The Political Economy of Township Government Debt, Township Enterprises, and Rural Financial Institutions in China

This paper sheds light on the ways in which township governments had mobilized resources from local financial institutions, and how failure to repay many of these loans had given rise to sizable local government debt. Mobilization of resources was done through loans to collective enterprises whose de facto owners were township authorities. Though the enterprises were nominal borrowers, loan transactions would not have occurred in the absence of guarantees by township governments. Another way of financial resource mobilization was by establishing local informal financial organizations that were subject to less strict regulations, and over which township authorities could exercise control. Further, because the enterprises’ profits and taxes ultimately went to township authorities, and the enterprises also contributed towards provisions of public goods that were the authorities’ obligations; enterprise financing became a roundabout way in which township authorities had sought financial assistance for their fiscal needs