Soft Budget Constraints : An Analysis Based on a Survey of Chinese Township Enterprises

The reduced influence of soft budget constraints is often seen as an explanation for the successful growth of China's non-state sector. Views differ, however, as to whether rural enterprises (REs) are in fact subject to hard financial discipline. This paper reports an inquiry into the issue. The study examines the financial behavior of REs, particularly that of loss-making enterprises, by scrutinizing a set of survey data of 630 township and village enterprises in Sichuan and Zhejiang (China). Being primarily explorative and conceptual in nature, our studyreveals that soft budget constraints can still be observed to be enjoyed by many REs, in particular among those collectively owned. As the budget constraints do appear to become more rigid, however, enterprises look for other opportunities to ease the financial discipline forced upon them by the market and by increasingly illiquid local governments. Accumulating inter-enterprise arrears, as well as withholding wage payments, are identified as means frequently used towards this end by REs in transitional Chinese economy