Bankruptcy fears for China's universities
By Wu Zhong, China Editor

HONG KONG - After the annual sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) in the first half of March, the issue of over-borrowing from banks by public universities has once again been brought to public attention, raising concerns over whether many Chinese schools will go under, with their bank loans becoming bad debts.

The problem of over-borrowing by universities was first exposed early last year. After auditing books of several public universities, the no-nonsense state auditor Li Jinhua warned against financial risks created by over-borrowing from banks.

According to the Chinese Academy of Social Sciences' blue paper on social development in 2006, the outstanding loans owed by Chinese public universities stood at 150 billion to 200 billion yuan (about US$19.3 billion to $25.8 billion at the current exchange rate) in 2005.

But even this figure could be well underestimated. "In fact, the debts owed by public universities are far larger than that," said Shao Hong during the just-ended NPC and CPPCC sessions. Shao is a member of the CPPCC Standing Committee and vice chairman of the Jiu San (September 3) Society - one of China's tiny non-communist parties.

Shao, former vice president of Nanchang University, described total debts of Chinese public universities at 400 billion yuan as "a conservative estimate". He said that in addition to bank loans, many schools also owe money to construction companies and other institutions.

Official figures show that since 1999, public universities across the country have invested more than 500 billion yuan in infrastructure construction. Many insiders agree with Shao that at least 80% of the funds came from loans.

Zhu Yongxin, vice mayor of Suzhou and also a member of the CPPCC Standing Committee, estimated that total borrowings could reach 500 billion yuan. In financial accounting, a number of universities are on the verge of bankruptcy. In practice, their operations are running into difficulties.

According to the influential Caijing magazine, the problem of universities' over-borrowing was one of the hot topics in panel discussions during the NPC and CPPCC annual sessions. Deputies have filed more than a dozen motions addressing the issue.

"Huge debts have become an important factor restricting the development of higher educational institutions. Some schools are on the verge of bankruptcy. If the problem is not handled properly there will be far-reaching consequences for China's higher education," Zhu Yongxin said.

In the final analysis, the over-borrowing problem stems from over-expansion of higher education since the late 1990s.

During the five decades between 1949 and 1999, Chinese universities were regarded as government-related organizations that operated on government funding and strictly followed the principle of "making expenditure within the limits of revenues". As such they were never allowed to borrow from banks.

However, in the mid-1990s, especially after the Asian financial crisis in 1997, the Chinese government adopted an expansionary fiscal policy to boost investments and domestic consumption and sustain the high-speed growth of the country's economy. It was under this policy that higher education was set to be expanded into a major sector of consumption.

Li Lanqing, then executive vice premier overseeing education, recalled after his retirement that the decision was made for several reasons. In addition to popularizing higher education, it would meet social demand so expenditure in education would increase to help boost domestic consumption. Furthermore, with more students enrolled, the pressure on unemployment would be eased. (But it turned out that the expansion of student enrollment only postponed the problem of unemployment, as it has become increasingly difficult for university graduates to find jobs.)

In June 1999, the State Council announced its decision greatly to expand student admission to higher educational institutions. However, while the central government set the policy to expand higher education, it was unable to increase its financial input proportionately. Instead, it encouraged the schools to be run commercially like enterprises, allowing them to borrow from banks for expansion.

Local government immediately saw this as a golden opportunity to boost local infrastructure construction. So the year 1999 witnessed massive borrowings from banks by public universities. Most of these loans have been spent on expanding campuses, building more classrooms or office buildings, dormitories and other facilities.

Many regions even competed to build huge new "university cities". For instance, Guangzhou invested 12 billion yuan to build its "university city" on 43 square kilometers of land. Langfang, a