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Soft Budget Constraints: An Analysis Based on a Survey of Chinese Township Enterprises


  • Sjöberg, Örjan

    (Stockholm Institute of East European Economics)

  • Gang, Zhang

    (Department of Economics)


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.

Suggested Citation

  • Sjöberg, Örjan & Gang, Zhang, 1996. "Soft Budget Constraints: An Analysis Based on a Survey of Chinese Township Enterprises," SSE/EFI Working Paper Series in Economics and Finance 93, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0093

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    References listed on IDEAS

    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
    3. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Li, Lixing, 2008. "Employment burden, government ownership and soft budget constraints: Evidence from a Chinese enterprise survey," China Economic Review, Elsevier, vol. 19(2), pages 215-229, June.
    2. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    3. Kornai, János, 2000. "A költségvetési korlát megkeményítése a posztszocialista országokban
      [Hardening of the budget constraint in the post-socialist countries]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 1-22.

    More about this item


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

    JEL classification:

    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
    • P32 - Economic Systems - - Socialist Institutions and Their Transitions - - - Collectives; Communes; Agricultural Institutions


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