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Countryside Crunch

Chinese villages have been warned to rein in their debt, largely due to vanity projects and failed businesses, which could scupper rural revitalization, experts warn

By Zhang Xinyu Updated Dec.1

Pictured is an ancient-styled architecture complex in Qiuhe Village, Yanshi, Henan Province, November 27, 2017 (Photo by VCG)

The red bamboo lampshades cast their glow on a smoothly paved concrete road stretching out into the darkness as night falls on Huangbijie Village, Jinyun County, southeastern Zhejiang Province.  

Beside the road, a lively food center, full of hot steam and cooking aromas, houses former street food vendors, who once sold their wares on a garbage-strewn street full of chaotically parked vehicles.  

Beyond the well-decorated food center are the communities and ancient buildings that have been refurbished over the past few years.  

The efforts to modernize ought to be lauded, if it were not for the excessive cost – more than 30 million yuan (US$4.12m) for a village where the population is less than 1,000. Most of the money was borrowed from the villagers.  

Among China’s 700,000 villages, Huangbijie is not an exception. By the beginning of 2019, rural debt in China totaled 900 billion yuan (US$124b), the central committee of the China Democratic League (CDL) said in a proposal submitted to the annual two sessions – the National People’s Congress and the Chinese People’s Political Consultative Conference – in March this year.  

Even the poster child for prosperity and rural modernization, Huaxi Village in Jiangsu Province, once the country’s wealthiest village due to investing in the Huaxi Group, which had extensive business interests in multiple fields, is suffering a chill wind. The 35,000 villagers, who in 2004 averaged around 1 million yuan (US$140,000) in their personal bank accounts, are now exposed to a debt crisis, online website Sina Finance reported on September 6. ���

Experts warned the mounting debt, if not reined in immediately, could destabilize China’s program of rural revitalization and jeopardize the stability of rural society.  

Long Overdue 
Among the colossal outstanding debt in rural China, some are old debts amassed from 1990 until the country decided to abolish the long-existing agricultural tax in 2006, according to Lü Dewen, professor and research fellow at the China Rural Governance Research Center, Wuhan University.  

“When farmers didn’t have enough to pay the agricultural tax, they borrowed money from village collectives (the shareholding cooperative in rural China). In the following years, some paid their debts when their lives improved, while others did not,” Zhou Xiangqian, deputy secretary of the Communist Party of China (CPC) of a village he declined to name in Central China, told NewsChina.  

Before 2006, rural debt was estimated at 360 billion yuan (US$49.57b). Many experts consider it as the thorniest issue affecting village governance. By the second half of 2020 when the central government asked for transparent balance sheets for all villages, the debt in Zhou’s village was estimated at 2 million yuan (US$280,000), including hundreds of thousands of yuan in old debt. 

Some of the old debt stems from the 1990s, when collectives were tasked with developing local manufacturing industries. These were partly funded by debts.  

In 2019, during field research in a village in Hubei Province, Professor Huang Yan from the School of Public Administration at the South China University of Technology found that to comply with orders from above, the village she visited had launched three projects in 1995, including one growing mulberry trees. But only a year later, all were bankrupt, leaving debts of 210,000 yuan (US$28,920) that still exist.  

Zhou revealed that during his 15-year tenure, his village has never been able to repay its debts. 

The creditors for these debts range from banks to rural credit cooperatives and financial institutions, as well as local residents and officials who lend money to farmers and invest in factories. Interest rates on these direct loans from individuals is usually higher than ones from financial institutions.  

Wang Lihui, an associate professor from the Law School at Nanjing Normal University, conducts regular field research in villages. She told NewsChina that one official had lent money to a village collective several decades ago but was never paid back. Short of money for his treatment, he died of cancer.  

Borrowing Bonanza
Zhou’s village built a new square with traditional-style features and paved 19 kilometers of roads around the village from 2006 to 2018, spending around 6 million yuan (US$830,000). According to Zhou, half the investment was funded locally, so local debt has continued to balloon.  

According to Huang, with central fiscal resources allocated from top to bottom, 30-60 percent of the financing of rural projects must come from local government. Filling the gap means borrowing from financial institutions or individuals and that is how the debts grow.  

In some villages, the government funding is held back until projects are completed satisfactorily. The village has to cover the entire cost up front, and often the government money falls far short of covering the entire bill.  

In Huangbijie, the funds allocated to the village at the end of the spruce-up project in 2019 only covered 2.04 million yuan (US$280,000), just 7 percent of the total. With the funding borrowed from residents, the village is mired in debt, Wu Yuping, an official at the Bureau of Agriculture and Rural Affairs in Lishui City which administers Huangbijie, told NewsChina.  

“It’s strange that the more attractive a village is, the greater the debt it owes,” Ma Xuemei, deputy director of the Department of Administrative Participation and State Affairs Discussion of the CDL’s Committee in Ningxia Hui Autonomous Region, told NewsChina, commenting on the tendency for “model” villages to look ornate on the surface, but be mired in debt underneath.  
In addition to debts caused by face-lift projects, rural businesses also created liabilities. Some yielded returns, but many did not.  

Lishui official Wu Yuping said that liabilities in the 986 villages administered by Lishui City had reached 373 million yuan (US$51.36m) by June 2022, accounting for nearly 63 percent of the total. But the villages are less concerned about these debts, as the local collectives are actually solvent. The loans, which convert to assets totaling 609 million yuan (US$83.86m), created 12 percent return rates on average in rural areas.  

However, not all villages are so fortunate. According to Huang, many villages adjacent to cities in Guangdong Province have become insolvent as the industrial zones they invested in are either ill-designed or badly managed.  

“It can be a chain reaction,” Lü said. “If the locals refuse to recognize their failures and continue to invest in these zones, debts will quickly multiply.”  

In some villages, investments in new projects are embezzled to make up for the old losses, which, according to Wang, is an attempt “to rob Peter to pay Paul.”  

The search for more investments to make up for rash decisions can involve more black-box operations such as rent-seeking corruption, she said. 

White Elephants 
Experts are increasingly concerned that village debts will endanger rural development in the coming years.  

Huang said local debts are mostly caused by white elephant projects. He described one village in Hubei Province with a population of 1,476. In 2019, the village’s GDP ranked second-last in the region, but its debt was 2.7 million yuan (US$370,000), mostly caused by construction of the village’s administrative building and its surroundings.  

“The project has been made flam-boyant enough to impress the higher authorities,” he said.  
“All the stakeholders benefit from these ‘face-lift’ projects. Higher officials get more credit to put toward promotions, local collectives win a good reputation and village officials profit from the construction,” Huang said.  

In particular, debts were driven up by the “Beautiful Countryside” campaign, an initiative started in 2013 to improve the living conditions and environment in villages, as well as new constructions intended to attract tourists and infrastructure renovation.  

“All the villages burdened by huge debts in my research had done face-lift projects,” Lü said.  
Zhou argued that not all projects in villages are for prestige. Some, like irrigation and paving roads, are improving the lives of local residents.  

Nevertheless, many experts believe that even if the infrastructure is necessary, the debts it creates have severe consequences.  

“The debts can ruin the villages’ future by paralyzing development,” Lü said.  

Over the past few years, some contractors who bid for village projects have resorted to suing local officials to get paid. From 2016 to 2018, the number of lawsuits rose from one to 114 in Gaoping, Shanxi Province, with the village governments losing them all. Most officials cannot pay, even after a court verdict, leading to individual punishment for collective failure to pay. 
In 2019, a representative from a village committee in Henan Province was detained after he refused a court order to pay for a project. Other village officials are blacklisted by the national social credit system, and are deprived of the right to use public facilities like trains and airplanes.  

According to Ma, in order to reduce the impact of being blacklisted, some villages change their officials.  

“But if the debts remain, the new leaders will probably be blacklisted again in a new round of lawsuits,” she said.  

Slow Recovery 
To pay their debts off, some collectives in less developed villages are renting out land or receiving relocated people from other places to get subsidies for relocation projects.  

In its proposal to the two sessions, the CDL called for village officials’ annual performance to be evaluated by indices such as debt recovery rates, debt service coverage ratios and asset growth rates. The increase or decrease of local debts should be a yardstick to influence local officials’ salaries and promotions.  

In January 2023, Lishui attempted to regulate village debt by asking county-level governments to address the issue. Counties should make a plan for each village that has accumulated debts above 1 million yuan (US$140,000).  

Zhou said that since 2021, higher authorities have tightened control over village debts, so it has been almost impossible for them to borrow money for new initiatives.  

There are other approaches. During his visit to Zhenluoying Town in Beijing’s suburban Pinggu District, Lü noted it is now the locals rather than contractors who are involved in construction projects to cut outsourcing costs.  

According to Wang Lihui, one province has ruled that funds for village projects will go direct to the contractors, and villages can no longer decide who wins the bid. The village committees have been replaced by town governments to decide on projects worth less than 600,000 yuan (US$84,000) and counties decide on projects valued at more than 600,000 yuan.  

“Village debts are likely to decline when county-level governments take charge of projects,” Wang said.  

Lü agrees. To uproot village debts, village committees should not get involved in planning projects or interfere in local businesses. “If they can follow the principles, the debts in villages will plummet,” he said. 

Workers lay asphalt on a rural road, Xiaogao Village, Liaocheng, Shandong Province, October 1, 2023 (Photo by VCG)