Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 93: Soft Budget Constraints: An Analysis Based on a Survey of Chinese Township Enterprises

Örjan Sjöberg and Zhang Gang
Additional contact information
Örjan Sjöberg: Stockholm Institute of East European Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Zhang Gang: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden.

Abstract: The reduced influence of soft budget constrints is often seen as an explanation for the successful growth of China's non-state sector. Views differ, however, as to whether collectively owned rural enterprise are in fact subject to hard financial discipline. This paper reports an inquiry into the issue. The study examines the financial behaviour of REs, particularly that of loss-making enterprises, by scrutinising a set of survey data of 630 rural enterprises in Sichuan and Zhejiang (China), Being primarily explorative and conceptual in nature, our study reveals that soft budget constraints can still be observed to be enjoyed by many rural enterprises, in particular among those collectively owned. As the budget constraints do appear to become more rigid, however, enterprises look for other opportunities to ease the financial dixcipline forced upon them by the market and by increasingly illiquid local governments. Accumulating inter-enterprise arrears, as well as withholding wage payments, are identified as means frequently used towards this end by REs in transitional Chinese economy.

Keywords: Soft budget constraints; economic transition; China; rural industry; township and village enterprises; inter-enterprise arrears

JEL-codes: P21; P32

35 pages, January 1996

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