Information about Asia and the Pacific Asia y el Pacífico

3 China’s Financial Policies for Minority Nationalities and Poor Areas

Ehtisham Ahmad, Vito Tanzi, and Qiang Gao
Published Date:
September 1995
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Information about Asia and the Pacific Asia y el Pacífico
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M. Zhu Zhenjun*

At present, China is devoting itself to setting up and perfecting a socialist market economy system, by using the successful experiences of other countries. A series of significant reforms in planning, investment, finance and tax, monetary and foreign trade have been made. Among these, the reforms of the financial and tax system are the key links. This paper provides background information on a major element in the relations between different levels of government: policies concerning minority and poor areas.

Concept of Minority and Poor Areas

China is a unitary state but, with 56 nationalities, is a multinational country. The Han people form the majority, accounting for 91.96 percent of the population. The other 55 nationalities are known as the “minority nationalities.” The minority nationalities of China have been living in the country for generations. As members of the Chinese national family, they, together with the Han people, form the multifaceted culture of China. After the founding of the People’s Republic of China, the status of minority nationalities was described in the Constitution, and regional national autonomy was assured. Thus, the rights and status of the minority nationalities are protected under the highest legal authority in China.

At present, there are 158 national autonomous areas in China, comprising 5 autonomous regions, 30 autonomous prefectures, and 123 autonomous counties (banners). Among the 55 nationalities, 45 have established autonomous areas, forming 78 percent of the total minority peoples in China. The area of the “minority nationalities” with regional autonomy amounts to 64 percent of the land area, with a population of 160 million, accounting for 13 percent of the population. In addition to guaranteeing the autonomous right of the minority people inhabiting the scattered and sparsely populated areas, there are about 1,700 autonomous villages (townships). In 1984, the “Law of Regional National Autonomy of the People’s Republic of China” was promulgated and implemented. In law, it is stipulated that the “minority” autonomous areas will enjoy wide rights of legislation, economy, science and technology, culture, education, public health, and managing local finances. These rights differ from the standard local constitutions and legal provisions. In 1993, China again issued and enforced the “Urban National Working Rules of the People’s Republic of China” and the “National Village (Township) Working Rules of the People’s Republic of China.” These established a national relationship of equality, unity, mutual cooperation, joint development, and common prosperity.

China, with a vast territory and large population, is a developing country. Given factors of history, geography, and so on, the economic development of each economic region is obviously in a state of imbalance. The economically undeveloped areas are mainly scattered in the desert, mountainous, and karst areas of southwest and northwest China. These areas have concentrations of poor people, and because of the factors of history, most of the population of these areas are minorities. Thus, the national minority areas are also the poorest areas in China. Until 1992, 27 million were classified as having unmet basic needs. Of these people, more than 80 percent were in the national autonomous areas. Another 80 million could be classified as poor. In recent years, the Chinese government has made strenuous efforts to address the problems of the poverty-stricken areas of the national autonomous regions.

A state of comparative prosperity is likely for the people of China by the end of this century, given current growth rates. However, some pockets of poverty are likely to remain in areas of central and western China. Moreover, the gap in social and economic development levels, in comparison with the eastern coastal areas, is getting wider. This is because of the relatively fast growth of the economy of the coastal areas, given the reforms and open policy of the past fifteen years. In order to address this problem, the Chinese government proposed a plan to eliminate the poverty of 80 million people in the central and western areas of China over a period of seven years. To accomplish this, the targets of the ninth five-year plan envisage that the Chinese government would provide additional resources to meet measures to reduce poverty in such areas by the end of the century. According to this plan, direct financial support to the poor will be supplemented by measures related to economic restructuring.

Financial Support Policies for Minority and Poor Areas

After the founding of the People’s Republic of China, a series of special policies and measures for the minority and poor areas were instituted, by the Constitution and law, in order to realize the goals of equality, unity, mutual cooperation, joint development, and common prosperity of various nationalities.

The national autonomous areas had the right of financial management. In 1963, when China operated under a planned economic system, the central government specially set up a financial management system for the national autonomous areas. It included the following:

• The balance of expenditures by the state would be made up by transfers, after local revenues and expenditures were checked and ratified by the state.

• Subsidies given to the national autonomous areas were to increase by 5 percent of final expenditures on administrative and institutional expenses of the previous year.

• The allocation of a reserve fund was 2 percent higher than in non-autonomous areas.

• Grants to the minority areas were provided in the state budget each year.

• The local governments’ surpluses of the previous year, and excess shared revenue in the process of implementing the budget of a given year, were to be retained by the local governments.

• Subject to the basic principles of the national tax law, the autonomous regions could influence tax rates in their areas, when necessary, subject to State Council approval.

In 1980, during reforms of the planning system, the Chinese government implemented the fiscal contract system (as discussed in other chapters—see, e.g., the discussion in Chapter 2). Under the new system, it was stipulated that the national autonomous areas would carry out their own fiscal management, while some special transfers for these areas would remain in the state budget. The resources of five autonomous regions, and Yunnan, Guizhou, and Qinghai provinces (hereinafter called eight poor provinces and regions), increased at an average rate of 10 percent a year. Meanwhile, a special fund from the central budget known as the “development fund supporting the undeveloped areas” was also set up. In 1992, for example, central transfers to the eight poor provinces and regions were 14 billion yuan and accounted for about 40 percent of total revenues, or 31.83 percent of the expenditures of these poor regions. In addition, the Chinese government established a number of special funds in the budget items of the central and local governments. These included the “development capital for supporting the economic undeveloped areas,” “grants-in-aid for minority areas,” “flexible fund for minority nationalities,” “subsidy for the construction of border areas,” “subsidy for capital expenditure of the border areas,” “Wu-bao (basic needs) fund for the poverty-stricken counties of the minority areas,” “special funds for the education of minority nationalities,” “agricultural construction funds supporting Sanxi” (namely, Zihaigu in Ningxia, Hexi, and Dingxi regions in Gansu), and “construction funds for the ‘Sanzhou’ autonomous prefectures in Sichuan” (namely, Liangshan, Aba, and Ganxi), and so on.

At the same time, policy measures were taken to reduce and exempt taxes in the poor areas, and to encourage more credits and loans of financial institutions to be invested in the minority and poor areas. Subsidized interest was provided for “special loans for the economic development of the poor areas,“special loans for the township enterprises in the central and west of China,” and so on, set up by the central financial institutions.

At present, with a transition from a fiscal contract system to a separate tax system, transfers will be needed to support policies in minority and poor areas. First, the interests of minority and poor areas should be kept in mind with the new tax system. The objective of tax reforms in China is to set up a new financial management system, which is suited to the demands of the socialist market economy, and to further strengthen macroadjustment and control by the central government. But, in design, it is not meant to adversely affect local interests. Attention, however, is needed to ensure that resources of the poorer areas are not reduced but are increased normally. The overall growth in revenues will permit an increasing increment for the poorer areas. Thus expenditure responsibilities should be clarified, for local governments, to ensure that there is no need for borrowing to meet local outlays, thus reinforcing macroeconomic management.

The stipulations in the proposed revenue-sharing system are that the base year for the local revenue level, to be assured by the central government, is taken as 1993. Thus, local taxes will be supplemented by the central government, out of its own taxes and shared revenue (e.g., 75 percent of VAT collections), so that 1993 nominal revenues for local governments are maintained. The local governments will have a complete and independent tax system and the legislative power on assigned taxes, after the implementation of the new tax system. The specification of the local taxes, to have a wide tax base, will also have a direct bearing on local economic development. Thus, local governments will emphasize local tax resources, tap the potentialities, and enforce effective collection. It is expected that local revenues, overall, will increase as a result of the reform.

Second, central government resources would continue to provide strong support for the undeveloped areas. As in Japan, and other countries, the central government plays an important role in redistribution across regions, to provide greater support to the poorer and less developed provinces. Since China is a large and diverse country, the central government also has a redistributive role but has lacked the resources to reasonably regulate the distribution of revenues between the regions. With additional revenues accruing to the central government, the systemic reform of fiscal relations should not only support the development of the developed areas but also the economic development of the undeveloped areas, through revenue sharing, transfer payments, and special appropriations (special purpose grants) by the central government.

Third, sharing the natural resources tax will greatly increase the financial revenue of the minority and poor areas and promote development of the regional economy. China has a vast territory and abundant resources, but natural resources are mainly concentrated in remote and mountainous areas, especially in the minority regions. Such regions, which form 64.3 percent of the total territory of China, account for 94 percent of the grassland; up to 41.6 percent of forest resources; and 52.5 percent of the water reserves of the whole country. Moreover, the regions have more than 90 percent of the deposits of rare metals, magnesium, and chromium; and over 35 percent of coal, copper, lead, zinc, and antimony; as well as abundant reserves of oil and natural gas. With effective use of this resource base, local governments should have ample revenues for rational development of the region.

Fourth, the existing special funds and transfers will be maintained in the short to medium term, to protect local activity levels, and will be standardized gradually through the tax-sharing and transfer system. The new revenue-sharing arrangements, however, are likely to confer benefits to the more advanced regions, and a new system of grants and transfers is still to be specified. The base period method of transfers is to be continued as an interim measure, but lacks a sound basis.

Policy Reforms in the Minority Areas

In the transition period between the new and old economic systems, the direction of the policies should support and provide preferential treatment to the minority areas.

A Factor-Based Method for Support to Minority Areas

The base number method adopted, taking the year 1993 as the base year, is an interim measure. Eventually, this method should be replaced by the factor method. The factor method would be based on the determinants of local finance, such as population, land area, cultivated land per capita, GNP per capita, proportion of minorities, geographical condition, natural resources, and circumstances of social development (as used by Australia in the determination of grants). Relativities would be determined by the government, taking into account relative disabilities on both the expenditure and revenue sides.

A comprehensive assessment of the various factors is needed to evaluate central and local government responsibilities. Both quantitative and qualitative analyses are needed to delimit the classification of central or local activities.

Guarantee of Minimum Levels of Public Services

In order to sustain the basic needs of social development of poor areas, and narrow the gap in social and economic development with other areas, different types of financial aid have been given to the local governments in different periods. In the past decades, there has been some experimentation to improve the economy in the minority and poor areas. Central government support has been used to improve the investment climate of these areas and to help them promote development of social services. The per capita incomes and expenditures in the minority and poor areas, however, are lower than the average for China. In many remote areas, minimum basic public services are still not met.

In many countries, the main objectives of transfer policies are to solve the problem of local fiscal disequilibria and to ensure a minimum standard of basic public services. The disequilibria of the local governments include vertical and horizontal imbalances, and a system of grants is needed to address such imbalances (see also Chapter 15).

Tax Administration, Assignments, and Revenue Sharing

The objective of the reform of the system of tax assignments and administration is to encourage local governments to increase revenues by expanding the tax base, reducing arbitrariness, and raising the transparency of the tax system. This system should provide for adequate social services and provide incentives to restrain expenditures.

In China’s tax reform (see Chapter 9), it has been decided to extend the scope of local taxes, to include resources, together with a simplification, amalgamation, and elimination of some tax categories. This reform can address both the issue of higher prices for raw materials of energy and the rational use of resources. More resources would then be forthcoming to the poor regions, thus narrowing the gap between east and west China. Despite this tax assignment, additional transfers may be needed, as noted above. These would include both “equalization” grants, as well as special purpose funds, but more work is needed to specify these transfers more precisely.


State Nationalities Commission, China.

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