The Chinese press these days are filled with fascinating stories. One story from Sina details what the Zhangmutou Township government in Dongguan had to do to placate some 7000 angry workers laid off by a toy factory without pay. To placate the workers, the township government decided to pay the August, September, October wages of these workers along with over-time. Fine, but anyone with cursory knowledge of Chinese public finance knows that cash strapped township governments with few revenue sources, even if they are located in prosperous Guangdong, do not have the means to pay this amount. Some simple math: suppose each worker is paid USD 150 a month and overtime is 10% of total wage bill. The township government would have to pay 150*3*7000 + 0.1 (150*3*7000), which is a whopping 3.5 million dollars (roughly 23.5 million RMB). Of course, the Dongguan government has the means to pay this amount. However, if we bear in mind that wage arrear is cropping up in all the townships of Dongguan, the Dongguan government is clearly facing an unmanageable problem.
Of course, the buck can stop at the provincial level, and the Guangdong government has the means to pay three month wage arrear of even millions of workers (3 million workers’ 3-month wage arrear would cost around 1.35 billion USD). However, since wage arrear is a “stability” issue, local governments are likely blackmailing the central government for money. In a paper that Mingxing Liu, Luke Qi Zhang and I did on fiscal transfers in China, we found that the central government is most prone to increase transfers to county governments out of stability concerns. In the past, local governments blackmailed the center using wage arrears of government officials, which threatened the entire functioning of local governments. Now, with protests and riots barely contained in factory towns, the provincial government certainly has strong reasons to ask the center for more funds. As I write this, I am sure the good people at the Ministry of Finance are fielding a barrage of requests for emergency funds from various local governments (as an MOF official once told me “we are the fire brigade”).
The problem is that given central fear of stability, workers, factory bosses, and local governments will make the problem of wage arrear seem much worse than it actually is in order to squeeze money out of the central government. Furthermore, things actually may get worse if the Christmas season in the US turns into a bust for retailers. This would create even more unemployment and wage arrear issues. Local governments, even provincial ones, are already under fiscal constraints due to the collapse of the land market, previously a major source of local revenue. In this case, both objective forces and political incentives may conspire together to create a substantial category in the 2009 central expenditure budget. On top of the stimulus package and possible bank bailouts next year, this would increase expected deficit in the Chinese budget in a non-trivial way. How much would it be? Suppose that the central government has to pay 6 months of wages for 20 million workers (roughly 15% of all migrant workers), it would cost the central coffer 18 billion dollar or 122.4 billion RMB. It is roughly 2% of all government revenue in 2007 and 4% of central revenue in 2007, really not that trivial.