The Red Dream

Chapter 2The Shadow Fiscal System: Local Governments, National Budgets

Who wants to be the mayor who reports that he didn't achieve 8 percent GDP growth this year?

—Unnamed local government official¹

The city's streets were plastered with signs and self-standing boards advertising brands of cigarettes and bottles of Chinese “wine.” The annual Wine and Spirits Conference (烟酒会: sic!) had just concluded. All of China's producers and sellers had gathered in one spot to brag and celebrate and drink and smoke. The conference had been held in a brand-new exhibition hall in the just-built part of town that had been carved out of the old town. The hall from a distance looked like a paper parasol opened on top of a building; designed by Japanese architects the complex was beautiful. In the background was a park and what was to be a large 100-story skyscraper that was still under construction. Where did the money come from for all this?

Finding some of that money is the objective of this chapter, which describes how local governments developed an alternate fiscal universe. In this universe, up to the financial crisis in 2008, they generated funding resources far in excess of the expenditures specified in their officially approved budgets. But if they were too successful, Beijing, with the same sort of fiscal insufficiencies, snatched away and even canceled altogether these lucrative resources in order to increase official revenue. This cycle of underfunding, finding new money and having ...