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Decentralization of Property Rights

A salient feature of China’s economic reform is the decentralization of control rights (over the cash flow from operations of state-owned assets) from the national authorities to provincial/local authorities. Intended as an incentive to improve the efficiency of these assets, the decentralization of control rights fundamentally changed the system of property rights in China. To be sure, the process of the decentralization of control rights was gradual. In 1984, the central government decided that the control rights of SOEs were to be delegated from the ministries and provincial authorities to major industrial cities where SOEs were located. Such control rights included, most critically, the rights to determine wages, benefits, and bonuses, as well as the use of capital, thus making local governments and SOE managers effective owners of these assets. The central government, however, retained its control rights over large SOEs in critical sectors, such as power generation, telecom, petrochemical industries, machine tools, and coal production.

Within a decade, the central government exercised effective control rights over only 5.4 percent of all the SOEs in terms of number (although these large SOEs generated 34.8 percent of China’s industrial output).24 Decentralization of control rights contributed to decentralized predation through several channels. It created more opportunities for local officials and SOE managers to appropriate the rents created by local monopolies and other political intervention. Indirectly, the presence of these assets with decentralized control rights would attract local predators, such as various government regulators and tax collectors, who used to be kept away by the political power of the central government. Because SOE managers now in control of these assets were politically less powerful than these local state agents, the latter could demand various illicit payments from SOEs without fear of political retribution, thus joining the looting of public wealth (the liabilities of SOEs were ultimately assumed by Chinese taxpayers).

The trend of decentralization of property rights accelerated in the 1990s as the Chinese state further delegated the power to manage the state’s most important asset—land. In the short term, the power to sell long-term land leases allowed a large number of state agents, mostly at the local level, to profit from sweetheart deals made with their friends. These deals resulted in the one-time loss of an incalculable amount of revenues for the state because the initial lease terms were significantly undervalued to allow the awardees to quickly make an easy and large profit.

Fiscal decentralization and predation

During the reform era, the relationship between the central government and the local governments has been fundamentally reshaped by deliberate policies and socioeconomic changes that have transferred a substantial amount of decision-making power to local governments. Theoretically speaking, the decentralization of decision-making authority from higher to lower levels of the state can be considered as part of the decentralization of property rights. Among such changes, fiscal decentralization—the transfer of revenue-raising power from Beijing to the provinces—is a near-perfect example of the decentralization of the state’s property rights, as it grants public authorities at lower levels a greater share of the revenue flows from the central state’s income streams .25

The dramatic shift in the relative revenue-collecting capacities of the central and local governments is an important piece of evidence of the decentralization of predation in post-Mao China. However, fiscal decentralization is only half the story. It may be a necessary, but not a sufficient, condition for decentralized predation. In all likelihood, administrative decentralization—the devolution of decision-making power concerning countless routine administrative matters—is more conducive to the emergence of