Stricter controls planned to tame rural industries

PUBLISHED : Thursday, 12 September, 1996, 12:00am
UPDATED : Thursday, 12 September, 1996, 12:00am

Beijing is trying to tighten controls on China's booming rural industries 18 years after Deng Xiaoping's reforms allowed them to run riot.

The National People's Congress (NPC) has started to debate the country's first law governing so-called township enterprises.

Details are unclear, but one thing is certain: wayward firms are likely to face more stringent controls.

The proposed law follows a barrage of attacks on some rural industries recently for horrendous pollution, a disregard for workers' safety which has led to numerous fatalities, and widespread production and sales of fake or shoddy products.

Whether the law will change all that remains to be seen, but economists say it will provide a catalyst for a shake-out in the rural industries, now touted as a pillar of China's economy.

They have already become a powerful economic force to reckon with.

According to figures from the Ministry of Agriculture, the gross domestic product of rural industries amounted to 1.459 trillion yuan (about HK$1.364 trillion) in 1995 - a quarter of China's total.

Rural enterprises paid a total of 205.8 billion yuan in taxes last year, one-third of the nation's total.

Taxes paid have risen at an annual rate of 43 per cent over the past five years, according to Xinhua (the New China News Agency).

Township enterprises have a total of 130 million people on their payrolls and that figure is likely to rise by an annual seven to eight million up to 2000, Xinhua said in another report.

Rural firms have come a long way since their origins in the disastrous Great Leap Forward of the 1950s.

Villages and communes at that time, were ordered to build 'backyard' steel furnaces using iron pots and pans as part of former Communist Party chairman Mao Zedong's dream to surpass the steel output of the United States and Britain.

Doomed to failure, those efforts did, however, lay the groundwork for a new crop of factories operated by the communes (which are now called towns) and production brigades (now called villages), according to Thomas Rawski, an economics professor at the University of Pittsburgh in the United States.

In the 1960s and 1970s, rural firms were confined to agriculture-related products for sale in the local markets, including farm machinery, building materials and chemical fertilisers. The agricultural reforms of the late 1970s released millions of farmers from the land, accelerating the development of rural industries amid rising demand and farm output.

The removal of long-standing barriers that had prevented rural firms from procuring resources (such as skilled technicians and special materials) and selling products in urban areas also helped spur a boom in rural industries, particularly in coastal areas blessed with efficient transport systems and relatively high incomes, Mr Rawski said.

The central government, faced with millions of people in surplus labour in rural areas, also encouraged the development of rural industries, mainly through tax incentives.

Until 1994, rural industries paid 14.8 per cent in corporate tax, compared to a standard 33 per cent for the state sector.

However, the biggest incentive from the central government came from its largely hands-off attitude.

Unlike those in the state sector, managers of rural enterprises had a high degree of autonomy.

They were free to alter their product mix, change prices, choose suppliers and entertain or even bribe customers. As a result, they responded quicker to market changes than the state sector.

Unlike the state sector, rural industries rarely provide housing or pensions for employees.

That partly explains why they are booming while the state sector is struggling.

However, this unchecked rampant growth has had its side effects.

Rural firms are at the lowest end of the technology spectrum and are the country's biggest source of pollution.

In 1994, about 20 million factories spewed out 4.3 billion tonnes of waste water, according to the official media.

Earlier this year, Beijing forced the closure of dozens of small paper mills which heavily polluted nearby rivers.

Liu Suinian, chairman of the NPC's financial and economic committee, said many firms had also evaded taxes, neglected labour safety and sold fake products.

Township enterprises also face structural problems, according to China economists.

Most rural industries are small and village-based, manufacturing largely cheap but inferior, and in some cases fake, products.

Growing demand for high-quality products, fuelled by rising incomes, is squeezing that market very hard.

Firms in the upper echelon, though small in number, are pushing towards nationally and internationally competitive industrial production.

Guangdong Kelon, a fridge maker, is an example. It has recently raised funds through a share sale in Hong Kong to expand production and improve technology.

More firms are now being urged to make a similar transition and are also suffering from policy changes.

At the beginning of 1994, Beijing levelled the playing field by raising the corporate income tax rate for rural industries to the national standard.

Ministry of Agriculture officials said the annual output by rural industry was expected to rise more slowly at 15 per cent in the next five years, down from an annual 30 per cent for the past 18 years.

However, as the surplus of rural labour is estimated to rise by 10 million each year, Beijing has no choice but to continue to encourage the development of rural industries, although it is keeping a close eye on them.

Mr Liu, of the NPC, said that according to the draft law, the government would use preferential tax policies for rural enterprises and extend low-interest loans. He said local authorities could set up funds for the development of rural enterprises.

But the draft law also contained specific articles on penalising rural enterprises for evading taxes, wasting resources, polluting the environment and neglecting safety on job sites, he said.

They would also be forced to earmark a certain portion of the profits for agriculture.

It appears the free-wheeling days are numbered.