public administration and development

Public Admin. Dev. 29, 263273 (2009) Published online 24 July 2009 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/pad.537

CENTRALIZING TREASURY MANAGEMENT IN CHINA: THE RATIONALE OF THE CENTRAL REFORMERS

YUEN YUEN ANG*,y
Stanford University, USA

SUMMARY The Chinese central government, spearheaded by the Ministry of Finance, launched a bold reform of the treasury management system in 2001, centralizing the disbursement of budgetary funds. This article analyzes the rationale of institutional reform from the perspective of the central reformers. Traditionally, governmental bank accounts in China were fragmented between and within levels of government, hindering budget implementation and intergovernmental transfers, as well as fomenting corruption. The centerpiece of Chinas treasury reform is the establishment of the Treasury Single Account (TSA), which serves to both strengthen expenditure controls and improve cash management. However, while the treasury reform promises to make signicant strides in improving scal control and countering the misuse of public funds, its implementation remains imperfect and incomplete. Copyright # 2009 John Wiley & Sons, Ltd. key words anti-corruption; China; scal control; intergovernmental transfers; treasury reform

INTRODUCTION As the school term approached, the parents of Jade Township in Chinas Shaanxi Province scrambled for loans to pay for the village school fees of 200400 Yuan. Parents feared that if the teachers were not paid, they would quit, and their children would be left to graze like wild goats. Since the abolition of agricultural taxes and fees in 2002, the Chinese central government allocated a series of earmarked grants to nance local public goods provision. Village teachers in Jade Township were supposed to receive an annual wage subsidy of 2800 Yuan each, but only a portion of the funds arrived. The villagers had little choice but to shoulder the gap. Where did the rest of the subsidy from the central government go? It turned out that the county government, tasked to transfer the grants to the townships, had withheld part of the funds. County ofcials lamented that they too have shortfalls to meet.1 Stories like the one we hear about Jade Township are commonplace in China. But they are not unique to the country. Fiscal management is characteristically weak in developing and transitional countries. Public funds are often diverted for unauthorized uses and even into private purses. One of the major causes of weak scal management is an overly decentralized treasury management system. Simply put, the treasury system governs how public funds are disbursed. Beginning in 2001, the Chinese central government, spearheaded by the Ministry of Finance (MOF), launched a bold reform of the treasury system. Traditionally, state bank accounts in China were fragmented across regions, departments, and levels of administration. This fragmented structure hindered the implementation of budgetary plans and cultivated a hotbed for scal malfeasances. Targeting these problems, the central government introduced the Treasury Single Account (TSA), rst piloted at the central level and then extended to subnational governments. By centralizing the disbursement of public funds, the reformers hoped to improve cash management and enforce budget implementation. Strengthened control over scal resources is a crucial pre-condition for the effective implementation of central policies, especially those requiring
*Correspondence to: Y. Y. Ang, E-mail: yuen@stanford.edu y PhD Candidate. 1 This story was reported in Xian Wanbao, 20 April 2005; Shaanxi Ribao, 17 June 2005; Xinjingbao, 25 June 2005.

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intergovernmental transfers, such as subsidizing rural education.2 However, budgetary reforms in China are far from perfect and complete. Multiple challenges, political and technical, lie ahead. Surprisingly, despite its far-reaching implications, there have been few analyses of Chinas treasury management reform in the English language literature to date. While the few existing discussions provided useful overviews, they had not sufciently lled in on the institutional details (see for example Wong, 2005; Yang, 2004; Ma and Niu, 2006; Ma and Ni, 2008). The objective of this article is to analyze the rationale of institutional reform from the perspective of the central reformers, most signicantly, ofcials at the Ministry of Finance. More specically, it explains central reformers, identication of the problems in the previously fragmented treasury system, and how elements of the new, centralized system they designed address those deciencies. While this analysis does not provide an empirical assessment of the reform from the perspective of multiple or local agencies at this stage, it does takes a modest rst step by explicating the logic of the most important set of actorsthe central designers of the reform. An understanding of how central reformers conceived problems, solutions, and challenges provides an important benchmark that future research may employ to assess the actual effectiveness of the reform. This article draws primarily on interviews with central ofcials and secondarily from policy documents and Chinese-language literature.3 It will proceed in four main sections. This section outlines the defects in the prereform treasury system that triggered the current reform. Next section explains how centralizing treasury management targets problems in the old system. Following section analyses challenges faced in perfecting the reform and implementing it at the local level. Finally, I present conclusions in the larger context of Chinas budget reforms and state capacity building. BEFORE THE REFORM: DEFECTS IN THE TRADITIONAL TREASURY SYSTEM Every government requires a treasury system, that is, a set of organizational arrangements governing the depositing and disbursement of governmental revenue.4 Broadly described, the treasury does the following: provide information about scal ows and transactions, essential for resource allocation and policy evaluation; governmental cash management; and monitor and control of public spending. As summarized by Tommasi, the treasury function aims at ensuring both efcient implementation of the budget and good management of the nancial resources (2007, p. 309). One of three entities may perform the treasury function: an independent treasury that acts as the sole depository (as in the US), commercial banks or the central bank. China adopts the third model. The central bank, the Peoples Bank of China (PBOC), holds the states funds and manages transactions. Traditionally, Chinas treasury system was described as decentralized and dispersed (Authors interview, June 2006). There are ve levels of formal administration in China: central, province, city, county, and township. State treasury accounts exist at only the rst four levels. Where PBOC branch ofces were absent at the county and township level, commercial banks performed a substitute role. The treasury system was fragmented vertically and horizontally. The central governments treasury account was unconnected to those of lower tiered governments. Hence, when the central government disbursed education subsidies from its account, the funds had to (and still do) pass through layers in the hierarchy before reaching the townships. Simultaneously, the treasury system of any local government is not linked to those of its counterparts in the same level of administration. This fragmented feature implies that the central government only had control over the implementation of its own budgetand even this control was weakbut not those of local governments.5 Furthermore, governmental bank accounts were fragmented across units within the central and local governments. In China there are numerous line or vertical authorities, such as ministries and commissions (typically titled bureaus at the subnational levels), as well as public organizations like universities and state
2 In 2007, scal transfers from the central government to local governments amounted to 709 billion Yuan. The central government will allocate 15 billion Yuan to subsidize debt reduction for the 9-year compulsory education program (MOF 2008). 3 I conducted interviews with ofcials at the Ministry of Finance and National Development & Reform Commission in 2006. 4 More precisely, the collection of governmental revenue is a tax administration function, while the treasury function is concerned with the mechanisms for depositing scal collections. 5 I thank an anonymous reviewer for pointing this out.

Copyright # 2009 John Wiley & Sons, Ltd.

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enterprises. The intersection of horizontal and vertical authorities forms a distinct matrix structure (Lieberthal, 2003). Before the reform of 2001, government departments, bureaus, and work units could set up earmarked transitory accounts (guoduhu) at their own discretion. These accounts were not linked to one another, and adding to the complexity, they proliferated during the reform era (Authors interview, June 2006). Given the disconnected structure and massive volume of governmental bank accounts in the entire administrative hierarchy, one can imagine the gargantuan challenges in monitoring transactions. Once money was disbursed to individual spending units (i.e. units that receive budget allocations), the central bank and nancial authorities were unable to gather reliable information about scal ows. In the words of a central ofcial, it was impossible to track how much went in and out, from where to where, and when (Authors interview, August 2006). Problems arose when depositing and disbursing funds. Problems when depositing funds It was difcult to ensure that Ministries, departments, and subsidiary units would turn all their revenue into the treasury account.6 Traditionally, there were three avenues for remitting revenue: (a) direct transfer from an individual transitory account; (b) collective transfer by a lead organization (which was common in the case of stateowned enterprises) (c) and indirect transfer through a local tax or collection agency (Ma, 2004). Multiple and indirect avenues for depositing scal revenue created opportunities for governmental units to delay submitting funds to the central or local treasuries or even to pocket a part of them. Problems when disbursing funds The disbursement of funds was subject to delays and diversion. To illustrate, Figure 1 presents a stylized model of the traditional treasury system. Imagine this scenario: Unit A, a subordinated unit of Ministry B, has a budget of

Figure 1. Indirect disbursement of funds under traditional treasury system.

6 Governmental revenue includes tax revenue, social security contribution, non-revenue receipts, income from transfer and gift, revenue from recovery of the principal of loans and from equity disposition, and revenue from generation of debt. For the denition of governmental revenue, see Tong Zhang and Xiaguang Teng, On the Reform of Chinas Fiscal Treasury Management System, Paper presented at the Conference on Next Steps in the Reform of Chinas Public Finance, Seattle, Washington, 2005.

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$100,000, of which $50,000 was budgeted for purchasing goods from Vendor C. Procedures for the disbursement of funds were as follows (based on Authors interview, June 2006): (1) (2) (3) (4) The Ministry of Finance (MOF) informs PBOC of the funds approved for disbursement to Unit A; Funds are disbursed to Ministry B; Ministry B transfers $100,000 to Unit A; and Finally, Unit A transfers $50,000 to Vendor C as payment.

Many glitches, intentional or unintentional, may trip the processthe most common of which was the withholding of funds by supervising units. Lower-level governments, agencies, and units typically face long delays in receiving budgetary allocations and scal transfers. For example, the Ministry of Water Resources (a central level Ministry) has seven subsidiary organizations and over 20 service units, spanning nine provincial territories. There are ve budgetary layers. More concretely, this means that funds that are supposed to reach the lowest unit at the Ministry of Water Resources would have to pass through at least four inter-bank transfers (Ma, 2004, p. 123125). In one particular instance, it took almost 10 months for a work unit in another Ministry to receive its budgeted funds. In most cases, even at the central level, it would take at least a month (Authors interview, August 2006). Besides creating delays, the traditional treasury system was inefcient at cash management. Surpluses would sit idle in bank accounts, earning little or no interest, while spending units needing the funds failed to get them in time. An equally serious concern arose as to whether governmental funds, when ultimately received, were used for budgeted purposes, in particular, essential public goods provision and wage payment. Many public enterprise workers and employees failed to receive their salaries in a timely manner. A 1999 report by the National Audit Ofce admonished that public funds had been systematically expropriated, in some cases they were blatantly transferred into individual private accounts and even used for stock market speculation (Wong, 2005). Monitoring problems were exacerbated by the absence of a specialized organization for supervising the treasury function. Prior to 2000, MOF did not have a Treasury Department. Although the treasury function resided with the Peoples Bank of China, the central bank lacked incentives to perform its role diligently. Under the traditional system, MOF did not pay the PBOC for its services and neither did the PBOC have to pay interest on state deposits. As a result, the central bank became the agent who didnt care (Tan, 2006, p. 286). Adding to the disincentive, PBOC underwent a major restructuring in 1999, during which its provincial branches were abolished, adding strains to treasury management. In short, the traditional treasury system was unsuited for the demands of a complex market economy. Under central planning, expenditure decisions were relatively centralized and streamlined (Oksenberg and Tong, 1991). But as the market economy took off, scal authority was decentralized and public nancial transactions increased exponentially. Opportunities for monetary gain, paired with a fragmented treasury system, gave bureaucratic agents powerful incentives to cheat and means to get away. Indeed, an understanding of the pitfalls of the traditional treasury system sheds new light on the institutional cause of a major form of corruptionbureaucratic stealing. Such acts of stealing include embezzlement, misappropriation, illegal transfers, and withholding of revenue.7 In 1999, 63.5 per cent of prosecuted corruption cases in China were in the categories of embezzlement and misappropriation (Sun, 2004, p. 39). These crimes have escalated since the 1990s, growing larger in numbers and scale (Sun, 2004, p. 114). Throughout the 1990s, audit authorities repeatedly cracked down on the collection of illegal monies and embezzlement of funds that were deposited in small treasuries (Wedeman, 2000, p. 498).8 But these problems persisted. As one ofcial said, We caught wrong-doers many times. But there were always more of them. It became clear to us that the system had gone wrong. So the system had to change (Authors interview, August 2006). The question was how.

7 The misappropriation of public funds is a non-transactional form of corruption. Transactional forms of corruption include bribery and graft. See Sun (2004). 8 Wedeman (2000) estimates the amount of misappropriated funds at 50150 billion RMB annually.

Copyright # 2009 John Wiley & Sons, Ltd.

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FROM 2001 ONWARDS: LAUNCHING THE TREASURY REFORM In early 2001, the State Council approved the Proposal for Treasury Management System Reform jointly submitted by the Ministry of Finance and the Peoples Bank of China. The statement marked the beginning of treasury reform in China. This section outlines three key institutional features of the proposed reform, including the creation of: (i) the Treasury Department (guokusi); (ii) the Treasury Disbursement Center (TDC) (guokuzhifu zhongxin) and (iii) the Treasury Single Account (TSA) system (guoku danyi zhanghu). Creation of the treasury department Reform of the treasury system began with formal establishment of the Treasury Department within the Ministry of Finance in June 2000. Creation of the Treasury Department was the rst step in providing specialized personnel and a lead organization for treasury management. The Treasury Department was in charge of managing budget implementation, government procurement, and bonds issuance; while its close kin, the Budget Department was responsible for budget formulation. The Treasury Department and Budget Department are the twin bureaucracies tasked to implement budget reforms. Creation of the treasury disbursement center In addition to the Treasury Department was the creation of the Treasury Disbursement Center (TDC). The TDC is the operational arm of the TD. It is responsible for managing the budget ledger, checking deposits, processing disbursement claims, and making payments to vendors. TDC ofces have been set up throughout the country with a personnel size of about 3000. To ensure that TDC ofcers serve central, rather than local interests, the central government hired and paid TDC ofcers (Authors interview, August 2006). Creation of the treasury single account The centerpiece of Chinas treasury reform is the establishment of the Treasury Single Account (TSA) system.9 Simply described, TSA is an account or set of linked accounts through which the government transacts all payments (Tommasi, 2007, p. 310). A consolidated TSA allows more efcient use of state deposits, and more importantly, strengthened control over spending through direct disbursement of funds. Chinas TSA was set up at the Peoples Bank of China and controlled by the Ministry of Finance. This consolidated account of all governmental units is divided into two separate accounts: one for managing revenue and the other for expenditure.10 Under each of the two accounts were ve ledger accounts (guoku fenlei zhanghu): (i) (ii) (iii) (iv) (v) Account Account Account Account Account for for for for for public wages; government procurement; minor direct payments; petty cash; and special organizations approved by the State Council.

Each of these subsidiary accounts is linked to the earmarked accounts of individual units. For example, the ledger account for public wages is linked to the individual accounts of public employees; the government procurement account to the commercial bank accounts of private vendors; the minor accounts at Ministries to those of their subordinate units, and so forth. In addition, a separate account was created for extra-budgetary funds, which is linked to the extra-budgetary accounts of all other scal units. In contrast to the traditional system, the reformed account system is inter-connected, with each account leading back to the central treasury account. Striking a resolute posture, MOF abolished all transitory accounts. Following the reform, all revenue had to be directly
9 10

For a general discussion of the treasury single account, see Tommasi (2007). The creation of these two accounts is part of a broader effort at separating revenue and expenditure (shouzhi liangtiaoxian). Public Admin. Dev. 29, 263273 (2009) DOI: 10.1002/pad

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deposited into bank accounts in the TSA. In short, the new design eliminated unauthorized accounts and reected the movement of funds from unit-to-unit and level-to-level. A central feature of the TSA is direct disbursement of funds from the treasury account to end users (be they public units, public employees or private vendors). The Treasury Disbursement Center (TDC) processes authorizations for budget allocations and then makes payment on behalf of spending units. In such instances, funds will be drawn directly from the treasury account. Figure 2 shows a stylized example of how the direct disbursement of funds works, contrasting it with the old system in Figure 1. Recall the scenario earlier described: Unit A, a subordinated unit of Ministry B, has a budget of $100,000, of which $50,000 was budgeted for purchasing goods from Vendor C. Following the reform, procedures for the disbursement of funds became as follows: 1. 2. 3. 4. Unit A signs a contract with Vendor C to purchase $50,000 of construction materials; Unit A submits the request for payment to TDC; TDC checks and processes the disbursement claim; and PBOC draws $50,000 from the state treasury and transfers it to the private bank account of Vendor C.

Compare the new system in Figure 2 with the traditional system in Figure 1. First, payment is made directly to Vendor C by the TDC through the central bank. Unit A makes a purchase of $50,000, but it does not pay the vendor directly; instead, the TDC performs the function. With this new scheme in place, [public units] spend money without seeing money (Authors interview, June 2006). Second, funds are no longer transferred level-by-level to reach Unit A; instead, they are deposited directly. Thus, delays in transfer are cut short. The supervising body, i.e. Ministry B, can no longer withhold funds from Unit A because the funds no longer go through it. Third, the remaining $50,000 of Unit A will be kept in the treasury account until Unit A makes another approved purchase request. Any budget surplus will stay in the treasury account under centralized cash management and control.11 Following the reform, not only can the nance authorities pay vendors directly from the treasury account, but they can also make direct payments to public employees, thus preventing the risk of wage arrears. More recently, the State Council has also urged local governments to remit subsistence subsidy (dibao) directly into the bank accounts

Figure 2. Direct disbursement of funds under new treasury system.

11 MOF is still exploring options on making best use of short-term cash balances in state bank accounts. For more on cash management, refer to Cheng (2007).

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of welfare recipients (Jingji Cankaobao, 2007). Evidently, the creation of the TSA empowered the central government to enforce budgetary decisions and to employ state deposits more efciently than before. In the new system, spending units can also make authorized payment for minor purchases through the zerobalance account (lingyue zhanghu), which applies to the rst four ledger accounts earlier described. This function allows spending units are authorized to make payments directly to vendors. Any balance will be cleared by the end of the day. This serves an important cash management function as any remaining funds will be returned to the treasury and then reallocated based on budgetary needs. With the new system in place, spending units submit their requests for making authorized payments once every 3 months. At the central level, approved funds can be transferred directly into the accounts of the respective units by the next working day (Authors interview, August 2006). Compared to the old system, this represents a quantum leap in efciency. A MOF ofcial summarized the logic of the dualdirect and authorizedpayment methods with an animated father, son, and McDonalds analogy (Authors interview, June 2006): Think of our institutional design as a father-and-son relationship. In the rst instance, the father tells his son, You may go to McDonalds and buy whatever you want, and I will pay your bill. [This refers to the direct payment system.] That way, the father knows exactly what the son bought at McDonalds. In the second instance, the father says, Heres $100 that you can spend at McDonalds this month. [This refers to the authorized payment system.] If the son goes to McDonalds and spends more than $100, McDonalds will inform the father. Therefore, you see, the son cannot play tricks! Reformers sought to improve the efciency of cash management and strengthen scal management, while designing practical solutions to cope with vast transactions conducted in a complex bureaucracy. The zero balance account allowed spending units to continue to enjoy a fair measure of convenience (Authors interview, 2006). At the same time, by making direct payments for large expenditure items through the Treasury Disbursement Center, MOF can focus its attention on monitoring larger sums of spending. Coupled with treasury reform, the Golden Finance Project aimed to construct a nationwide public nancial information system that could reach down to the township level (Wong, 2005). By 2006, MOF ofcials claim they have acquired the ability to track every revenue and expenditure item in over 20,000 central-level scal units at any point in time. As one ofcial beamed, If someone [in the government] goes to dinner with ofcial funds, we know exactly where they dined and what they ate! (Authors interview, August 2006). The new institutional design described was rst piloted at the central level, but it has not been implemented throughout the administrative hierarchy. Following the approval of the Proposal for Treasury Management System Reform in 2001, the treasury reform was tested among six central-level units in July 2001. The Ministry of Finance, Ministry of Water Resources, Ministry of Science & Technology, State Council Law Ofce, Central Science Academy, and Natural Sciences Foundation, were selected as pilot cases. Then, from 2002 onwards, the reform was extended progressively. In 2003, 38 central-level bureaucracies and 795 subsidiaries were included in treasury reform, with direct disbursement of funds reaching 65.2 billion RMB in value (Ma, 2004, p. 119). Soon after, the treasury reform was implemented at all central-level bureaucracies and subsidiaries, 36 provinces and municipalities, selected municipalities and even some counties. Sichuan, Anhui, Chongqing, and Fujian were among the rst provincial test points for the reform. By 2007, MOF reported that all subsidiary spending units at the central, provincial, and municipal level will be included in the centralized treasury management system (Ministry of Finance, 2008).

REMAINING CHALLENGES While the reform promises to make signicant strides in countering corruption and improving scal management, its implementation remains imperfect and incomplete. Central reformers seemed well aware of the challenges that lie ahead. Treasury reform is meaningless unless there is a budget to begin with. And in China, the budget is only beginning to be seriously debated and formalized in the ways practiced in Western developed countries. In addition,
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considerable obstacles remain in extending the reform to lower-tiered governments and economically backward regions. Extrabudgetary funds The current treasury structure includes a separate account for extra-budgetary funds, as described in the previous section. However, this account has not been introduced at all sub-provincial governments. Moreover, there are sources of revenue that go beyond traditional categories of extrabudgetary funds, for example, proceeds from the sale of land. In such instances, it may be possible for governmental units to deposit the income outside of the treasury single account (in commercial banks), which would escape the surveillance of nance and audit authorities. Kickbacks and bribes Under the reformed system, the treasury disbursement center makes direct payments to vendors. However, this arrangement does not entirely rule out kickbacks and bribe taking. It remains possible for governmental units to collude with vendors, offering purchase contracts in exchange for commissions. After receiving payments, vendors can still reward bureaucratic patrons in cash. For this reason, treasury reform is incomplete without the institutionalization of governmental procurement rules.12 Multiple layers in intergovernmental transfers Even after restructuring the treasury system, intergovernmental grants still have to ow through several layers in the administrative hierarchy to reach governments at the grassroots. As it stands, the principle of local scal sovereignty governs intergovernmental relations in China. Not only are direct transfers to base level governments blocked by infrastructural limitations, they also pose legislative and accounting problems (Authors interview, August 2006). In an attempt to deliver central subsidies to grassroots units, MOF conducted an experiment. It tried to send earmarked grants for the Rural Compulsory Education Project directly to local schools. However, when implementing the proposal, A MOF ofcial related that they did not realize that some counties did not even have post ofces, not to mention banks! Hence, the central government had to transfer grants through the provincial governments and then to county governments, which are supposed to deliver funds to individual schools. As transfers would inevitably go through them, higher-level governments may still withhold funds for lower level governments. This experiment, expressed a MOF ofcial, presents a small rst step but there are many challenges ahead (Authors interview, August 2006). Uneven local Implementation Implementing treasury reform at the local level is highly uneven given wide variation in conditions both across and within provinces. Contrast, for example, Hebei province and Beijing municipality, both of which are provincial level administrations and geographically adjacent. Hebei provinces treasury disbursement center had only a modest staff size of 15, smaller than treasury working groups providing friendly services in the capital city. In contrast to Beijings sophisticated and computerized public nancial information network, Hebei relied upon regular communication and monthly meetings to monitor transactions (Ma, 2004, p. 152154; Beijing Treasury Department, 2005). Further, there are practical constraints in extending treasury reform to the county level, as MOF ofcials explained. First, county governments face a general lack of skilled manpower for carrying out what some consider a technical reform; second, county budgets are generally small, which would fail to justify the cost of creating a modern treasury system; and third, counties have generally not practiced detailed budgeting (Authors interview, August 2006). Additionally, at the county level, leaders dominate and make budget decisions on an idiosyncratic and ad hoc basis. Budgets are seldom fully transparent to the public or even to senior county ofcials (Wang, 2002).
12

By 2005, government procurement spending accounted for less than 10 per cent of total government spending (Cheng 2007, p. 12). Public Admin. Dev. 29, 263273 (2009) DOI: 10.1002/pad

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Bureaucratic resistance? Do the rest of the bureaucracies beyond the nance authorities embrace or resist treasury reform? There are some hints that this reform has hurt the interests of some departments (Ma, 2004, p. 122). In introducing the new system, MOF made three promises of no change (sanquan bubian): no change in the budgetary and organizational structure of spending units; no change in the units spending autonomy; and no change in the units nancial autonomy. What changed, however, were the structure of accounts, methods of payment, and methods of scal monitoring. The fact that MOF elected to create a separate account for extra-budgetary funds, thereby allowing bureaucracies to keep some measure of autonomy, may be signs of an inter-bureaucratic compromise.13 As earlier research has pointed out, extra-budgetary funds present a crucial source of autonomy for local bureaucracies (Wang, 1995). In an earlier article, David Bachman (1989) argued that the Ministry of Finance occupies a much weaker position in the Chinese bureaucracy compared to other states because the budgeting process has been subordinated to the planning system. Experts described 19561978 as a period of pre-budgeting, in which the budget merely served as a tool of plan implementation (Ma, 2009, p. 14). It appears that the distribution of power has since changed. The former State Planning Commission underwent a major restructuring in 2000, becoming the current National Development and Reform Commission (NDRC). Currently the NRDC takes charge of allocating, disbursing, and monitoring funds for the primary purpose of construction (Authors interview, June 2006). Perhaps over time, the budgeting process may dominate the planning system.

HAS THE REFORM WORKED? Has the treasury reform worked? I urge guarded optimism. MOF ofcials claim that the reform has dealt corruption a heavy blow, improved scal control, and the efciency of cash management. Based on an understanding of the new institutional design, we have reasons to be hopeful about these claims. In places where the treasury reform has been implemented, public spending units have much less discretion than before because of direct disbursement. A consolidated budget enhances information on scal ows, making the illicit diversion of funds riskier than before. Furthermore, technological improvements, such as the computerization of budgetary records, have accompanied these changes. However, these sophisticated reforms take time to percolate to lower level governments. Furthermore, while the treasury reform may counter the mishandling and stealing of public funds, it cannot prevent transactional forms of corruption like bribery. Yang reported that with the treasury reform, fund diversion and embezzlement [of central level Ministries such as the Ministry of Water Resources] have largely become a thing of the past. He also found that some provincial governments succeeded in removing bogus ghost payrolls through the direct disbursement of public wages, thereby saving administrative costs (Yang, 2004, p. 245). Another study reported that centralized treasury management allowed MOF to detect scal malfeasances in 61 central ministries amounting to 2.96 billion Yuan in 20022003 (Ma and Ni, 2008, p. 131). At a relatively wealthy county I had visited in Jiangsu province, the consolidated budget account had been implemented several years ago, and local ofcials said that it was not possible for a public agency or unit to open an unauthorized bank account these days.14 At another less wealthy county I had visited in Shandong province, all the public employees including teachers had their salaries wired directly into their bank accounts.15 Obviously, more research is needed to evaluate the penetration and effectiveness of centralized treasury management. The analysis presented here seeks to lay an empirical foundation for this direction of research.

13 Governmental ofcials explained that extra-budgetary funds would eventually merge with within-budgetary funds. Hence, the special account is supposed to serve a transitional function (Authors interview, June 2006). 14 Authors eldwork in a county in Jiangsu province, 2008. 15 Authors eldwork in a county in Shandong province, 2006.

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CONCLUSION Improving budgeting rules and processes is a central element of state capacity building (Caiden and Wildavsky, 1974; Ma, 2009). Centralized treasury management in China is not an isolated reform, but part of a tripartite package that includes departmental budget reform and government procurement reform (Ma and Ni, 2008; Ma, 2004). Government procurement reform aims to establish rm rules for open and competitive bidding. Without the enforcement of such rules, direct scal disbursement will not alone prevent bribes and kickbacks. Simultaneously, departmental budgeting requires each department to formulate an itemized budget. Since the 1950s, China has operated on a Soviet-style budget system, which lists expenditure by broad categories, such as defense, education, culture, etc. However, as a recent MOF report concedes, budgets are [still] crudely prepared, and they are not scientic and accurate enough (Ministry of Finance, 2008). Without a detailed budget, treasury payment ofcers often nd it difcult to objectively evaluate some special funding requests from budgeted agencies (Cheng, 2007, p. 12). Under such circumstances, the process of disbursement would remain bargaining-as-usual.16 Evidently, the three sets of reforms need to proceed in tandem in order for budgetary reforms to produce results. The Chinese experience of treasury reform holds broader lessons on budgetary reforms in developing countries and their consequences for effective policy implementation. By centralizing treasury management, central reformers in China hoped to disburse scal transfers and earmarked grants in more reliable manner to lower-level governments, as well as grassroots social service providers like village schools. Centralized treasury management also plays a crucial anti-corruption function, as central reformers had stressed repeatedly (Yang, 2004; Ma and Ni, 2008). Several inuential comparative studies on corruption recommend program elimination, privatization, anticorruption campaigns, reforming public compensation, and instituting independent anti-corruption agencies as instruments of anti-corruption, but these discussions have neglected the importance of budget reforms (RoseAckerman, 1999; Bardhan, 1997; Manion, 2004). This suggests the need for more research by social scientists on how budgetary institutional variation may affect scal and corruption control and more attention by policymakers to designing effective budgetary systems in developing countries.

ACKNOWLEDGEMENTS

I thank Nick Hope for extensive comments on earlier versions of this article and to anonymous reviewers for their valuable criticism. I also thank the ofcials whom I had interviewed for generously sharing their time and expertise with me.

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Public Admin. Dev. 29, 263273 (2009) DOI: 10.1002/pad