally recognised. The first major cooperation between Singapore and China has taken place. Singapore-style water recycling and renewable technology will be used for the Chinese province of Jiangsu in the city of Zhangjiagang.59 The metropolis of Zhangjiagang will build high-concentration waste water treatment facilities, study water supply issues and learn how to make the most of its water resources in an urban setting. Singapore’s environment companies could also offer their services in the cleaning up of the Taihu Lake.60 One major Singapore success story would be that of Hyflux, a Singaporean home-grown water company with vast investments in China. Hyflux first entered China in the early 1990s and today, it has some 15 water treatment plants in China. Conclusion China’s looming water crisis is largely contributed by the central government’s poor water management capabilities. Over the years, the government has paid too much attention to economic growth and development to the extent of compromising the country’s water supply. Today, China has not only one of the lowest per-capita water reserves but also the most polluted water system. Rapid industrialisation and urbanisation coupled with prolonged drought is also straining the water supply. Nonetheless, Beijing is beginning to take steps to tackle the country’s 58

Singapore wins kudos for water expertise. (16 August 2007) The Straits Times. Singapore-style water treatment for China. (29 August 2007) The Straits Times. 60 Seize chance to clean up Lake Taihu, S’pore Firms told. (2 November 2007) The Straits Times. 59

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worsening water problem. Some of the few measures include controlling water pollution to increase the supply of clean water and to increase water supply to drought-prone areas, in particular to the northern regions. The central government is also increasing its investments on water projects to improve the supply of water. It is also encouraging more foreign investments to participate in improving the water situation in China. Although it is still too early to tell whether these steps would be successful in resolving the country’s water problem, it is a good initiative to prevent the problem from spiralling out of control. Appendix

Box 1:

Serious Water Pollution Incidents in China in the Past Three Years.

1) Feb 2008: Han river in Hubei and Yunnan provinces polluted; two hundred thousand people went without drinking water. 2) May 2007: One million residents in Wuxi city went without drinkable water due to the Taihu lake pollution. 3) Sep 2006: Water pollution in Yueyang city in Hunan province. 4) Aug 2006: Jialing river in Chongqing seriously polluted. 5) Aug 2006: Songhua river in Jilin province polluted by industrial chemicals. 6) Jan 2006: Xiangzhangxiang river in Hunan was polluted by cadmium. 7) Dec 2005: Beijiang in northern Guangdong province polluted by heavy cadmium. 8) Nov 2005: Jilin Shuangbenhua factory explosion affecting Songhua river; Harbin city had to cut water supply for four days, affecting Russia too. 9) Mar 2004: A million people stopped using tap water after the level of ammonia in Sichuan’s Tuo river rose 50 times above the safety limit.

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Box 2:

191

Increasing Competitiveness of China’s Water Industry.

On 29 January 2007, the government of Lanzhou through Lanzhou Public Water Supply Holdings Company in Gansu province signed a contract with French company Veolia Water whereby Veolia will invest RMB 17.1 billion for 45 percent of the shares and a 30-year concession. Veolia estimated the company’s annual revenue could be 1.6 billion Euros. It was the 21st contract signed in China by Veolia. This signifies that China’s water industry is fast-changing and the water market is becoming more and more competitive. The failed bids from Sino-French Water ( ) and Shou Chuang Holdings ( ) were 440 million Yuan and 280 million Yuan respectively, much lower than that offered by Veolia. On 20 March 2007, Veolia won 50 percent of shares of Haikou Water Group when it bided 950 million Yuan, much higher than Sino-French Water’s 440 million Yuan and Shou Chuang Holding’s 410 million Yuan.61 Table 4: Tariff Category

Water Tariffs in Singapore (S$).

Consumption Water Water-borne Block Tariffs Conservation Fee Sanitary (m3/mth) (cents/m3) Tax (% of tariff) (cents/m3) Appliance Fee

Domestic

1 to 40

117

30

30

Domestic

Above 40

140

45

30

Non-domestic

All units

117

30

60

Shipping Industrial

All units All units

192 43

30 —

— —

$3/ fitting per mth $3/ fitting per mth $3/ fitting per mth — —

Source: Public Utilities Board Singapore, 2008. Note: Water Conservation Tax is meant to reinforce the message to conserve water usage; sanitary and water-borne fees are meant to offset the cost of treating used water and maintenance and extension of the public sewerage system.

61

http://www.ijob.com.cn/indu_detail/service/company/other/0001.htm

Sep 2005 Oct 2005 Nov 2005 Sep 2006 Jan 2007

Chang Shu Potable Water Lan Zhou Water

Source: Everbright Securities.

)

Evian-General First Berlin Water Utilities Zhong Huan Bao Evian Evian-Zhongxin Qin Fu Evian- Zhongxin Qin Fu Zhong Fa Water Utilities Evian

Water Supply Capacity (10,000 tons/day)

Price of Transferred Shares (RMB 100 mil)

Price Premium (%)

50

2.66 (Euros)

120

7.6

160

45 100

4 (US$) 4.8

167 + 108 30

25.7 2.68

5.5 79

100; 55.9

0.999; 3.371

Potable water: 45; Waste water: 55. 49 49

1.562 4.5

45.5 71

1.54 3.75

1.5 20

49

10.05

111.5

7.78

30

49

6.01

67.5

3.08

95

118

4.122

280

45

15.7 (capital injection RMB 140 mil).

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Dec 2004

Evian (

M&A Price (RMB 100 mil)

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Dec 2003 Jul 2004

Pudong Water Company Shen Shui Holdings Wang Xiao Huang Waste Water Factory Xiamen Water Utilities Holdings Liu Zhou Potable Water Chang Zhou Potable Water Kunming Potable Water

Share Holdings (%)

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Apr 2002

M&A Hunter Company

M. Yang and S. S. Teng

Date

M&A Targeted Company

Recent Mergers & Acquisitions in China’s Water Industry.

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Table 5:

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193

Major Special Environmental Laws in China.

Renewable Energy Law Law on Radioactive Pollution Prevention and Control Law on the Environmental Impact Assessment Law on the Promotion of Clean Production Law on the Administration of Sea Areas Law on Desert Prevention and Transformation Law on Conserving Energy Law on Prevention and Control of Pollution from Environmental Noise Law on the Prevention and Control of Environmental Pollution by Solid Waste Law on the Prevention and Control of Atmospheric Pollution Law on Water and Soil Conservation Basic law: PRC Environmental Protection Law Law on the Protection of Wildlife Water Law Land Administration Law Mineral Resources Law Fisheries Law Forestry Law Grassland Law Law on Prevention and Control of Water Pollution Marine Environment Protection Law

2005 2003 2002 2002 2001 2001 1997 1996 1995 1995 1991 1989 1988 1988 1986 1986 1986 1985 1985 1984 1982

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CHAPTER 9

The Tainted Milk Formula Incident: Another Hard Lesson for China Zhao Litao and Lim Tin Seng

The Sanlu milk formula incident was an undesirable event for Beijing, especially when it was exposed to the international media less than a month after holding a highly successful Olympics games in August 2008. Not only did the incident wipe out the euphoria that came with the Games, it also killed six children and caused more than 290,000 children to fall ill after having consumed the melamine-tainted milk powder. The incident also triggered a wave of panic over the safety of Chinese food products across the globe as countries ranging from Japan to Singapore, the United States to Ghana banned the imports of Chinese-made dairy goods and the sale of food products made with Chinese ingredients. Similar to many of the social problems that China is currently facing, the milk powder incident highlighted the harsh reality that the existing political and administrative structures in the country are outpaced by the country’s economic development. In the case of this incident, the shortcomings in the structures created opportunities for milk manufacturers and suppliers as well as local officials to circumvent an outdated food safety monitoring system and an ineffective government bureaucratic system in using melamine to fake the protein content of the milk. These dealings compromised the welfare of consumers in China and tarnished the international image of the “Made in China” brand. This chapter first studies how the incident unfolded to become such a major event before explaining its major causes. This includes highlighting the growth of the dairy industry and the difficulties faced by local milk companies and their milk suppliers as well as the inefficiencies of the government. The chapter concludes by discussing the government responses and the fallout to the incident.

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The Unfolding of the Milk Formula Incident The tainted milk formula incident was a nationwide scandal and an international embarrassment for China. According to Chinese health officials, the incident made more than 290,000 children sick. Among them, six died and most suffered from “urinary system abnormalities”.1 The incident was made public in early September 2008 when reports emerged stating that 14 babies were diagnosed with kidney stones and tested positive for melamine in their urine in a local hospital in Gansu province.2 When doctors carried out more tests on the sick babies, they discovered that the babies had consumed milk formula that was laced with melamine, an industrial chemical substance used to make plastics and fertilisers. Local and central authorities later traced the source to the popular low-end milk powder formula called Sanlu Bei Bei Infant Powder produced by the Hebeibased Sanlu Group. The authorities also revealed that Sanlu’s milk powder was not the only product that was contaminated. Batches of popular milk powder produced by 21 other dairy companies including dairy giants Yili and Mengniu groups from Inner Mongolia and Bright Dairy from Shanghai were also contaminated with melamine.3 The poisonous chemical was added to the milk powder as a cost-cutting measure to increase the nitrogen level content of the milk and therefore its apparent protein content.4 Central authorities and an announcement by Andrew Ferrier, the Chief Executive Officer of the New Zealand-based Fonterra Cooperative Group which owns 43 percent of the Sanlu Group, revealed that cases of melamine poisoning could be traced back to March 2008 when Sanlu first received complaints about its products. However, it was not until early August 2008 that the milk company’s Board and Fonterra was 1

The initial number of sick babies related to the incident was 60,000. This was later revised to 290,000 in December 2008. The number of fatalities was also revised from four to six. Chinese Baby Toll Escalates. (17 September 2008) BBC News. China warns more may be sickened by tainted milk. (16 September 2008) CNBC. China May Compensate Milk Victims. (11 December 2008) International Herald Tribune. 2 China Blames Dairy Farms for Tainted Baby Formula. (12 September 2008) Associated Press. 3 Melamine Found in More Milk. (17 September 2008) China Daily. 4 World Health Organisation (2008). Questions and Answers on Melamine, http://www.who. int/csr/media/faq/QAmelamine/en/index.html (accessed on 27 November 2008).

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informed.5 Fonterra then ordered the contaminated products to be recalled but the attempt was blocked by the local government of Shijiazhuang, the capital city of Hebei province where Sanlu was located. This prompted Fonterra to bring the matter to the New Zealand government on 5 September 2008 which then blew the whistle in Beijing prompting the Chinese government to launch a nationwide probe right about the same time when the first victims were reported in Gansu province.6 Initially, the melamine-contaminated milk incident was confined to China’s borders. Chinese health authorities even assured other countries that none of the contaminated milk powder was exported in mid-September 2008.7 However, reports surfaced in late September 2008 that a handful of children in Hong Kong and Taiwan were sick from consuming melamine-laced Chinese food products. Tests conducted by health authorities worldwide also revealed traces of melamine not only in Chinese milk powder, but other Chinese food products such as candies and biscuits that were made with Chinese-produced milk. In October 2008, reports stated that melamine traces were also found in Chinese-produced eggs.8 The discoveries led countries across all continents to ban the sale and import of Chinese food products. It also prompted the WHO (World Health Organisation) and UNICEF (United Nations Children’s Fund) to issue a joint statement to warn mothers not to use Chinese infant formula and to encourage them to breastfeed their infants.9 The tainted milk formula incident, however, was not the first time that the safety of Chinese food products was placed under scrutiny. Back in 2004, 13 babies died and more than 200 were sick in Anhui province 5

China’s Sanlu Apologizes for Milk Powder Contamination. (15 September 2008) China Daily. 6 Fonterra: We Acted Responsibly on Killer Milk. (16 September 2008) The New Zealand Herald. 7 Health Ministry: Tainted Milk Powder Not Sold Abroad. (13 September 2008) Xinhua. 8 China Egg Producer Apologizes for Melamine Contamination. (30 October 2008) People’s Daily. 9 UNICEF and WHO China Statement on Contaminated Infant Formula. UNICEF, (24 September 2008). http://www.unicef.org/media/media_45735.html (accessed on 26 November 2008).

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from malnutrition after being fed with counterfeit Sanlu milk powder that contained no nutritional value.10 This event prompted a strong response from the central government which launched a multi-level nationwide initiative involving various government departments such as the State Food and Drug Administration and the Ministry of Health to weed out counterfeit milk products in China and to improve the safety systems of its products.11 Although the initiative was successful in arresting the ones responsible for producing the counterfeit milk powder, it soon fizzled out and was overshadowed by a series of food-related incidents ranging from tainted toothpaste to melamine-contaminated pet food and lead-covered toys and poison dumplings. Consequently, these incidents compromised the safety and integrity of Chinese food products. But most of all, they exposed the failure of the Chinese government to follow up on these food scares appropriately by committing to effective measures such as improving the food safety system. As China progresses towards the market economy at such remarkable pace, the constant need to revise its existing food safety system to keep it up-todate is particularly important. However, as the tainted milk incident shows, China has failed to take the appropriate steps.

China’s Growing Dairy Industry The tainted formula incident emerged amid a burgeoning dairy industry. In fact, the industry has been growing at a steady pace in the past decade and on track to become the most attractive sector in the animal husbandry and food industry in China. According to the National Bureau of Statistics, China’s total dairy production increased from about 18 million tons in 2000 to over 70 million tons by the end of 2007 (see Chart 1). Merrill Lynch estimated that the industry was worth well over US$20 billion in 2007.12 Similarly, the country’s per capita yearly consumption of milk has grown nearly four-fold since 2000 from seven kilograms to nearly 27 kilograms in 2007 (see Chart 2).

10

China ‘Fake Milk’ Scandal Deepens. (22 April 2004) BBC News. Tough Action to Wipe Out ‘Killer’ Milk Powder. (20 April 2004) China Daily. 12 Dairy industry takes a fatal beating. (22 September 2008) China Business Weekly. 11

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199

80

70

60

Million Tons

50

40

30

20

10

0 1996

1997

1998

1999

2000

2001

2002

Dairy products (million tons)

Chart 1:

2003

2004

2005

2006

2007

Milk products (million tons)

China’s Dairy Production 1996–2007.

Source: National Bureau of Statistics.

30

25

Kilograms

20

15

10

5

0 1980

Chart 2:

1985

1990

1995

2000

2005

2006

2007

China’s Per Capita Consumption of Milk 1980–2007.

Source: National Bureau of Statistics.

The driving force behind the rapid development of the dairy industry is largely due to changes in the purchasing habits of Chinese consumers. After experiencing high economic and income growth, Chinese consumers are beginning to adopt the dietary habits of their developed Asian neighbours;

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higher value-added dairy products such as milk beverages, yogurt and cheese have become an important part of their daily consumption.13 Nutrition guidelines and programmes introduced by the government in recent years also played a major part in bringing about the dietary change. For example, the implementation of the school milk programme in larger cities such as Beijing and Shanghai has raised awareness among youths of the benefits of dairy products. Similarly, the inclusion of milk products as a recommended dietary component in the government’s food and health guidelines has changed the traditional perception that milk was a nutrition supplement only for infants and the elderly.14 Premier Wen was reported to have said that he had a “dream” that every Chinese, especially children, would be able to drink a pint of milk daily. Strong advertising also had a part to play in boosting dairy product sales. According to a survey, 93 percent of the sample households in Beijing, Shanghai and Guangzhou indicated that their positive perception on milk products were formed after watching television advertisements extolling the healthiness of milk consumption.15 Most of China’s milk output originated from North China, particularly Inner Mongolia, Heilongjiang and Hebei where Sanlu, Yili and Mengniu, the three largest milk producers in China, are located.16 In 2007, total milk output of the three provinces made up more than 50 percent of the nation’s total milk output, with Inner Mongolia having the largest share (see Chart 3). Northern provinces have a comparative advantage in dairy cattle husbandry.17 For example, air temperature in the northern parts is much lower than the southern areas, thus making dairy cattle milk production a better option than crop growing.18 There is also ample farmland in the 13

Fuller, F., Huang, J., Ma, H. and Rozelle, S. (2006). Got Milk? The Rapid Rise of China’s Dairy Sector and its Future Prospects. Food Policy, 31, 204–205. 14 Ibid., p. 204. 15 Ibid., p. 204. 16 Chen, K., Hu, D. and Song, H. (2008) Linking Markets to Smallholders Dairy Famers in China: Quality as a New Driver. FAORAP Regional Workshop. 17 Ibid. 18 To a large extent, climate and topographic features define the agricultural products to be produced in an area. As mentioned in the text, dairy farming is most developed in the northern provinces because the cooler climate makes them unsuitable for growing crops.

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100%

80%

60%

40%

20%

0% 1975

1980

1985

Inner Mongolia

Chart 3:

1990

Hebei

1995

2000

Heilongjiang

2005

2006

Others

Regional Distribution of China’s Total Milk Output.

Source: China Dairy Yearbook.

northern provinces for the establishment of dairy cattle husbandry. The per capita farmland availability of Inner Mongolia, Heilongjiang and Hebei is about 0.6 hectare.19 This is twice as big as the national average of 0.3 hectare and triple the per capita farmland availability of the coastal provinces which is only around 0.2 hectare. Cutting Corners to Stay Competitive Although the dairy industry is growing, competition among local milk producers is fierce. This is due partly to the growing number of local milk companies wrestling for a larger market share. The growth of milk companies is facilitated by the opportunities created as a result of the country’s drive towards the market economy. Besides, local governments, particularly in the northern regions, are actively taking steps to attract milk companies to set up operation in their region. In addition,

19

Ibid.

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improvement in technology, most notably the ultra high-temperature (UHT) milk production technology, allowed private milk companies to break the monopoly held by state-owned milk companies in the dairy industry. Prior to that, state-owned milk companies monopolised the dairy industry because they controlled the distribution network that was needed for the delivery of pasteurised milk to consumers. The introduction of UHT technology, however, allowed new entrants to produce milk products that have longer shelf life. This permitted them to enter the market without the need to acquire this crucial distribution network as they can sell their products through various channels such as supermarkets, retail stores, etc. The over-expansion of the dairy industry is also caused by the relentless drive by local government to attract investment. Prior to the tainted milk incident, some local governments had been extremely open to local and non-local dairy companies. This eroded the profit margin and saturated the dairy market. For example, the Sanlu Group, which was based in Hebei province, had been the largest powdered baby milk formula producer in China since the 1980s. In 2007, it was producing one fifth of the country’s total formula market. However, Hebei province’s decision to allow more dairy producers such as Mengniu, Yili and Guangming to enter the local market ended Sanlu’s domination and greatly increased the competition among dairy companies. In order to stay ahead, milk companies, including Sanlu, resorted to cost-cutting measures by lowering its quality standards, thus allowing contaminated milk products to enter the market. The fierce competition among local milk companies is also partly due to the size of the market; they are largely restricted to the lower-end market. The high-end market, particularly for infant milk powder, is dominated by foreign milk companies. For example, Mead Johnson, a unit of BristolMyers Squibb, leads with a 25 percent market share. Wyeth and Dumex, the powdered-milk unit of France’s Danone, have 20 percent and 12 percent share, respectively.20 Other than their internationally reputable brand 20

Foreign firms gain from China milk powder scandal. (19 September 2008) Reuters. http://www.reuters.com/article/marketsNews/idUSPEK11092420080919?pageNumber=1 &virtual BrandChannel=10272 (accessed on 22 September 2008).

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names, the foreign companies are able to wrest control of the higher-end market from local companies because of the superiority they have in terms of capital and technology. Rising domestic inflation and the government’s price control measures over staple foods, including milk products, in early 2008, aggravated the problem further. With milk companies forgoing quality controls in order to stay competitive, opportunities were created for their milk suppliers or milk collection centres to tamper with their products. Furthermore, most of the centres are privately-owned and thus not placed under the supervision of their contracted milk companies. What drove milk collection centres to supply adulterated milk was the stiff competition they were facing. Like the milk companies, these centres are facing an oversaturated market. Due to the new business strategy adopted by milk companies to outsource their milk supply in order to reduce cost and the generous financial incentives provided by the local governments for farmers to purchase cows to expand the local animal husbandry industry, the number of milk collection centres has been growing at a rapid pace. As a result, in order to stay afloat, owners of these collection centres began colluding with purchasing agents of dairy companies to provide melamine-enriched diluted milk. Milk collection centres were able to acquire melamine quite easily. In fact, it has been reported that the use of melamine was an “open secret” in the countryside as farmers were aware that the industrial chemical could be used as a “special formula” to transform inferior food products.21 It has also been reported that the factories in the countryside around Shijiazhuang have reported a sharp rise in melamine sales in the last two years.22 Incidentally, it was during this period that cases of melaminecontaminated food products began to surface in China. First, it was on pet-food products in 2007 and now in baby milk powder and other dairy products. The audacity of collection centres in “openly” using melamine in their products is also partly due to the lack of supervision by the local 21

China Milk Scandal: Families of Sick Children Fight to Find out True Scale of the Problem. (3 December 2008) Telegraph. 22 Ibid.

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government. Sun Zhengcai, Minister of Agriculture, noted that currently, milk collection centres in China are not regulated as they only began operation recently.23 This makes it difficult for the state to ensure quality control in the centres, giving owners of milk collection stations the opportunity to work with cow farmers as well as purchasing agents of dairy companies to provide tampered milk supply. As a result, to a large extent, the cause of the melamine-tainted formula incident was also the result of the failure on the government side. Tainted Formula as a Government Failure What causes the government failure? The lack of government regulations is one. The fact that the tainted products were widely consumed and affected a huge number of children as well as exported overseas further suggested that the institutions put in place at both the central and local levels by the Chinese government to protect and improve consumer welfare have failed miserably. At the central level, the infant milk formula incident highlighted loopholes in the food inspection system under the purview of the General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ). It revealed that GAQSIQ allowed food producers designated as national brand names to bypass inspections. Sanlu was China’s most trusted brand in 2006. But as it turned out, the milk company was the first to be incriminated and its products were found to contain the highest level of melamine. Other major milk companies that were incriminated such as Mengniu and Yili were also considered trusted brands in China. The GAQSIQ was also not proactive in revising existing or putting in place new regulations that will ensure the safety and quality of milk supply from milk collection centres. This gave milk suppliers room to tamper with their products at the cost of the safety of the country’s food products. Poor coordination among government institutions in introducing measures or new regulations was also a major cause for the outbreak of the tainted milk formula incident. One example was the failure on the part of the National Development and Reform Commission (NDRC), the 23

Milk Buying System to be Overhauled. (24 September 2008) China Daily.

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economic planning agency under the State Council, to introduce price control measures to limit price increases of staple foods, including milk products, to ease the inflationary pressure in January 2008.24 Although the NDRC’s intention was to help consumers, it did not take into consideration how price caps could affect milk producers which are already facing difficulties amid an oversaturated dairy market and rising production costs. This forced dairy companies to diffuse cost pressures through the supply chain all the way to milk collection centres, creating greater incentives for adulteration such as adding melamine to enrich inferior milk.25 There are also problems at the sub-national level. As mentioned earlier, the Fonterra Group reported that it became aware of cases of melamine poisoning in March 2008 but attempts by the New Zealand milk company to have the contaminated products removed was blocked by the city government of Shijiazhuang. The media was likewise blocked. For example, the local government blocked Southern Weekend, an independent newspaper publication in China, from publishing articles related to the incident in July 2008.26 Fu Jianfeng, editor of Southern Weekend, revealed in his blog that the reason given by local officials was that the articles were “too close” to the Olympic Games and would damage the country’s international image. Reports also showed that alarms raised by government agencies such as the GAQSIQ branch in Hunan and the Health Bureau of Gansu were also ignored by Shijiazhuang, prompting them to relay their message to the central government in Beijing.27 The tardy response at the local level partly reveals the slow decisionmaking process in the multi-level party and government hierarchy, and partly shows China’s weak crisis management capabilities, particularly at the local levels. As in the Sichuan earthquakes and the snow storm in 24 From November 2007 to November 2008, China was battled by high inflationary pressure. During this period, the country’s average CPI was more than six percent and reached as high as 8.7 percent in February 2008. China Works to Curb ‘Structural Price Rise’. (30 January 2008) China Daily. 25 China Says 432 Infants Have Kidney Stones From Sanlu Formula. (13 September 2008) Bloomberg. 26 An, A. (2008). Media Control and the Erosion of an Accountable Party-State in China. China Brief, 8(19). 27 Ibid.

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early 2008, the effective and powerful state machinery only started to operate when the highest authorities like Hu Jintao and Wen Jiabao personally intervened. The tardiness at the local level has a more fundamental reason. Local governments tend to cover up the problem for local firms, particularly the larger ones like Sanlu, because local governments rely on them to provide employment and generate revenues. Local governments at the county and city level are hard pressed to spend on basic education, healthcare, pension and other public services, and local officials are given strong career incentives to compete with officials in neighbouring areas for better political, economic, social and environmental performances. While alerting the public as early as possible is the best way to manage public safety issues, what local officials care most is not public interest above and beyond the local level. They are most concerned about their local interest and fear that alerting the public could raise the awareness of otherwise uninformed consumers, thereby exacerbating rather than mitigating the problem for local firms. Insofar as local governments and local firms need each other and place their own interest above trans-local public interest, it would be unrealistic to expect the enforcement of the central government’s efforts to improve food product safety at the local level. Government Response to the Incident When the Sanlu infant formula incident became known to the central government, China launched a “first class national food emergency response” to carry thorough investigations into the causes of the contamination. In less than three weeks, the operation had tracked and shut down the sources, arrested 18 suspects, detained 28 others and summoned more than 80 people for questioning.28 Ji Chuntang, mayor of Shijiazhuang, was dismissed for failing to act after receiving earlier reports on the tainted milk formula. Li Changjiang, director of GAQSIQ, was also dismissed as public anger over tainted milk mounted. The government also ordered GAQSIQ to test all locally-produced milk powder to find out the melamine level. Products that have the slightest trace of 28

12 more arrested in China’s tainted milk scandal. (19 September 2008) Associated Press.

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melamine were removed. After reports surfaced that melamine was also found in other milk-related food products such as yoghurt and biscuits, the government extended the tests and bans to the new products. The Ministry of Health also announced that the government was mulling a plan to compensate the affected families.29 Most significantly, the government took decisive steps to revamp the food safety system. In October 2008, the Chinese authorities began drafting a new food safety law to replace the existing one.30 The draft, which is still currently being debated, forbids chemicals and materials other than authorised additives in food production. The Ministry of Health would be given the authority to list the approved additives. The draft also prohibits food safety authorities from issuing inspection exemptions to food producers of “trusted brands”. The government also launched a four-month campaign in early December 2008 to improve the coordination of various ministries and departments in matters related to food safety, product quality and the production and distribution of food.31 In late December 2008, China publicised the trial of the executives from the Sanlu Group and charged them with “producing and selling fake or substandard products”, a crime that is punishable by either life imprisonment or even death.32 At the same time, the government also announced that it will be setting up a compensation fund to cover the medical expenses of the victims until they reach the age of 18. The victims will also receive a one-off compensation of 2,000 yuan (US$292).33 While the central government has activated the system of accountability in the wake of the incident, it remains to be seen how this system will work in the long run. There is ample evidence that the problem is more systemic than the “misbehaviour” of individual officials. The intimate relationship between local governments and local firms (or between local 29

Compensation Considered for Milk Victims. (11 December 2008) South China Morning Post. 30 China Reviews Food Safety Draft Law Following Tainted Dairy Products Scandal. (23 October 2008) Xinhua. 31 China to Launch Food Safety Drive. (9 December 2008) The China Post. 32 Sanlu Ex-Boss was Aware of Tainted Milk. (1 January 2009) China Daily. 33 Compensation to Cover Medical Costs ‘until 18’. (31 December 2008) China Daily.

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officials and local entrepreneurs) has hindered the effective enforcement of central regulations at the local level. Therefore, without addressing this issue, any new regulations or “first class” response would be insufficient to prevent similar incidents from happening in the future. Nevertheless the central government should find an ally in the media in the domain of public safety issues. As shown earlier, independent newspapers were among the first to learn about children falling sick after consuming melamine-tainted milk formula. As independent bodies, reporters are able to interact with the public freely and produce symmetrical information. Indeed, the newspapers revealed that they became aware of the incident because they were approached by the parents of the affected children. In other words, rather than blocking or distorting information from the media, local governments should work with them on issues related to public safety as they can be a valuable and independent source of information. Winners and Losers China’s dairy industry has been badly affected by the scandal. Dairy giants such as Mengniu and Yili have developed China’s most valuable brands in the food industry in less than a decade. Their efforts to consolidate their domestic position and venture into the overseas market, however, have been dampened by the scandal. Mengniu has issued a public apology, and promised to recall all tainted dairy products and offered to foot the medical bills for all consumers who fall ill within the next five years. Yili also recalled all unsold milk powder. Foreign brands, on the other hand, stand to gain from the scandal. Mead Johnson is reportedly raising the price of its products and seeking to take an even larger share in China’s high-end infant formula market. Some domestic dairy producers such as Beijing-based Sanyuan, which are not on the list of tainted milk powder producers, also see opportunities of expansion in this difficult time. It remains to be seen whether these smaller and local players can rise to become national brand names. Nevertheless China’s large dairy markets will recover eventually, and produce national leaders, be they Mengniu, Yili, or currently less wellknown producers.

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In the short run, however, China’s consumers are turning to soy milk and other traditional foods and drinks as substitutes for dairy products,34 giving traditional food/drink producers an opportunity to emerge after being marginalised by dairy producers. It is still uncertain whether a soy milk industry can rise to rival the dairy industry though. The issue is not simply about nutritional values, but also about consumer preference shaped by cultural values and lifestyles. China’s consumers will benefit from safe and high-quality food, but it could come at a cost, particularly for low-income families, who may find it increasingly difficult to afford dairy products. While a more effective enforcement of quality control in the low-end consumer market can help solve the problem of adulteration, it may create a new problem of affordability. The new problem, of course, will call for new solutions rather than a return to the past. It is also necessary for the central government to constantly revise any new or existing regulations. China is a big diverse country which is changing rapidly. Therefore, it is imperative for Beijing to establish a review system that it could rely on to prevent another crisis from occurring in the future. All in all, the tainted milk formula incident highlighted the various levels of challenges that China has to face as it progresses towards the market economy. China has to improve its existing institutions and mechanisms to suit the magnitude of change that these challenges may bring.

34

Starbucks, which used Mengniu milk, now recommends soy milk to customers instead.

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CHAPTER 10

A Pivot for Change: The Potential Role of the Haigui in Addressing China’s Social Problems Yang Mu and Tan Soon Heng

China’s miraculous economic growth has created many social challenges in Chinese society which could only be met with changes to the traditional societal structure. In many cases, initiating such changes must be brought about by “agents” in the society. In this paper, we identify the agent as the Haigui ( ), or China’s “overseas returnees”. Communist party leaders such as Deng Xiaoping and Zhou Enlai and avant-garde Chinese scientists like nuclear physicist Qian Sanqiang and rocket engineer Qian Xuesen are some examples of Haigui. Evidently, they have all played an important role in shaping Chinese society. By studying Haigui’s contribution to China’s development, we aim to give a description of the Haigui and their potential in guiding China’s scientific progress in becoming a “harmonious society”.

Haigui: From the Past to the Present The Haigui, or Chinese overseas returnees, is a group of students and professionals who have lived, studied, or worked overseas for a period of time before resettling in mainland China. The origins of this term could be traced back to the turbulent times when the country experienced a large exodus of Chinese who were seeking better opportunities more than two centuries ago. Generally, this group of Chinese could be classified into three groups. First is the “Chinese diaspora” — “Haiwai-huaqiao” ( ). They were those who chose to stay permanently in countries such as Indonesia, Thailand and Malaysia, Singapore and even the

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United States.1 The second group is the “sojourners” or those who left but have the intention of returning to China after making their fortunes overseas. This group was significant especially in the post-civil war era when the Chinese Communist Party (CCP) carried out campaigns to convince them to return and contribute to its modernisation efforts. Large numbers heeded to the call in the 1950s and 1960s2 — the returned sojourners are officially called “Guiguo-huaqiao” ( ) or the “returning Chinese”. “Haigui” is the third group of Chinese exodus or the “Liuxuesheng” ( ). In the past decade, due to its increased popularity in the mainstream media including the Internet, the term has indeed entered Chinese discourse. “ ” in Chinese (which we romanised as “Haigui”), or literally translated as “overseas returnees” are like the “sojourners” who left China with the intention of returning. The difference is in the reason they left — to study. Their goal is to return to China to “transfer” the knowledge gained from their overseas education to help in the development of the country. In this sense, this group is also related to the modernisation process of China. A better understanding of this proposition could be illustrated by examining the history of Haigui and their contribution to China’s development. The exodus of Haigui began in the 19th century and in the late Qing dynasty after China’s defeat in the Opium Wars (1842). The defeat which led China to sign a series of humiliating treaties prompted Beijing to launch a self-strengthening programme spearheaded by the notion of sending officials such as Zeng Guofan, Li Hongzhang and Rong Hong to colleges in the United States and Europe to acquire new technological knowledge. Students were also sent for overseas education. In 1872, some 120 scholars aged between 12 and 15 were hand-picked by the Qing government and sent to Yale University to learn mechanical engineering. This group of students became the first batch of Haigui. From 1872 to 1875, there were altogether four batches of Haigui, each producing prominent figures who helped in China’s modernisation process. 1

Overseas Chinese Affairs Commission of the Republic of China, ROC Taiwan, 2005. Unfortunately they were subjected to much brutality during the Cultural Revolution. See Godley, 1989. 2

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The focus of Haigui in the late 19th century was associated with the modernisation of the military. In fact, figures such as Liu Buchan, Lin Taizeng, Lin Yongsheng and Huang Jianxun who were responsible for developing China’s first modern navy fleet were returnees from the overseas studies programme. However, other Haigui also played a role in improving society such as bringing in modern transportation system and establishing modern universities. For example, Zhan Tianyou was responsible for building China’s first railroad. Tang Shaoyi, Yan Fu, Cai Shaoji and Tang Guoan were involved in the establishment of Fudan, Peking, Beiyang (now Tianjin) and Tsinghua universities respectively. They were also supporters of the expansion of the overseas studies programme. At the turn of the century, Japan became an alternative destination for Haigui scholars. The Japanese victory in the 1894–95 Sino-Japanese war as well as the Russo–Japan War in 1905 allowed Japan to establish itself as a major power in Asia and one of the centres of modern knowledge and discourse. With Japan’s close proximity to China in terms of culture and geography, the country soon became a favourite destination for Haigui scholars. In fact, Japan attracted more than 90 percent of all overseas Chinese students from 1900 to 1910. An important figure who studied there was Sun Yat-sen who gathered anti-Qing resistance groups and established the Tongmenghui (later renamed as Kuomintang) in Tokyo in August 1905, before setting off to complete his worldwide revolutionary work. Another was Chiang Kai-shek who studied in the Military State Academy of Japan in 1907 before joining Sun’s revolutionary movement and later served as the President of the Republic of China. Other famous figures who studied in Japan included great Chinese writers Lu Xun and Guo Moruo who later returned and worked with other Haigui such as Li Shizeng, Cai Yuanpei, Wu Zhihui and Wang Jingwei as well as local intellectuals like Chen Duxiu to initiate the New Cultural Movement. The movement which fiercely criticised the shortcomings of Chinese culture harped on the notion that China’s nation-building process should be shaped by intellectuals who were exposed to Western ideology and not traditional Confucius thoughts. It viewed traditional thoughts as the cause of China’s weaknesses, fragmentation and exploitation by other nations. In this sense, the New Cultural Movement was also the intellectual platform for the birth of

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Chinese nationalism. More importantly, it was the impetus that fuelled the May Fourth Movement in 1919 which broke out when China was not given the opportunity to secure its interests in the Paris Peace Conference. Although the May Fourth Movement failed to overturn the ruling in the Versailles Treaty, it greatly aroused the nationalistic sentiment of the Chinese and tilted Chinese discourse towards the left and closer to Marxism. This laid the ideological foundation for the establishment of the Chinese Communist Party (CCP). Haigui’s connection with the Marxist ideology strengthened after the Soviet Union established the Sun Yat-sen University in Moscow. This provided a learning centre for CCP officials and leftists to learn socialist ideology. Some of the CCP officials who were sent there were then-CCP Party Secretary Zhang Wentian, Marshal Ye Jianying, party leaders Wang Jiaxiang and Qin Bangxian, and even the son of Taiwan President Chiang, Chiang Ching-kuo. Despite Haigui’s growing affiliation with Marxism, some of them still continued to travel to non-Communist countries, particularly the United States, to acquire science and technological know-how. The period between 1909 and 1945 saw an estimated 3,000 to 4,000 Chinese students going to the United States. A reason why the United States was among the favourite destinations for Haigui was because of the setting up of the Gengkuan-liumei (“ ”) scholarship programme in 1907. The scholarship provided education funds for Chinese students by drawing money from the Boxer Indemnity Fund. Among US-educated scholars who returned are famous avant-garde scientists in Chinese academia. These include rocket engineers Qian Xuesen and Ren Xinming, physicist Qian Weichang, meteorologist Zhu Kezhen, mathematicians Hua Luogeng ( ) and Hu Mingfu ( ), physicist Ye Qisun, zoologist Bing Zhi, electrical engineer Mei Yiqi, geologist He Jie, chemist Hou Debang and astrophysicist Zhang Yuzhe.3 These pioneers later headed and taught in prominent institutes and universities and were critical for laying the foundations for advancing knowledge and technology in China. Other famous US-bound nonscientists include social philosopher Hu Shi, diplomat Wellington Koo, 3

See also Song Jian: Bainian jieli liuxuechao:

:

, p. 2.

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and economist Ma Yinchu. Meanwhile, there were also others who went to Germany and England; these include world-prominent nuclear physicist Wang Ganchang, social philosopher Ma Junwu, poet Feng Zhi, meteorologist Lu Jiong, geologist Li Siguang, planktologist Zhu Shuping and writer Xu Zhimo. The throng of prominent figures associated with Haigui showed how this group played an important role in shaping Chinese society. Not only did they bring new ideological discourse and advanced technological knowledge, they also introduced elements of a modern society such as establishing modern universities. As seen earlier, returning talents were responsible for establishing some of the earliest Chinese universities, while others contributed their expertise in a wide spectrum of domains including the sciences and the arts — their overall passing of knowledge to the younger generations and contribution to educational work were immense and invaluable. Especially important were the scientists who laid down legacies that are still shaping Chinese academia today; it was no surprise that most later came to be known as “fathers” of their respective disciplines. Politically, a number of them also held important cabinet positions within the old Republican governments of China (see Table 1). After the disassembling of the dynastic court which ruled China for almost four thousand years, credit must be given to those who played a significant role in consolidating a modern cabinet government amidst the political chaos of that time. The fact that many of these Haigui played a significant role in China’s post-dynastic transition suggests that there is Table 1: Number and Percentage of Haigui Cabinet Ministers in the 1911–1949 Governments. 1911 First Nanking Government

Haigui Non-Haigui Unknown Total Number

15 3

83% 17%

18

100%

Source: Wang Qisheng ( 1872–1949. (

1912–1928 Beiyang Government 56 47 6 109

51% 43% 6% 100%

1927–1949 Republican Government 62 25 22 109

57% 23% 20% 100%

) (2005). The History of Chinese Overseas Students from [1872–1949]).

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indeed a strong correlation between modernisation and the group’s role in China’s modernisation process. After the founding of the People’s Republic of China (PRC) in 1949, there were some 5,000 Chinese scholars, students and graduates who were still overseas and who were urged by the new leadership to return to contribute to the nation-building process. Between 1949 and 1954, a total of 1,424 Chinese heeded the call. Besides recalling the Haigui, Beijing continued to send its best students overseas except that their destinations were confined to countries within the Soviet bloc. From 1950 to 1953, a total of 1,700 students were sent to universities across Eastern Europe and the Soviet Union. It was later increased to 5,800 students after the Central Committee revised the approach of its overseas studies programme from “restrict selection and (put) quality before quantity” to “selecting carefully while sending as many (students) as possible”.4 The revision was made to address the country’s shortage of science and engineering as well as defense technology expertise. The shortage was hampering China’s effort to develop its nuclear capabilities and to build up its military. In fact, the shortage prompted Beijing to go to the extent of sending education consuls to universities in Eastern Europe and the Soviet Union to urge Chinese students who were majoring in social sciences and humanities subjects to switch to majors related to science and technology and military defense such as nuclear science, physics, aviation technology and defense industry.5 Many prominent CCP leaders were trained in technical expertise, including China’s ex-President Jiang Zemin who received his engineering training at Stalin Automobile Works, and ex-premier Li Peng who studied at the Moscow Power Institute and majored in hydroelectric engineering. Subsequently, the Haigui from the overseas studies programme returned to China to serve as scientists, engineers or researchers in the country’s nuclear programme which was led by Qian Sanqiang, a Haigui who received his training in France during the Chinese civil war in 1948. The retuning Haigui also worked in other programmes such as the space 4

Li, X. (2007). A History of the Modern Chinese Army. Lexington, KY: University Press of Kentucky, p.164. 5 Ibid, p. 164.

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programme and the missile programme. The former was led by Qian Xuesen and the latter, Ren Xinming and both of them were Haigui who were sent overseas before 1949.6 Although the space programme was unsuccessful, the missile programme yielded significant results in developing China’s first tactical and strategic missiles, including the short and medium range Dongfeng missiles. Some of the Haigui from the overseas studies programme also contributed to the modernisation process of the country’s education system as they were involved in the setting up of institutions such as the Chinese Academy of Science and the Physics departments in the Peking and Tsinghua universities, and were responsible for training local scientists and engineers. Haigui’s contribution to the progress and development of China, however, came to an abrupt stop in the 1960s after relations between China and the Soviet Union deteriorated following the fallout between Mao Zedong and Khrushchev which eventually led to the Sino–Soviet split. On the domestic front, the notion of acquiring scientific knowledge was replaced by the notion of attaining self-sufficiency and anti-rightist revolutionary ideologies. During the height of the Cultural Revolution in the late 1960s, Haigui, together with other liberals, were branded traitors and persecuted. Haigui returned to the forefront of China’s development process after the country adopted the opening up and reform programme in 1978. In the early 1980s, only a small number of Chinese students totalling around 3000 were sent abroad but the numbers picked up in the late 1980s. Between 1985 and 1990, the total number of Chinese students who went overseas jumped from 7,872 to 27,316. This momentum continued as China’s development of its market economy gathered speed especially after Deng Xiaoping’s “Southern tour” or naxun in 1992. From 1990 to 1995, the total number of Chinese students studying overseas ballooned from under 3,000 students to over 20,000 students. By the end of 2004, this shot up to over 110,000 students (See Table 2). However, for these students to be viewed as Haigui, they had to return to China. Since the overseas studies programme was reinstated after 1978, the return rate of these students has been quite low, 6

Ibid, p. 162.

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Number of Students Studying Abroad and Returning.

Year

No. of Students Studying Abroad

Accumulative No.of Students Abroad

No. of Students Returning

Accumulative No. of Students Returning

1978 1980 1985 1990 1995 2000 2001 2002 2003 2004

860 2,124 4,888 2,950 20,381 38,989 83,973 125,179 117,307 114,682

— 2,984 7,872 27,316 86,950 210,625 294,598 419,777 537,084 651,766

248 162 1,424 1,593 5,750 9,121 12,243 17,945 20,152 24,726

— 407 1,831 11,170 31,958 69,906 82,149 100,094 120,246 144,972

Source: 2005 China Social Statistical Yearbook.

averaging about 25 percent of the total number of students studying abroad. Nonetheless, those who returned contributed to the development of the country. Indeed, many returnees returned as top professionals who applied the skills and experience they have acquired overseas to help China develop in various areas, particularly in Science and Technology as well as Information Technology.

Haigui’s Contribution to China’s Technological Advancement In science and technology, Haigui are playing a key role in developing China’s high-tech sector. Many leading Chinese institutes prefer to hire Haigui scholars and are competing with institutes all over the world to retain their services as these Haigui could provide highly advanced technological transfer to help increase China’s R&D capacity. In fact, Haigui made up about 85 percent of the scientists in the Chinese Academy of Sciences, China’s topmost institute in scientific research, and 54 percent of the engineers in the Chinese Academy of Engineering. Furthermore, 81 percent of the team that was spearheading China’s high-tech research and development programme or the “863 Plan” introduced in 1986 consisted

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of Haigui scholars.7 Some of the milestones set by Haigui in China’s scientific progress in recent years include the launching of spacecrafts Shenzhou 5 and 6 (2005), the testing of an anti-satellite missile and the launch of the first lunar probe Chang’e 1 in 2007. These achievements speak volumes of the potential role of Haigui, only three decades after the Cultural Revolution. Haigui left an equally big mark in the development of the country’s “technopreneurship”, a term used to refer to the setting up of IT companies. Today, technopreneurship is a booming business in China with more than 60 fast-growing “technopreneurship parks” spread across major cities. Some of them include Beijing’s Zhongguancun ( ) and Shanghai’s Zhangjiangyuan ( ). Both had been growing rapidly in the last decade. Currently, Zhongguancun has a total of seven “technopreneurship parks” in its locality. The Haidian Science Park is one example. This park is best known as a leading Chinese IT-based park which houses more than 130 top research institutions including the Chinese Academy of Sciences. It also has 56 leading higher-learning institutes such as the Peking and Tsinghua universities. On the other hand, Zhangjiangyuan, which is located in Shanghai’s Pudong area, is well-known as China’s bio-pharmaceutical and telecommunication base. It houses more than 90 bio-pharmaceutical enterprises and national-level R&D institutes including the Institute of Materia Medica of the Chinese Academy of Sciences and the National Human Genome Center. By the end of 2005, Zhangjiangyuan attracted an accumulated foreign investment of US$13.748 billion and a fixed asset investment of RMB69.514 billion.8 Both Zhongguancun and Zhangjiangyuan are often hailed as China’s new Silicon Valleys and models for other cities such as 7

Shanghai Jiatong University website, Daihui guoji qianyan keti he xianjin guanli linian “Haiguipai” gaoxiao shizhan caihua: “ ” (Bringing Back Advanced Knowledge and Management Theories: The Haigui-pai Making an Impact in High School): http://www.sjtu.edu.cn/newsnet/newsdisplay.php?id=1538 (accessed on 26 February 2008). 8 Zhangjiang High-tech Park website: http://www.zjpark.com/zjpark_en/zjgkjyq.aspx?id=7; see also website (in Chinese), Zhangjiangyuan, shanghai keji chuangxin de mingzhu: , (Zhangjianyuan: Shanghai’s Pearl of Technological Creativity): http://www.cas.ac.cn/html/Dir/2006/09/08/14/35/46.htm and the website (in English) Pudong: Building a Hi-tech Platform: http://www.chinatoday.com.cn/English/e20034/ pudong1.htm (all accessed on 26 February 2008).

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Guangzhou, Shenzhen, Dalian, Xiamen, Wuhan, Xi’an and Chengdu to develop their IT sector and use it as a source of growth for their economies.9 One domain in technopreneurship that shone in recent years is Internet technologies. This came in the wake of the recent explosion of Internet users in China. From 2003 to 2006, Internet users almost doubled from 69 million to 137 million or about 10.5 percent of the country’s population (Table 3). The growth popularises e-businesses in China which led to a boom in the industry. The forerunners of Internet technopreneurship are the Haigui. Local technopreneurs only play a prominent role in later years after the foundation was set by the Haigui. An explanation for this is that China is unable to produce its own IT specialists and has to rely on overseas returnees to kick-start the industry. This reflects the importance of Haigui in the transfer of IT knowledge.10 Table 3:

Internet Usage and Population Statistics.

Year

No. of Internet Users (in Millions)

Approx. Population (in Millions)

Approx. % of Population

2003 2004 2005 2006

69 94 103 137

1,288 1,288 1,290 1,307

5.4 7.3 7.9 10.5

Source: Internet World Stats and China Internet Network Information Center. 9

For a list of cities and the benefits and incentives dished out, see the website (in Chinese), Haigui chuangye shida “redi” jujiao: “ ” (The Ten “Hotspots” of Haigui Entrepr-eneurship) at http://www.abcdv.de/index.php?act=detail& ID=1591 (accessed on 26 February 2008). 10 In recent years, there are signs of local e-companies catching up or even overtaking Sohu +and Baidu in terms of market capitalisation. Two of these are Liang Jianchang’s ( )’s online travel gateway ctrip.com, and Ding Lei’s ( , a non-Haigui) multi-functional NetEase.com, both of which are listed in NASDAQ. Increased Internet usage has caused the boom of other e-businesses as well, such as China’s online music and video market, estimated to have reached RMB500 million in value in 2006 and predicted to escalate to RMB3.4 billion in 2010 (I-Research, reported in the website chinatechnews.com). In our view, the setting up of Beijing’s Zhongguancun as headquarters for high-tech start-ups certainly plays an important role in promoting this growth. Although Haigui are still spearheading the trend, local IT specialists have caught up in the race and even carved out their own niches — Ding Lei ( ) and Chen Tianqiao ( ), founder of online company Shanda Entertainment, are good examples of these local technopreneurs.

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Some of the leading Haigui Internet “technopreneurs” are Li Yanhong and Zhang Chaoyang who set up Internet search companies Baidu and Sohu respectively. They made headlines when their portals overtook giants Google and Yahoo in the domestic market. Mao Daolin, the creator of China’s largest Internet portal, Sina.com, is also a successful Internet “technopreneur”. Non-Internet IT figures include Shi Zhengrong, the founder of Suntech Power, whose company is currently the largest manufacturer of photovoltaic cells in China and among the top 10 in the world.11 Other successful examples are AsianInfo Holdings’ CEO, Ding Jian; DataSys Corporation’s director, Ding Weiming; Time Innovation Ventures’ director, Ma Qiyuan; UTStarcom’s director, Wu Ying; and ChinaEquity Incorporation’s director cum CEO, Wang Chaoyong. Managing Social Issues: Haigui’s Experience in China’s Reforms By showing that they could contribute to the rapid development of China’s Science and Technology sector, Haigui could also well serve as a force to induce much needed reforms to improve the society. Haigui’s brush with reforms, however, was not something new. In fact, they played an important role in the reform of China’s state-owned-enterprises (SOEs). Not only did they bring in new technology and other advanced production methods to improve the efficiency of these companies, Haigui also introduced corporate and management skills adopted by MNCs (multi-national corporations). In fact, many SOEs hired Haigui managers to improve their organisational governance. Haigui were also hired to provide valuable expertise particularly in promoting a better understanding of international affairs and the global economy to help these companies break into the international markets. Besides this, Haigui also played a role in reforming other sectors such as the financial and the legal. Haigui also played a part in reforming China’s education system after the opening-up and reform programme by re-introducing subjects such as economics, sociology, demography, public administration and international relations. These subjects were removed from the Chinese academic 11

Dr. Shi was ranked 350 by Forbes among The World’s Richest People in 2006; he was once the richest Chinese living in China.

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curriculum during the Cultural Revolution and their re-introduction is important for the value-added development of China’s human resources. For example, economics provides the foundation for training of new economists who will, in turn, help to spearhead China’s reforms and accelerate its integration into the world economy. These economists could also help introduce new economic policies to ensure China’s sustainable economic growth. One of the Haigui who led this reform movement in Chinese academia was Justin Lin Yifu, a PhD holder in economics from the University of Chicago. He was one of founders of the China Center for Economic Research and the Journal of Economic Science. The centre is based in Peking University and is one of the most respected research institutions in China. It is an important platform for the exchange of theoretical ideas and in guiding central and local governments’ reform efforts.12 Haigui are also taking up teaching positions in education institutions across China. In Shanghai, for example, a report revealed that almost half of its universities’ lecturers including associate and assistant professors are Haigui and the trend is expected to become the norm for other major cities.13 Most importantly, Haigui are proving to be a new force in Chinese politics. Current observations suggest that the CCP leadership has become more open and liberal as more Haigui are being recruited into the communist party and are serving in important posts in both the central and local governments. Some of the current examples include Minister of Education Zhou Ji, Minister of Science and Technology Xu Guanhua, and Minister of National Defense Cao Gangchuan. Others are State Council’s SecretaryGeneral Hua Jianmin, member of the State Council Chen Zhili, Governor of the People’s Bank of China Zhou Xiaochuan and even the 2006 disgraced ex-Shanghai Committee Secretary Chen Liangyu. In April and June 2007, the Chinese government broke its political tradition by appointing two notably non-CCP members Wan Gang and Chen Zhu as Minister of Science and Technology and Minister of Health respectively. Both are 12

East Asia Economic Review website (in Chinese), Tuidong zhongguo jingjixue geming haiguipai kai fengqi zhi xian: (Starting a Revolution in Economics: The Haigui-pai Taking a Leading Role): http://www.e-economic. com/info/2645-1.htm (accessed on 26 February 2008). 13 Ibid.

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typical Haigui: Wan has a doctorate in mechanical engineering from Clausthal University of Technology in Germany and has previously worked with the German Audi Corporation for more than a decade. Chen Zhu, on the other hand, did his doctorate in Hospital Saint-Louis, University Paris VII in France and has worked as a scientist in Europe before his current appointment. Most recently, in a reshuffling exercise involving the appointment of new leadership in 31 mainland provinces, autonomous regions and municipalities, a number of candidates such as Chen Zhangliang, Guo Zhenglian and Zhang Taolin who were promoted in the early half of 2008 are also Haigui.14 With an increasing number of Haigui being appointed at the top and local levels, it is certain that the mindset of the leadership would change. This change could be shaped by Haigui’s liberal ideas picked up during their studies overseas which could provide the much needed guidance for the government to adopt a better governance structure or new policies to help solve China’s mounting social problems. Additional References Almond, G. A. and Coleman, J. S. (eds.) (1960). The Politics of the Developing Areas. Princeton: Princeton University Press. Almond, G. A. and Powell, G. B. (1966). Comparative Politics: A Developmental Approach. Princeton: Princeton Press. Barro, R. J. (1997). Determinants of Economic Growth: A Cross-Country Empirical Study. Cambridge, MA: MIT Press. Bell, D. (1973). The Coming of Postindustrial Society. New York: Basic Books. Chen, S. and Ravallion, M. (2004). Finance and Development. World Bank. Diamond, L. (1993). The Globalization of Democracy. In Global Transformation and the Third World, Slater, R. O., Schutz, B. M. and Dorr, S. R. (eds.), pp. 31–69. Boulder, CO: Lyenne Rienner. Florida, R. (2002). The Rise of the Creative Class. New York: Basic Books. Giddens, A. (1984). The Constitution of Society: Outline of the Theory of Structuration. Berkeley: University of California Press. 14

From Sina.com, 31 shenqushi huanjie xuanju jieshu 12 wei daishenzhang shunli zhuanzheng: 31 12 (31 Provincial and Regional Reshuffling Exercise Completed, 12 Provincial Vice-Heads Become Heads): http://news.sina.com.cn/ c/2008-02-01/042814876380.shtml (accessed on 26 February 2008).

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Godley, M. R. (1989). The Sojourners: Returned Overseas Chinese in the People’s Republic of China. Pacific Affairs, 62(3), 330–352. Gu, X. (2007). Building a New Social Safety Net. In Interpreting China’s Development, Gungwu, W. and Wong, J. (eds.), Singapore: World Scientific. Inglehart, R. and Welzel, C. (2005). Modernization, Cultural Change and Democracy: The Human Development Sequence. New York: Cambridge University Press. Inglehart, R. (1990). Culture Shift in Advanced Industrial Societies. Princeton: Princeton University. Lerner, D. (1958). The Passing of Traditional Society: Modernizing the Middle East. New York: Free Press. Lipset, S. M., Seong, K. R. and Torres, J. C. (1993). A Comparative Analysis of the Social Requisites of Democracy. International Social Science Journal, 45, 155–75. Pye, L. W. and Verba, S. (eds.) (1963). Political Culture and Political Development. Princeton: Princeton Press. Randall, V. and Theobald, R. (1998). Political Change and Underdevelopment. 2nd Ed. Durham: Duke University Press. Ritzer, G. and Goodman, D. J. (2003). Modern Sociological Theory, 6th Ed. United States: McGraw. Sibeon, R. (2004). Rethinking Social Theory. London: Sage Publications. Wallerstein, I. (1974). The Modern World System I. New York: Academic Press. Wong, J. and Liu, W. (eds.) (2007). China’s Surging Economy: Adjusting for More Balanced Growth. Singapore: World Scientific.

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Index

10th Five-Year Plan 156, 177 11th Five-Year Programme 149, 155, 162, 173, 175–177, 179, 189 17th Party Congress 101, 143, 157 893 Plan Academic Ranking of World Universities 84 air pollution 9, 141, 142, 151, 154, 155 auctions 99, 110, 111, 112, 124, 135 authoritarian government 11, 12, 21 barefoot doctor 25 blue-green algae outbreak 153, 154

142, 150,

carbon credit 160 centrally-planned economy 8, 24, 29, 35, 39, 121 Changjiang Scholars Programme 86 Chinese Communist Party 2, 11, 87, 141, 212, 214 Chinese Diaspora 211

commercial land 90, 123, 135 Cooperative Medical Scheme 3, 25, 32, 33, 43, 51, 52, 61 Cooperative Medical System 42 cross-region purchase of land 135 democracy 11, 12, 18, 20, 21 Deng Xiaoping 1, 12–14, 74, 76, 211, 217 desertification 141, 142 diagnosis-related groups (DRGs) 58, 59, 61, 68–70 direct subsidy approach 46 Document No. 52 138 Eastern University Town 83 Eco-City project 160, 161 Economical and Affordable Housing (EAH) 95–97, 104, 110 educated unemployment 86, 87 energy efficiency 2 environment degradation 9 environment-friendly 155, 157 environmental law 143–146, 167, 193 farmland preservation 136

119, 135,

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fee for service 36, 53, 54, 58, 61, 67, 68 Fonterra 196, 197, 205

intergovernmental decentralisation 13 itemised billing 53, 54, 58, 59

General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) 204–206 Gini coefficient 100 global financial crisis 5, 92, 93 green credit 158 Green GDP 149, 150 green index 159 Gross Domestic Product (GDP) 2, 4, 5, 11, 14, 26, 41, 49, 75, 76, 79, 80, 81, 99, 126–128, 149, 150, 159, 162, 177, 184

Jiang Zemin 216

Haigui 10, 211–223 harmonious society 3, 4, 7, 15, 32, 100, 109, 143, 211 Health Insurance Scheme (HIS) 25, 30–32, 35, 42, 43, 52, 61, 62, 66 healthcare insurance 3, 24, 25, 30, 31, 33, 34, 36–38 higher education 7, 8, 73–92 Housing Provident Fund (HPF) 95, 96, 101, 107, 110 Hu Jintao 1, 3, 12, 14, 15, 76, 87, 101, 143, 157, 175, 206 hukou 95, 107, 115, 116, 129 Hu-Wen administration 2, 6, 7, 100, 166

market-oriented economy 2, 7, 24, 30, 35, 36, 38, 39, 93, 94 media 29, 162, 195–197, 205, 208, 212 melamine-tainted milk 10, 195, 208 migrant workers 1, 3, 5, 20, 87, 100, 107, 114, 129 milk industry 209 Ministry of Land and Resources (MLR) 99, 124, 126, 131, 133–135, 137, 138

income inequality 2, 100 industrialisation 8, 123, 125, 134, 154, 155, 173, 189

1, 12–14, 18, 76, 77,

land acquisition 89, 119, 123, 132, 138, 176 Land Administration Law 123, 145, 193 land market 8, 119, 120–127, 129–131, 133–135, 137–139 land supply 8, 100, 131 land use rights 119, 122, 134, 135, 137, 139 Low Rental Housing 5, 95–97, 101

National Development and Reform Commission (NDRC) 23, 31, 147, 148, 154, 158, 160, 182, 204, 205 National Land Supervision System (NLSS) 137 neo-liberal paradigm 13

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New Rural Cooperative Medical Scheme (NRCMS) 32, 33 non-governmental organisations 16, 162 Olympic Games

10, 166, 205

patient co-payment 43, 53 Plan of Revitalising Education in the 21st Century 76, 77 privatization 13, 19, 35, 36, 39, 45, 110, 139 Project 211 85 Project 985 85 pro-people approach 1 public housing 8, 93, 94, 98, 100–103, 105–109, 114, 115 Public-Owned Housing (POH) 95, 98, 110 reform and opening up 11, 143 regional disparity 2 renewable 157, 158, 160, 180, 188, 189, 193 rural collectives 41, 122, 123, 127, 138 rural lands 8, 9, 123, 130–136, 138, 139 Sandwich stratum 98 Sanlu 10, 195–198, 200, 202, 204–207 Science and Technology 10, 85, 141, 148, 216, 218, 221, 222 scientific development 7, 15, 100 selective recentralisation 13, 14 Severe Acute Respiratory Syndrome (SARS) 2, 29, 98

227

Shijiazhuang 98, 182, 197, 203, 205, 206 show-off projects 97 Sichuan earthquake 205 Sili daxue (private university) 81 Sili minban daxue (private enterpriserun university) 81 snow storm 205 social-pooling 42, 43 sojourners 212 Songhua River 153, 154, 190 special interest groups 16 State Council 29, 33, 34, 46, 76, 95, 101, 102, 146, 147, 149, 159, 161, 163, 166, 178, 205, 222 State Environmental Protection Administration (SEPA) 144, 146–148, 152–154, 157, 158, 161, 162, 176, 177 State Land Supervision Bureau 119 state-owned enterprises (SOEs) 1–3, 16, 96, 121, 159, 221 student enrolment 73, 78, 84–86 Taihu lake 142, 146, 150, 153, 166, 177, 183, 189, 190 tender system 99 third-party purchasers 47–51, 53, 59, 60 Tianjin 98, 137, 160, 161, 168, 170, 175, 178, 182, 184, 213 tuition fee 74, 80, 82–84, 86–89 ultra high-temperature (UHT) milk production 202 Urban Employees’ Healthcare Insurance (UEHI) 25, 34 urban land 8, 110–112, 123, 134

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Urban Residents’ Healthcare Insurance (URHI) 33, 34 Urban Residents’ (UR) Plan 42, 43, 52, 61, 66 urbanisation 8, 123, 134, 138, 154, 173, 174, 189 user fees 59, 60, 62, 64 Value-Added Tax (VAT)

125

Water Law of 2002 154 water management 154, 165–167, 180, 184, 185, 189 water market 175, 176, 180, 186, 188, 191 water pollution 9, 145, 146, 151, 152, 154, 165–167, 170, 172,

173, 175–177, 181, 183, 190, 193 water reserves 141, 152, 165, 167, 168, 189 water shortage 9, 141, 150–152, 165, 166, 174–176, 183–185, 189 water usage 168–170, 174, 189, 191 Wen Jiabao 12, 14, 160, 166, 175, 206 Western Development Initiative 2 Xiamen 8, 93–95, 98, 102, 103–109, 111, 113–117, 132, 137, 142, 182, 192, 220 Zhu Rongji

16