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captured by a study of the Ministry of Agriculture. According to its findings, at the end of 1998, 90 percent of townships and 83 percent of villages were deeply in debt. The total amount of debts owed by these townships and villages totaled 325.9 billion yuan. Townships owed 177.6 billion yuan, averaging 4 million yuan per township; villages owed 148.3 billion yuan, averaging 210,000 yuan per village. The amount of debts grew 17.5 percent in 1999 and 11 percent in 2000. This means that township and village debts reached 423 billion yuan by 2000, equivalent to almost 30 percent of agricultural GDP in 1999.64 A senior researcher at the Ministry of Finance who led a team to study the issue of rural public indebtedness estimated that, by 2004, the total amount of public debts owed by townships and villages ranged between 600 billion to 1 trillion yuan, or close to 10 percent of GDP.65 Agricultural regions were most heavily indebted. The debt-to-asset ratio was 26 percent in eastern coastal regions, 42 percent in central agricultural regions, and 24 percent in the poor western regions.66 Media reports on rural indebtedness in individual provinces provide further evidence of fiscal stress in large agrarian provinces. A survey of township governments in Hunan in 2000 found that 88 percent were in debt; they owed 8.5 billion yuan, about half the province’s total fiscal revenue. In Henan, debts accumulated by township governments reached 9 billion yuan, or 40 percent of the total provincial fiscal revenue. Nearly all the township governments owed their employees back pay.67 In Anhui province, debts owed by township and village governments amounted to three times their annual revenue in 1998.68

Several factors were responsible for the rapid accumulation of debts in rural China. A Ministry of Agriculture survey found that the most important cause of the indebtedness was failed investments in TVEs. Loans borrowed to finance these enterprises, many of which eventually failed, accounted for 38 percent of the debts owed by township and village governments. Borrowing to provide basic services and finance local roads, bridges, and other infrastructure accounted for 18 percent of the accumulated debts. Some Chinese researchers criticized such spending as a wasteful use of resources that benefited the political careers of local officials. In particular, they singled out the building of image projects, especially paved highways and roads, as an example. Almost 8 percent of all debts were loans borrowed to build roads. Loans borrowed to finance everyday commercial and agricultural operations amounted to 8 percent of the debts; 4 percent of the debts was attributed to the loans used by township and village governments to pay taxes; and 5 percent of the debts was used to pay the salaries for local officials.69

The case of an unnamed county in Anhui was representative. In this county, bad loans borrowed to finance village and township industries accounted for 37 percent of the debt. In villages, 15 percent of the debt was owed as a result of building local public infrastructure such as schools and roads. In townships, the figure was 30 percent. The costs of the image projects launched by local officials to burnish their record accounted for 8 percent of the debts. The costs of supporting bloated local bureaucracies and their administrative expenses added an additional 20 percent to the debt load.70 One study reported that about half the loans borrowed from banks by township governments were used to pay the salaries of township officials in 2001.71

According to Chen Xiwen, a leading expert on rural China, township and village governments relied on three sources for borrowing: local agricultural cooperative credit associations (nongye hezuo jijin hui), which provided loans for commercial projects; local entrepreneurs; and state-owned banks and rural credit unions.72 A more detailed breakdown of these credits showed that banks and rural credit unions were the single largest source of loans, providing 42 percent, or 136 billion yuan, in loans.