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Plus ça Change:Three Decades of Fiscal Policy and Central–Local Relations in China
In China's decentralised system, vital public services such as health, education and social welfare are provided by local governments. The intergovernmental fiscal system is critical to ensuring local governments are adequately financed. Since 1994, China has overhauled its public finances to create a system able to finance government operations, support economic growth and fund industrial policies and international initiatives. Its Achilles' heel remains a weak intergovernmental fiscal system that is unable to fund local governments efficiently and equitably. This article analyses local finance through three decades of reform. Despite a promise early in the Xi Jinping administration to realign central–local fiscal relations, local finances have deteriorated since 2015 due to slowing growth, tax cuts and pressures from tightened budget management. Local fiscal difficulties have caused a decline in social spending as a share of gross domestic product. If continued, this trend threatens to reverse recent gains in improving services and undermine other national policy goals.
INTRODUCTION
Since beginning its transition to a market economy in 1978, China has undergone over four decades of growth and development that have vaulted it to the front ranks of world economies. Along the way, China's public finances have been substantially overhauled and incrementally rebuilt to create a system that is able to finance government operations, support economic growth and provide the revenues underpinning the government's ambitious industrial policies and international programmes such as the Belt and Road Initiative. The process of fiscal reform is, however, not yet complete. Realigning local government revenue assignments to match their expenditure responsibilities was deferred in the 1994 tax reform, and the unbalanced central–local [End Page 1] relationship has continued to be a major source of distortion in the Chinese economy.1 At the outset of the Xi Jinping administration in 2013, an ambitious plan was laid out for a comprehensive reform of the fiscal system targeted for completion by 2020, but the goal of a significant intergovernmental realignment remains elusive.
This article reviews China's fiscal reform and broad trends in the economy over the past three decades to provide an updated analysis of China's intergovernmental fiscal system. Since the early 1990s, central–local fiscal relations have gone through three distinct phases with different policies, trends and problems. These phases coincide largely with leadership changes: the 1990s under Zhu Rongji, the 2000s under Hu Jintao and Wen Jiabao, and since 2013 under Xi Jinping. In each phase, the leaders responded to problems of the previous decade and introduced policies designed to address them. Much has changed since the 1994 Tax Sharing System reform, whose success led to a long period of fiscal expansion that saw revenues growing at 20 per cent per annum from the late 1990s through 2013 and accruing equally to central and local governments.2 With expenditures growing even more rapidly and the burden falling disproportionally on local governments, the fiscal gap they face has widened but that has been financed by rapidly growing central government transfers. With a slowdown in revenue growth in recent years, signs are emerging that local governments, especially at the lower levels of the administrative hierarchy, again face growing fiscal stress.
This article has three objectives. First, it outlines the evolution of local finance over three decades of China's rapid economic growth and development. Second, it unpacks the reforms implemented since 2013 and demonstrates that reforms in strengthening budget management have substantially reduced the fiscal space for local governments. With slow progress in intergovernmental realignment, local government financial difficulties have again impeded national policy implementation. Third, it shows that gaining an understanding of local finance requires going beyond the central–local fiscal dichotomy to delve into the architecture and mechanisms of China's administrative system to study how policies and resources are transmitted to the counties and cities that implement most government programmes. [End Page 2]
The article is organised as follows. The next section presents a brief discussion of the Zhu Rongji era as the first of three decades of fiscal reform. The third section examines the roll-out of the "Harmonious Society" programme under Hu Jintao and Wen Jiabao and how it affected the intergovernmental fiscal system. The fourth focuses on reforms in the Xi Jinping era, when the 18th Party Congress endorsed a sweeping programme of reforms in November 2013 to improve state governance, of which fiscal reform was highlighted as "a foundation and important pillar".3 The fifth section presents a detailed examination of the current local fiscal status, and the sixth concludes with an assessment of the present state of the intergovernmental fiscal system and the next steps for reform.
THE ZHU RONGJI ERA
One of the most urgent problems for Zhu Rongji, who took over economic policymaking in 1992, was the long fiscal decline triggered by the transition to a market economy that eroded government revenues and weakened the central government's capacity for economic management.4 In the planned economy, government revenues relied overwhelmingly on profit remittances and tax payments from state-owned enterprises (SOEs).5 Three pillars of the planning system worked in concert to ensure high profitability for SOEs: first, administrative prices that favoured industry over agriculture and resources; second, state monopoly on ownership of industries; and third, compulsory procurement. As market forces eroded these pillars and SOE finances, government revenues slowed, lagging far behind gross domestic product (GDP) growth (Table 1). By 1992 when Zhu Rongji became vice premier, fiscal resources had fallen from more than 30 per cent of GDP in 1978 to less than 15 per cent and the share under central government control decreased to less than three per cent after revenue-sharing with local governments.6 To counter the threat posed to state capacity, the paramount objective of fiscal reform was to rebuild the government's revenue mechanism and restore central government control.
The Tax Sharing System (TSS) reform implemented in 1994 introduced a new tax system to replace the previous system of industrial-commercial taxes. A new central tax administration was split off from the local government tax administrations to [End Page 3] collect most of the taxes, and revenue-sharing with local governments was revised to give central government control over the majority of revenue.7
Changing Fiscal Fortunes through the Transition (Annual Growth, Price-adjusted)
With new taxes and a stronger tax administration, the TSS quickly reversed the fiscal trend (Table 1). By the second half of the 1990s, government revenues were outstripping economic growth. With economic growth accelerating after China joined the World Trade Organization in 2001, government coffers were soon overflowing. The improved fiscal outlook allowed the administration of Hu Jintao and Wen Jiabao to address problems accumulated during the fiscal decline, among which were a severe deterioration in public services especially in rural areas and in poor regions, and a sharp rise in interregional fiscal disparities.
Underprovision of Public Services and Growing Inequalities during Fiscal Decline
Fiscal decline and the erosion of central revenues had translated into weakening support for poor regions, a trend starkly illustrated in Guizhou. The poorest among China's 31 provinces,8 Guizhou witnessed a steady fall in the share of its budgetary expenditures financed by central subsidies, from 57 per cent in the early 1980s to just 17 per cent in 1993 (Figure 1). Guizhou was not alone. Nationwide, central transfers (excluding tax rebates) fell to just one per cent of GDP during the 1994–97 period, and were below two per cent of GDP through most of the 1990s (Figure 2).
With few transfers to help poor regions, the already large regional disparities in public spending grew throughout the 1990s, especially since the system of tax-sharing under the TSS had left more revenues in regions with richer tax bases.9 Table 2 shows that the absolute and relative gaps in per capita expenditure grew across provinces, and the coefficient of variation rose from 0.57 to 0.75, indicating growing divergence [End Page 4] among them. As for Guizhou, left mostly to its own resources, per capita budgetary expenditure fell from 58 per cent of the national average in 1991 to 42 per cent in 1998.10
Share of Provincial Expenditures Financed by Transfers in Guizhou Province
Source: Christine Wong, "Rebuilding Government for the 21st Century: Can China Incrementally Reform the Public Sector?", The China Quarterly 200 (December 2009): 929–52, Figure 2.
Decline of Transfers in the 1990s (as a percentage of GDP)
Source: Calculated from NBS data; National Bureau of Statistics (NBS), China Statistical Yearbook (Beijing: China Statistics Press, various years).
[End Page 5]
Growing Disparities in Per Capita Budgetary Expenditures by Province
Table 2, which includes only data on budgetary resources, in fact underestimates the regional inequalities. In the face of chronic fiscal shortfalls, governments at all levels turned to extra-budgetary channels to collect fees and levies and earn extra income using state assets. In the late 1990s, these extra-budgetary revenues rivalled budgetary revenues in size and had accrued disproportionally to rich regions.11
In the poor regions and especially rural localities, the shortage of funding meant that local governments often could not provide mandated services or even meet payroll in full.12 For example, although the Education Law (1986) called for nine years of compulsory education for all children, in 2004 about 17 per cent of rural counties could not provide it.13 A scholar estimated that as many as 150 million rural children did not receive nine years of schooling during the 1985–2000 period, due to a shortage of schools and high fees that schools charged to make up for funding gaps.14
Throughout the 1980s and 1990s, local government financing had constrained social spending. As a result, education expenditure stagnated at around 2.0 to 2.5 per cent of GDP, well below the government's goal of four per cent,15 and the World Bank estimated that China faced a spending gap of nearly five per cent of GDP in critical [End Page 6] social services.16 The large gap between urban and rural services was reflected in the Human Development Indexes in 2003, which estimated life expectancy of 69.6 years for China's rural residents, 5.6 years fewer than that for urban residents.17
THE SECOND DECADE: THE HU JINTAO–WEN JIABAO ERA
With robust growth in revenue, the Hu Jintao–Wen Jiabao administration was able to address these shortfalls. From the outset of his term, Premier Wen Jiabao embraced a new development paradigm that emphasised sustainable growth and "putting people first" (yiren weiben)—a view that was laid out in some detail starting with the Government Work Report in 2003 and the 11th Five-Year Plan that began in 2006.18
Under the new paradigm, the government ramped up spending on pro-poor, pro-rural programmes. Starting with the rural fee reform in 2000 that eliminated the quasi-taxes levied by townships to fund rural services and followed by the abolition of agricultural taxes from 2006, the government ended the self-financing rural fiscal structure installed under the planned economy and replaced it with one that is supported by central transfers.19
While the Zhu Rongji era was dominated by the tax-sharing system reform and its single-minded focus on revenue rejuvenation, reform in the Hu–Wen era was multifaceted. There were changes in revenue assignment—most notably the rural fee reform and the extension of subsidies to the rural sector. The Hu–Wen administration pushed through the completion of the tax-sharing system reform to the subnational levels by ordering the abolition of fiscal contracts that were in force at the subprovincial levels and by extending tax-sharing to all levels of government.
There were changes to the expenditure assignments as well, most notably the reassignment of the heavy burden of education and health expenses from the township to the county level. These changes culminated in the "county-based" (yixian weizhu) reforms that shifted all rural public services to county management, along with their budgets. In most provinces, the reform marked the end of township budgets. Another administrative change was the reform of "province-administered counties" (shengguanxian), which placed many counties directly under provincial control to [End Page 7] eliminate the fiscal role of prefectures20 in administering rural jurisdictions.21 By far the most important reforms during the Hu–Wen period were the massive expansion of government spending, the rebalancing towards social services and the concerted effort at redistributing resources towards the rural, less developed regions.22
The Harmonious Society Programmes
Under the banner of the "harmonious society", adopted at the Fourth Plenum of the 16th Communist Party of China (CPC) Central Committee in September 2004, Beijing began to pump resources into expanding social services and extending the social safety net to include rural citizens.23 The Ministry of Finance reported that expenditures on "sannong",24 an ad hoc category created to track spending on the rural sector, had grown from RMB77 billion in 1996 to RMB725.3 billion in 2009.25 During the 2000–12 period when China's GDP grew more than fivefold from RMB10 trillion to RMB53.9 trillion, government spending rose nearly eightfold, from RMB1.6 trillion to RMB12.6 trillion.26 The same period also witnessed an increase in budgetary spending on education from RMB176.5 billion to RMB2.1 trillion, and on health from RMB49 billion to RMB724.5 billion. Across the board, the growth in social spending outpaced government expenditures, which in turn overtook GDP growth, with momentum building especially from 2006 onwards (Table 3).
New programmes were introduced in quick succession, starting in the rural sector. The "two exemptions and one subsidy" programme was introduced in 2001 to reduce out-of-pocket costs of compulsory education for rural children,27 followed by [End Page 8] a series of direct subsidies to farmers in 2002.28 In the wake of the SARS epidemic in 2003, a new health insurance scheme was introduced to provide coverage for the rural populace. Lin and Wong counted 12 programmes altogether introduced during the 2002–07 period to benefit the rural population—some provided production subsidies, while others social welfare and public services, of which some were aimed at improving living conditions in villages.29 Some of these programmes were enormous, with hundreds of millions of beneficiaries (Table 4).
Annual Growth in Key Indicators during the Hu–Wen Era (Price-adjusted)
Key Programmes in Rural Public Services
Some of the rural programmes provided benefits that urban residents had long enjoyed, such as state funding for compulsory education. Others were new services that were then quickly extended to include urban residents, such as the Urban Resident Basic Medical Insurance scheme introduced in 2007 to provide coverage to children, students and other non-working urban residents, and the Urban Residents Pension Programme in 2011. Both programmes extended coverage to residents who were previously left [End Page 9] out of the employment-based formal sector schemes, filling a huge gap in coverage. Since 2007, China has also introduced an ambitious social housing programme and poured fiscal support into schemes for public rental housing, assisted home ownership and slum upgrading.30
With the successive roll-out of new programmes, by the end of the Hu–Wen decade, China had built a framework for a comprehensive social welfare system with universal coverage, albeit sometimes at very low levels of protection. By targeting many of the services and subsidies to the rural sector and poor regions, policies of the Hu–Wen administration helped turn the tide on the large income inequalities that had grown during the 1980s and 1990s (Figure 3). However, the policies, while having decisively stemmed the growth of inequalities, did not shrink the inequalities measurably. With official estimates of the Gini coefficient (a statistical measure of income inequality) flattening out at around 0.47 in 2012, China remained one of the most unequal countries in the world when Hu and Wen completed their terms in office.
Getting to the "Four Uns"31
The implementation of the Hu–Wen policies had thrown the intergovernmental fiscal system increasingly out of balance. Under the current assignment of responsibilities, the higher spending on social services accrued almost entirely to local governments, resulting in a sharp rise in their share of budgetary expenditures, from 65 per cent in 2000 to 85 per cent in 2011 (Figure 4). In the absence of a commensurate adjustment in revenue assignments, the fiscal gap grew, requiring more transfers.
In 2000, the central government provided RMB254 billion in transfers to finance the fiscal shortfall of local governments, equal to 2.5 per cent of GDP and roughly 35 per cent of the central government's revenues. By 2012, transfers had grown to RMB4 trillion, equal to 7.5 per cent of GDP and roughly 70 per cent of central government revenues—and trending upward (Figure 5). The bulk of these transfers went to grassroots governments at the county level that were responsible for the provision of compulsory education, basic healthcare and safety net services, such as social welfare and pensions—–the big programmes driving up costs.
Due to the costs incurred from "Harmonious Society" programmes, counties' expenditures jumped from RMB417 billion in 2000 to RMB5.7 trillion in 2012, and their share of the national budget rose from 26 per cent of total expenditures to more than 45 per cent (Figure 6). Although the Ministry of Finance had called on provinces to devolve more revenues to shore up county finances, their revenue share rose only to 25 per cent of the total in 2012, lagging far behind their spending. In 2012, county [End Page 10]
Evolution of China's Gini Coefficient
Sources: National Bureau of Statistics, China Statistical Yearbook, various years (Beijing: China Statistics Press. various years); and CEIC.
Growing Unbalanced Local Government Share of the Budget
Sources: National Bureau of Statistics, China Statistical Yearbook, various years (Beijing: China Statistics Press. various years)
[End Page 11]
Growing Central Government Transfers
Notes: The left-hand-side (LHS) vertical axis represents percentage share of GDP; the right-hand-side (RHS) vertical axis represents percentage share of central revenues.
Source: Author's calculations based on Ministry of Finance data; Ministry of Finance of the PRC, Finance Yearbook of China (Zhongguo caizheng nianjian), various years (Beijing: China Financial and Economic Publishing House, various years).
Higher Spending and Growing Fiscal Gaps at County Level
Source: Ministry of Finance of the PRC, Fiscal Yearbook (Caizheng nianjian), 2001–2013 (Beijing: China Financial and Economic Publishing House, 2001–2013).
[End Page 12] governments had in aggregate RMB2.9 trillion in revenues and a shortfall of RMB2.8 trillion that was financed by transfers.32 Figure 7 shows county governments' growing fiscal gap, from RMB309 billion in revenue shortfall in 2002 to RMB2.8 trillion a decade later. Through the Hu–Wen decade, counties accounted for 60 to 80 per cent of central transfers.
County-level Fiscal Shortfalls and Their Share of Central Transfers
Source: Ministry of Finance of the PRC, Fiscal Yearbook (Caizheng nianjian), 2001–2013 (Beijing: China Financial and Economic Publishing House, 2001–2013).
China's heavy reliance on the use of transfers is unusual, given the high administrative and compliance costs.33 What is even more problematic is the intergovernmental fiscal system's reliance on a level-by-level transmission process through its administrative system. For transfers to reach the county/township level, the central government allocates them first to the provinces and relies on each provincial government to pass through the appropriate amounts to the next level, i.e. the prefectures or counties. [End Page 13]
The transfers are divided territorially and by sector and programme. During the Hu–Wen decade, earmarked transfers proliferated with introduction of new programmes and services. In 2010, the first year for which the Ministry of Finance published a detailed list of transfers by type, more than 100 categories of earmarked transfers were listed, along with 17 categories of "general transfers".34 There were 220 programmes requiring earmarked transfers at the central level in 2013.35 Earmarked grants, as they passed through the administrative hierarchy, were often further divided into finer categories as each administrative layer tried to target funds to where they were needed, or sometimes just to keep track of the different sources of funding. The author found in fieldwork conducted in a county in 2012 that more than a dozen transfers were for rural basic education alone.36 The burden of managing transfers created an extraordinary strain on the bureaucracy, far outstripping the capacities of government monitoring and supervisory systems.37
In addition, each level of government has some discretion on how to pass on the transfers by weighing its own needs against those of the lower levels. These decisions became more fraught since all levels of subnational government faced fiscal shortfalls and depended on the same pool of central transfers for financing (Table 5).38 As a result, fund disbursement was often slow and unpredictable. Empirical studies have found that provinces differed in their pass-through rates and the extent to which they allocated transfers to achieve equalisation.39 By tracking the flow of earmarked transfers [End Page 14] for essential public health services, Tan and Wong found that service providers sometimes received their appropriated funds only at the end of the fiscal year.40
Changing Shares of Budget Across Levels of Government (Percentage of Total)
The intergovernmental fiscal system also caused problems in cities. Amid the steep fiscal decline from the 1980s to mid 1990s, the Chinese government had few resources to devote to urbanisation and its extraordinary need for infrastructure, and borrowing was strictly limited. To avoid slowing growth, political leaders tolerated and tacitly encouraged the use of informal, backdoor practices that enabled cities to finance infrastructure. For this, China's municipalities relied overwhelmingly on extra-budgetary resources—mainly land sales and off-budget borrowing through local government financial vehicles.41 Even as budget resources grew, and especially under the stimulus programme in 2008–09, these practices expanded, operating largely beyond the central government's oversight.42 In an economy that was growing at double-digit rates, the easy access to money from land and borrowing led inexorably to excessive land takings, urban sprawl and the creation of excess capacity in industry as cities competed for investment to create jobs and raise land values. In the absence of regulatory oversight, these activities also fostered graft and corruption, and left many cities with unsustainable levels of debt.
In sum, the fiscal expansion and large increases in social spending during the Hu–Wen decade revealed major weaknesses in the intergovernmental fiscal system and [End Page 15] created a situation that could fittingly be described as the "four uns": unbalanced, unstable, uncoordinated, and unsustainable.
THE THIRD DECADE: COMPREHENSIVE REFORM UNDER XI JINPING
In contrast to the piecemeal reforms of the previous decades, the Xi Jinping administration laid out a sweeping programme of governance reform that was endorsed at the Third Plenum of the 18th CPC Central Committee meeting in November 2013, and identified fiscal reform as a key priority.43 Citing the "Overall Plan for Deepening Reform of the Fiscal and Taxation System" approved by the Politburo in July 2014, Finance Minister Lou Jiwei described the programme's three big tasks as: strengthening the budget management system; improving the tax system; and building an intergovernmental system with appropriate resources and responsibilities. Emphasising that in this round, the reforms were not just "applying patches here and there", nor a process of "fanning the broth to keep it from boiling over", he promised a comprehensive programme aimed at achieving a fundamental restructuring of the fiscal system, to proceed in three phases. The first phase—to begin immediately—would focus on budget reforms; phase two would begin in 2015 with reforms of the tax system; and phase three would begin in 2016 with intergovernmental reform to rationalise the assignment of revenues and expenditures.44
With Party and legislative support, fiscal reforms were off to a fast start in 2014. By far the most important step was the passage of the revised Budget Law in August, which ushered in a huge and hugely important programme of reform to strengthen budget management, rein in extra-budgetary revenues and install mechanisms for controlling local government debt. It also called for a shift to medium-term budgeting and strengthening budget oversight by the people's congress.45 These are technical reforms in public financial management that are mostly invisible to the public, but critical in building the institutions and mechanisms for modern budget management. These reforms typically take many years to implement and refine, but they have made significant progress over the past six years in improving government financial reporting and transparency, strengthening cash management and extending budget control over [End Page 16] off-budget resources.46 Tax reform has had few notable achievements aside from the conversion of the value-added tax (VAT) to a consumption type and its extension to services. The impact of these reforms on the intergovernmental fiscal system will be discussed in later sections.
Progress on Intergovernmental Fiscal Reform
To address the imbalance in the intergovernmental fiscal system, the authorities had made clear that adjustments would be carried out on the expenditure side—by recentralising some expenditures while leaving the revenue division largely unchanged. The Third Plenum Decisions called for the central government to take on greater responsibility for social security and major infrastructure with an interregional span, and to provide more transfers to help finance local public services that have significant externalities or interregional impact, such as education and health.47 The Decisions also called for a revamp of the system of intergovernmental transfers to reduce waste and improve their effectiveness.48
To date, the three key documents on intergovernmental fiscal reform are: (i) the State Council Guiding Opinions on Promoting the Division of Central and Local Fiscal Responsibilities;49 (ii) the 13th Five-Year Plan for Advancing the Equalisation of Basic Public Services;50 and (iii) the Reform Plan for the Division of Shared Expenditure Responsibilities between the Central and Local Governments in Basic Public Services.51
The 2016 document laid out some general principles for the division of expenditure responsibilities that divide public services into three groups: those that are central government responsibilities (e.g. national defence and diplomacy), local government responsibilities (e.g. public safety, urban transport and facilities, and rural roads), and shared responsibilities. The document calls for "appropriately" increasing the share of [End Page 17] public services under central responsibility while reducing those under shared responsibility. The document also calls for the large number of shared tasks in education, health, social security and environmental protection, etc., to be broken down into subtasks and for clarifying the division of responsibilities to avoid shirking.
The road map calls for functional ministries and provinces to work out the appropriate divisions within their areas of competency, and sets a time frame for the work to be completed. The ministries of defence, national security, foreign affairs and public security were assigned to take the lead in launching the reform in 2016, to be followed by the ministries of education, health, environmental protection, and transport and communications in 2017 and 2018. By 2019–20, the assignment of responsibility should be completed for the main public services, and provinces will have formulated their plans for clarifying divisions with subprovincial levels.
In January 2017, the State Council issued the 13th Five-Year Plan for promoting equalisation of public services. The plan, which has followed the trajectory of gradually increasing government spending on public services and improving access for all citizens that was first introduced in the 11th Five-Year Plan, has gone further. For the first time, it declares the provision of basic public services to be a core duty of government, and access to these services to be the right of every citizen.52 The plan creates a framework for the provision of these core public services by defining the scope of the government's commitment, the target beneficiaries and the mechanisms for implementation. It establishes a national list of services in eight areas: education, labour and employment, social security, healthcare, social welfare, housing assurance, culture and sports, and services for the disabled. These are broken down into 81 subtasks, with eight in education, 10 in labour and employment, seven in social security, etc. For each of the 81 tasks, the list identifies the intended beneficiaries and specifies the suggested standard of provision, lead agencies responsible and financing responsibilities.53 Among the 81, 10 are designated as shared responsibilities, with specific shares assigned to the central and local governments. The remainder are primarily local government responsibilities, sometimes with central government assistance provided "as appropriate". Since the list is presumably the outcome of consultation and negotiation with all the relevant ministries, its issuance completes much of the work called for in the 2016 document for delineating authorities and responsibilities, and provides a clear framework for working out the expenditure needs of local governments.
Indeed, without waiting for the ministries to issue guidelines in their functional areas, the State Council issued the Reform Plan for the Division of Shared Expenditure Responsibilities between the Central and Local Governments in Basic Public Services (Document no. 9) in February 2018. Drawing from the national list of basic public [End Page 18] services and following the principle laid out in the 2016 document, the plan names eight public services to be classified as shared responsibilities between the central and local governments, and sets out the national minimum standards of provision and cost-sharing ratios for 18 subtasks (Table 6). It promises that services on the national list that are not included may be added in future when economic and social development warrants it. The plan also divides the 36 provincial and "semi provincial" units into five groups for cost-sharing designations, replacing the long-standing regional divisions of "east", "central" and "west" (Table 7).
List of Central and Local Government Shared Tasks in Basic Public Services
[End Page 20]
Classification of Budgetary Units (2017)
Loud Thunder, Small Drops of Rain
Coming 13 months after the 13th Five-Year Plan document on the equalisation of public services, the 2018 reform plan seems a lost opportunity. Rather than further building momentum for rebalancing the intergovernmental relationship, the plan largely formalised current divisions, signalling a pause in intergovernmental reform. Its issuance has had no effect on raising the central government's share in spending, which has continued its downward trend, slipping from 14.8 per cent in 2018, 14.7 per cent in 2019 to 14.3 per cent in 2020.54
Contrary to official rhetoric that portrays the greater differentiation of provinces as a change towards greater equalisation, this change favours the rich provinces, and makes the central–local cost-sharing less redistributive than before. A close examination of the 18 listed services shows that the sharing rates are largely unchanged from previous practices, with one important exception. For the tier I and tier II provinces—i.e. the "western" and "central" provinces—the sharing rates are unchanged for major expenditures across the board. For example, the sharing rates for compulsory education (Table 6, items 1, 2 and 3) were established in 2007;55 those for student assistance [End Page 21] (items 5 and 6) were set in 2012,56 and those for the Residents' Basic Medical Insurance Scheme (item 11) in 2014.57 For tier I and II provinces, the reform merely codified current practice. The exception is that for tier III, IV and V provinces—the three groups broken out from the former "eastern" provinces—the central government's sharing rates have increased for many services for which these provinces had previously received little or no support.
In terms of the effort to clarify and codify the division of central–local responsibilities, the limited scope of the 2018 plan only serves to highlight the huge task ahead. Following the plan's roll-out, a new category of "transfer payments for shared fiscal responsibilities" was created in 2019, which listed 54 items of transfer. The 18 subtasks listed in the plan were represented among 12 of the 54, and together they accounted for slightly less than half of the total "shared responsibility transfers".58 Confusingly, transfers for the shared responsibilities were only 43 per cent of total transfers net of tax rebates, implying that more than half of the transfers in 2019 were provided for expenditures for which the central government had no responsibility, including many of the environmental protection expenditures. At the same time, the cost-sharing transfers are sometimes misleading. The "Urban and Rural Compulsory Education Transfer" at RMB156.5 billion covered only 10.3 per cent of local governments' total budgetary expenditure on compulsory education, of RMB1.5 trillion in 2019, far less than the sharing ratios implied in Table 6.59 Given that the central government increasingly sets national standards for service provision, and with threequarters of all transfers in China set on a discretionary basis, the narrow scope of the 2018 reform signals the central government's reluctance to cede financial control.60 [End Page 22]
Most disappointingly, the reform plan made no mention of the assignment of responsibility for capital investments needed for the provision of public services—schools, clinics, hospitals, roads, and the like. The heavy burden in financing infrastructure and restrictions on borrowing had, in past decades, driven local governments to rely on land revenues and off-budget borrowing through financial vehicles, a practice that current reforms aim to curb. The omission of this critically important area of shared responsibility, in the absence of new revenue assignments, leaves local governments in the same predicament as before and exposes them to the same financial risks.
LOCAL GOVERNMENT FISCAL STATUS TODAY
Since the start of the Xi Jinping era, the fiscal position of local governments has deteriorated. The first cause is the changing macroeconomic environment and associated fiscal policies. After a decade of double-digit growth, the Chinese economy began to slow down markedly after 2010 (Table 8). Revenue growth fell even more sharply, to less than one half of the level in the previous decade. This was followed by a pullback in expenditure growth to keep the deficit within an acceptable band (Figure 8), whereby the long fiscal expansion (measured as revenue and expenditure as a share of GDP) that had begun even before 2000 flattened out, and then ended in 2015. Thereafter both budget revenues and expenditures began to fall (as shares of GDP), and the deficit widened to five per cent in 2019.
Slowing Economic Growth and Fiscal Trends under the "New Normal"
The sharp slowdown in revenue growth since 2015 was in large part due to a series of tax cuts and tax changes. The first was the conversion of the value-added tax (VAT) to a consumption-type VAT in 2016, which allowed for expenses for investment goods to be deducted. This welcome change was estimated to cost RMB900 billion over two years, or about one per cent of GDP.61 The VAT was also extended to cover services, replacing the Business Tax, and concessions made in the transition have also reduced [End Page 23] the tax base.62 Several tax cuts followed. In 2018 the top VAT rate was reduced from 17 per cent to 16 per cent, and further to 13 per cent in April 2019.63 The threshold for the personal income tax was raised in October 2018 from RMB3,500 to RMB5,000 per month, and generous deductions were introduced in January 2019 that further cut tax receipts.64 Altogether, cuts in taxes and fees totalled more than RMB7.6 trillion over the 2016–20 period, with RMB4.7 trillion in tax cuts.65
Fiscal Expansion Goes into Reverse
Source: Author's calculations from data based on National Bureau of Statistics, China Statistical Yearbook, various years (Beijing: China Statistics Press, various years).
Tax cuts have affected local revenues, in particular, especially the recent cuts favouring small and medium enterprises that form a larger share of local tax bases in smaller cities and towns.66 In aggregate, local revenue growth lagged overall revenue growth [End Page 24] during the 2015–19 period, in contrast to previous periods of fiscal expansion until 2015, when local revenues had grown faster than total revenues (Table 9, panel A), as had local expenditures (panel B). This was reversed after 2015, when both local revenues and local expenditures lagged. The growth in transfers (panel C) slowed even more rapidly, further squeezing local governments.
Changes in Revenue, Expenditure and Transfers (Annual Growth, Price-adjusted)
The Effect of Budget Reform and the Central Government Policy Pivot
While the slowdown in transfers was in part driven by the slowdown in revenues, the sharp downturn reflects a pivot in the central government's willingness to fund local expenditures. As noted earlier, during the Hu–Wen administration the central government had devoted a growing proportion of its revenues to transfers, whose growth exceeded that of central revenues and local expenditures by a sizeable margin. This changed after 2012 when the central government held transfers to around 70 per cent of central revenues throughout the 2012–19 period (Figure 9). As a result, even with local spending slowing sharply after 2015, transfers were funding a declining share of it, falling from a peak of 39 per cent in 2009 to 31 per cent in 2019.
The tightening of transfers was also driven by budget reforms that aimed to improve budget execution and cash management, as well as make transfers more effective. As noted earlier, the rapid proliferation of new programmes and transfers during the Hu–Wen era had sometimes left local governments scrambling to keep pace. Audit reports have found widespread problems of slow programme implementation and low rates of utilisation of funds, especially with transfers arriving in multiple strands and often late in the year. In Guangdong, for example, an audit of the 2015 provincial budget faulted 21 departments and agencies for low project implementation rates. Among them, the health and family planning commission and the provincial agricultural science academy were singled out for having, between them, nearly 200 programmes with disbursement rates of less than 30 per cent at year end, holding more than RMB600 million in unused funds.67 Audit reports also [End Page 25] found frequent diversion and misuse of funds, even in the high-profile poverty alleviation programme.68
Central Government Transfers and Local Government Transfer Dependency
Source: Author's calculations from data based on National Bureau of Statistics, China Statistical Yearbook, various years (Beijing: China Statistics Press, various years).
Reining in and mobilising idle balances have been a major focus of budget reform, one strand of which is strengthening treasury management to ensure that local governments reveal the full extent of their fiscal resources. The Budget Law states that all government revenues must be turned over to the state treasury (Article 50). Since the creation of a treasury single account in the 1990s, the government has struggled to get all fiscal funds and spending routed through this account, especially at the subnational levels where local governments often justified keeping special fiscal accounts to hold earmarked funds. In concert with reforms to reduce earmarked transfers and ensure earlier disbursal of funds, the Ministry of Finance has pushed harder to shut down fiscal special accounts.69
Other policies affecting local government finances include the commendable programme to equalise public services discussed in the previous section, for which rising national standards and joint financing requirements translate into growing [End Page 26] burdens for local governments. According to the director of the Shandong Commissioner's Office of the Ministry of Finance, in 2017, a prefectural city faced 75 public service mandates whose costs totalled RMB338 million. This was an increase of RMB270 million over a decade, or a fivefold increase that far exceeded the prefecture's revenue growth during the period.70 In a similar vein, one county official complained that the increased standards for the rural minimum living stipend programme (dibao) had raised the county's expenditure from RMB10 million in 2015 to nearly RMB200 million in 2019, equivalent to 50 per cent of the county's budget.71
Such an extraordinary increase in dibao expenditure was caused by the effort to coordinate with the poverty alleviation programme in 2016, for which provincial governments were ordered to raise the standards of dibao provision to match the national poverty threshold, a change that required very large increases in some localities.72 Since dibao is one of the services listed in the 2018 reform plan without a specified share from the central government, county governments, which are responsible for programme implementation, are at the mercy of higher-level governments to help cover the rising costs. A glimpse of how costs can ratchet up so quickly is provided by the example from Jiangxi province, which shows that when transfers fall short, local governments, in this case especially rural governments, are left with big holes to fill (Table 10).
Planned Changes in Dibao Programmes in Jiangxi Province for 2020
After a decade of fiscal expansion and lavish spending under the Harmonious Society programme, it was prudent for reforms in the Xi Jinping era to start with a period of review and consolidation of expenditures. Efficiency savings may be harder to find, [End Page 27] though, after several years of hardening budget constraints. As the fulcrum of spending and service provision, county-level governments are bearing the brunt of the fiscal tightening. With the recent tax and fee cuts taking a heavy toll on their revenues, many counties are straining to meet payroll and deliver social services—a situation that was greatly exacerbated by the COVID-19 crisis in 2020.73
CONCLUSION: THE PRESENT STATE OF THE INTERGOVERNMENTAL FISCAL SYSTEM AND PROSPECTS FOR REFORM
According to the plan presented by then Finance Minister Lou Jiwei in 2014, comprehensive reform of the fiscal system should have been completed by 2020. Reforms have fallen far short of that goal, but considerable achievements have been made in building fiscal institutions.
In budgeting and public financial management reform, much of the vision that Lou laid out has been realised in form, if not yet completely in essence. These reforms include reining in extra-budgetary resources and extending budget control over fiscal resources segregated in the "four budgets".74 Government financial reporting reforms have brought improved budget transparency and more detailed, standardised reporting. Monitoring and supervision are conducted not only internally by the supervisory department of the Ministry of Finance, but also externally by the people's congress, the National Audit Office and the Central Disciplinary and Inspection Commission. Treasury reforms have broken through the level-by-level fragmentation to allow the Ministry of Finance to monitor cash balances of county governments.75 These reforms will go a long way towards building the mechanisms for tracking how public monies [End Page 28] are spent and holding spending units accountable for results—weaknesses that had been glaringly exposed during the Hu–Wen era.
Reforms to rein in local government borrowing have also begun to take hold. After several years of cat-and-mouse games where local governments outwitted regulators and continued to borrow outside the debt quotas under various guises including local government financing vehicles (LGFVs), public–private partnerships and procurement contracts, a concerted effort in coordination with financial sector authorities has succeeded in some degree of deleveraging. With tighter budget control and imposition of rules assigning responsibilities for direct and contingent debt to the leading officials and tying them to personnel records, the growth of hidden local government debt appears to have slowed since 2018, and LGFV debt has also shrunk.76
Achievements in these "phase 1" reforms were intended to pave the way for realignment in central–local relations, with tax reform in phase 2 delivering some new revenue sources from property tax and revised resource taxes. Instead, local budgets are being squeezed from all sides. Fiscal difficulties at the county level were the likely culprit for China's ineffectual social welfare response to the COVID-19 crisis in 2020, when the vast majority of workers suffering economic hardship received no help from the government despite promises of assistance from top leaders. Wong and Qian found in their study that through the whole year of 2020 the dibao programme added only a million recipients and the unemployment insurance scheme added merely 420,000.77
Data at the macro level suggest that local fiscal problems have begun to depress social spending, with budgetary expenditure on social services as a share of GDP declining since 2016 (Figure 10). This trend threatens to undermine the government's goals of improving public services and rebalancing the economy towards consumption. If the trend continues, intergovernmental fiscal relations could return to the state in the 1990s, when local fiscal difficulties impeded national policy implementation.78
As for local government debt: stopping the growth of off-budget debt is an important but unsustainable achievement. The huge stock of debt—estimated at 46 to 75 per cent of GDP—remains a heavy burden on local finances that necessitates continued borrowing, both on- and off-budget, for the vast majority of localities that [End Page 29] lack the resources to repay.79 Former Finance Minister Lou Jiwei warned that the next five years will be the peak maturity period for urban investment bonds, and as many as one-quarter of the provinces will face debt-servicing costs (principal repayment and interest) exceeding 50 per cent of their revenues.80 With local finances under growing stress, defaults of local SOEs and financial vehicles may soon emerge as financial risks to the Chinese economy.
Budgetary Spending on Education, Health, Social Security and Housing
Notes: Data for social security and employment are net of expenditures on public sector pensions and those related to the armed forces (demobilisation and resettlement of soldiers, and disability and death benefits).
Sources: Author's calculations from CEIC and the Ministry of Finance final accounts, various years.
This review of three decades of China's fiscal reform has found that the leaders in each decade had achieved success in meeting their main objectives: restoring the revenue [End Page 30] mechanism and recentralising control over fiscal resources under Zhu Rongji; rebalancing government spending and building a social welfare system under Hu Jintao and Wen Jiabao; and building institutions for public financial management under Xi Jinping. A common thread that runs through all three periods is the role of revenues in shaping policies. "Do what we can"—a loose translation of you duoshao qian, ban duoshao shi—is a constant refrain that has underpinned fiscal policymaking under distinctly different leaders and distinctly different policies. The same thread is shaping the deeply conservative policies implemented through the COVID-19 crisis and recovery that have so differentiated Chinese policy responses from those pursued by other major economies.
A radical realignment of the intergovernmental relationship is therefore unlikely to happen in China in the near term. A document issued in March 2021 by the State Council calls for local governments to redouble efforts to find savings through better budgeting and mobilising idle balances, and also suggests that they look harder for fiscal resources to repay loans. Otherwise, it encourages them to negotiate with financial agencies to roll over and extend the terms of debt, liquidate assets and build legal mechanisms for debt resolution.81
Christine Wong (christine.wong@nus.edu.sg) is Visiting Research Professor at the East Asian Institute, National University of Singapore and the Bank of America Merrill Lynch Visiting Chair Professor in International Finance, Schwarzman Scholars Program at Tsinghua University. She obtained her PhD in Economics from the University of California, Berkeley. She has published widely on China's public finance, intergovernmental fiscal relations and their implications for governance, economic development and welfare.
ACKNOWLEDGEMENTS
The author thanks Bert Hofman and Sarah Y. Tong for their comments on an earlier draft. This article has benefited from the generous support of the Lincoln Institute of Land Policy at Peking University in arranging field visits and research assistance in 2018 and 2019.
Footnotes
1. David Dollar and Bert Hofman, "Intergovernmental Fiscal Reforms, Expenditure Assignment, and Governance", in Public Finance in China: Reform and Growth for a Harmonious Society, ed. Lou Jiwei and Wang Shuilin (Washington, DC: World Bank, 2008); Lou Jiwei, "Review of 40 Years of Major Fiscal and Taxation Reforms", Bijiao (Comparative Studies), 28 March 2019, at <https://mp.weixin.qq.com/s/Og-cPIsKuGFNZun1pP_uhg> [20 April 2021]; Philippe Wingender, "Intergovernmental Fiscal Reform in China", IMF (International Monetary Fund) Working Paper WP/18/88, April 2018; see references to Christine Wong below; World Bank, China: National Development and Subnational Finance, A Review of Provincial Expenditures (Washington, DC: World Bank, 2002); World Bank and Development Research Center of the State Council, the People's Republic of China, Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization (Washington, DC: World Bank, 2014).
2. For a discussion of the Tax Sharing System reform, see Christine Wong, "Central–Local Relations Revisited: The 1994 Tax-Sharing Reform and Public Expenditure Management in China", China Perspectives, no. 31 (September–October 2000): 52–63.
3. Xi Jinping, "An Explanation of the Communist Party of China Central Committee Decision on Several Major Questions about Deepening Reform" (in Chinese), Xinhua News, 15 November 2013, at <https://news.xinhuanet.com/politics/2013-11/15/c_118164294.htm> [20 April 2021].
4. Christine P.W. Wong, "Central–Local Relations in an Era of Fiscal Decline: The Paradox of Fiscal Decentralization in Post-Mao China", The China Quarterly 128 (December 1991): 691–715; Wang Shaoguang and Hu Angang, The Chinese Economy in Crisis: State Capacity and Tax Reform (Armonk, NY: M.E. Sharpe, 2001).
5. During the 1970–78 period, state enterprises accounted for nearly 90 per cent of budget revenues. See the Ministry of Finance of the People's Republic of China (PRC), Zhongguo caizheng nianjian (Financial Yearbook of China) (Beijing: China Financial and Economic Publishing House, 1988).
6. Christine Wong, "Budget Reform in China", OECD Journal on Budgeting 7, no. 1 (2007): 1–24, at <http://www.oecd-ilibrary.org/governance/budget-reform-in-china_budget-v7-art2-en> [20 April 2021].
7. Ibid.
8. This article uses the word "provinces" as a shorthand to refer to all provincial-level units, which include provinces, autonomous regions and municipalities with provincial status.
9. The tax-sharing system divides taxes into central, local and shared taxes, with the same sharing rates for all provinces irrespective of their income levels.
10. Calculated from the Ministry of Finance of the PRC, Compendium of Local Fiscal Statistics (Difang caizheng tongji ziliao), various years (Beijing: China Financial and Economic Publishing House, various years).
11. Christine Wong, "Rebuilding Government for the 21st Century: Can China Incrementally Reform the Public Sector?", The China Quarterly 200 (December 2009): 929–52.
12. This was the main conclusion of the World Bank report (2002); see World Bank, China: National Development and Subnational Finance, A Review of Provincial Expenditures. In the budget report to the National People's Congress (NPC) in March 2002, Finance Minister Xiang Huaicheng noted that 25 of the 36 provinces, regions and cities reporting directly to the Ministry of Finance had incidents of wage arrears in 2002; Xiang Huaicheng, "Report on the Implementation of the Central and Local Budgets for 2001 and on the Draft Central and Local Budgets for 2002", speech delivered at the Fifth Session of the Ninth NPC, 6 March 2002.
13. Information from the Ministry of Education of the PRC; Wang Rong, "A Study on Reform of Public Service Unit in China's Education Sector", Background paper prepared for the World Bank, May 2004.
14. Zhang Yulin, "Fenji banxue zhiduxia de jiaoyu ziyuan fenpei yu chengxiang jiaoyu chaju—guanyu jiaoyu jihui jundeng wenti de zhengzhi jingjixue tantao" (The Urban–Rural Gap in Education Resources Under Decentralised Financing …), Investigation of Chinese Villages, no. 1, 2003.
15. The Education Law of the People's Republic of China 1986.
16. World Bank, China: The Chinese Economy: Fighting Inflation, Deepening Reforms (Washington, DC: World Bank, 1996).
17. United Nations Development Programme (UNDP) China, China Human Development Report 2005: Development with Equity, October 2005.
18. Wen Jiabao, "Explanations on the CPC Suggestions on the 11th Five Year Plan on National Economic and Social Development", 8 October 2005, Xinhua News Agency, 19 October 2005 (released).
19. Achim Fock and Christine Wong, "Financing Rural Development for a Harmonious Society in China: Recent Reforms in Public Finance and Their Prospects", World Bank Policy Research Working Paper no. 4693, August 2008 (Washington, DC: The World Bank, 2008).
20. "Prefectures", as a shorthand, refer to prefectures and prefectural-level cities.
21. The reform of province-administered counties was not adopted in all provinces, and not even in provinces where it was adopted, because not all counties were placed under provincial management. The 2012 budget report to the National People's Congress (NPC) noted that 1,080 counties—approximately half of all county-level units excluding urban districts—were under the programme.
22. In this article, "reform", in a broad sense, includes large adjustments to the size and composition of budget spending.
23. Christine Wong, "Fiscal Reform: Paying for the Harmonious Society", China Economic Quarterly 14, no. 2 (2010): 22–7.
24. The term literally means the "three rurals", and refers to agriculture, rural villages and farmers.
25. Lin Wanlong and Christine Wong, "Are Beijing's Equalization Policies Reaching the Poor? An Analysis of Direct Subsidies Under the 'Three Rurals' (Sannong)", The China Journal, no. 67 (January 2012): 23–46.
26. National Bureau of Statistics, China Statistical Yearbook (Beijing: China Statistics Press, various years). Unless otherwise noted, the term "government expenditures" is used in this article to refer to general expenditure budget.
27. Chinese law has made it compulsory for children to attend nine years of schooling, i.e. through junior middle school. Under the "two exemptions and one subsidy" scheme, the government provides funding to replace the loss of school revenues from the abolition of the textbook and miscellaneous fees (the "two exemptions") and finances a subsidy for needy students boarding in schools.
28. These included the well-bred seeds subsidy to promote the adoption of improved varieties; a direct subsidy for grain production to increase returns to grain farming; a subsidy for the purchase of agricultural machinery to encourage mechanisation; a subsidy for the purchase of agricultural production inputs to offset price inflation; and a subsidy for agricultural insurance. See Lin and Wong, "Are Beijing's Equalization Policies Reaching the Poor?".
29. Lin and Wong, "Are Beijing's Equalization Policies Reaching the Poor?".
30. Yu Lei and Christine Wong, "The Dual Logic of Welfare Provision: Access to Public Housing For Migrant Workers in Chinese Cities", manuscript under review.
31. Following the conclusion of the National People's Congress in March 2007, then-Premier Wen Jiabao warned that the Chinese economy was increasingly "unbalanced, unstable, uncoordinated, and unsustainable". This quote has come to be known as the "four uns".
32. Author's calculations based on Ministry of Finance data; Ministry of Finance of the PRC, Finance Yearbook of China (Zhongguo caizheng nianjian), various years (Beijing: China Financial and Economic Publishing House, various years).
33. Compared to that in other countries, the amount of transfers in China is large relative to both GDP and total revenues. For a sample of 29 OECD countries, Blöchliger and Charbit found that transfers averaged 2.3 per cent of GDP and 4.8 per cent of total government expenditure. For China, transfers averaged 7.5 per cent of GDP and 32 per cent of total government expenditure in 2012. See Hansjörg Blöchliger and Claire Charbit, "Fiscal Equalisation", OECD Journal: Economic Studies, vol. 2008(1) (Paris: OECD Publishing, 2008), pp. 1–22.
34. Ministry of Finance of the PRC, "2010 Final Accounts", at <http://yss.mof.gov.cn/2010juesuan/201107/t20110720_578421.htm> [9 October 2021].
35. Xiao Jie, "Report to the State Council on Deepening Reform of the Transfer Payments System", 26 December 2016, Ministry of Finance of the PRC, at <http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201612/t20161226_2504987.htm> [28 December 2020].
36. These transfers include: (a) Subsidy for resolving the nine-year compulsory education debt; (b) Subsidy for resolving other compulsory education debt; (c) Subsidy for non-salary operating costs; (d) Subsidy for unsafe building maintenance and renovation; (e) Subsidy for unsafe building maintenance and renovation informed in advance; (f) Subsidy for living allowance for poor rural students in boarding schools; (g) Performance-based payment in compulsory education; (h) Teachers on special assignment, phases 1 and 2; (i) Policy-related transfer for compulsory education; (j) Nutrition improvement in rural compulsory education (stage 1); (k) Subsidy for free textbooks in rural compulsory education; and (l) Subsidy for teachers in rural compulsory education under unified recruitment and allocation.
37. World Bank, China: Public Services for Building the New Socialist Countryside, Report no. 40221-CN (Washington, DC: The World Bank, 2007). For an understanding of the history of the weakening of accountability systems by the dismantling of the planned economy and the subsequent long fiscal decline, see Wong, "Rebuilding Government for the 21st Century". To understand the weaknesses of the monitoring and evaluation systems, see Christine Wong, "Toward Building Performance-Oriented Management in China: The Critical Role of M&E and the Long Road Ahead", ECD Working Paper Series no. 27, September 2012 (Washington, DC: World Bank Independent Evaluation Group, 2012).
38. This is true even for the richest regions. In 2019, for example, Shanghai had budget revenues of RMB716.5 billion and expenditures of RMB817.9 billion, drawing on tax rebates and transfers of RMB90 billion. Guangdong province had budget expenditures of RMB609.8 billion partly financed by RMB163.2 billion in tax rebates and transfers from the central government. Provincial government websites.
39. World Bank, Reforming Subnational Finance: Lessons from Northeast China (Washington, DC: World Bank, 2006).
40. Tan Xiao and Christine Wong, "Anatomy of Intergovernmental Finance for Essential Public Health Services in China", manuscript under review.
41. Christine Wong, "Paying for Urbanization: Challenges for China's Municipal Finance in the 21st Century", in Metropolitan Government Finances in Developing Countries, ed. Roy W. Bahl, Johannes F. Linn and Deborah L. Wetzel (Cambridge, MA: Lincoln Institute for Land Policy, 2013).
42. For an early account of how the central government was kept largely in the dark on the development of local government financing vehicles (LGFVs) and the extent of local government borrowing, see Christine Wong, "The Fiscal Stimulus Program and Problems of Macroeconomic Management in China", OECD Journal on Budgeting 11, no. 3 (2011): 1–24. doi.org/10.1787/budget-11-5kg3nhljqrjl.
43. Xi, "An Explanation of the Communist Party of China Central Committee Decision on Several Major Questions about Deepening Reform" (in Chinese).
44. Han J., Gao L. and He Y., "Deep Changes that Affect the Modernization of the Nation's Governance System: Minister of Finance Lou Jiwei Explains the Overall Programme for Deepening Reform of the Fiscal System", Xinhua News, 2014.
45. National People's Congress (NPC) Standing Committee, "Decision on Revising the People's Republic of China Budget Law" (in Chinese), 31 August 2014, Beijing, at <http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201409/t20140901_1133762.html> [9 October 2021].
46. Christine Wong, "An Update on Fiscal Reform", in China's Forty Years of Reform and Development: 1978–2018, ed. Ross Garnaut, Song Ligang and Cai Fang (Canberra: ANU Press, 2018), at <http://press-files.anu.edu.au/downloads/press/n4267/pdf/ch15.pdf> [9 October 2021]; Christine Wong, "Uncovering China's Fiscal Stimulus Policies in the Budget Report", EAI Commentary no. 16, 6 July 2020, East Asian Institute, National University of Singapore.
47. The Third Plenum of the 18th Communist Party of China (CPC) Central Committee, Article 19, 12 November 2013; Xi, "An Explanation of the Communist Party of China Central Committee Decision on Several Major Questions about Deepening Reform" (in Chinese).
48. The Third Plenum of the 18th CPC Central Committee, Article 18, 12 November 2013.
49. The State Council of the PRC, "State Council Guiding Opinions on the Promotion of the Division of Central and Local Fiscal Responsibilities", Document no. 49, August 2016, at <http://www.gov.cn/zhengce/content/2016-08/24/content_5101963.htm> [22 April 2021].
50. The State Council of the PRC, "The 13th Five-Year Plan to Promote the Equalization of Basic Public Services", Document no. 9, January 2017.
51. The State Council of the PRC, "Reform Plan for the Division of Shared Expenditure Responsibilities between the Central and Local Governments in Basic Public Services", Document no. 6, February 2018, at <http://www.gov.cn/zhengce/content/2018-02/08/content_5264904.htm> [21 April 2021].
52. See, for example, "Our Country Launches the List of National Basic Public Services for the First Time", Xinhua News, 1 March 2017, at <http://www.gov.cn/xinwen/2017-03/01/content_5172329.htm> [24 April 2021].
53. The State Council of the PRC, "The 13th Five-Year Plan to Promote the Equalization of Basic Public Services", Document no. 9, January 2017, Appendix 1, at <http://www.gov.cn/zhengce/content/2017-03/01/content_5172013.htm> [28 June 2021].
54. Calculated from the National Bureau of Statistics and 2021 Budget Report to the NPC.
55. Lin and Wong, "Are Beijing's Equalization Policies Reaching the Poor?".
56. Ministry of Education of the PRC, "Opinions on Expanding the Scope of the Tuition Exemption Policy for Secondary Vocational Education and Further Improving the National Bursary System", at <http://www.moe.gov.cn/jyb_xxgk/moe_1777/moe_1779/201210/t20121030_143848.html> [25 April 2021].
57. "Notice on Raising the 2014 New Rural Cooperative Medical System and Urban Resident Basic Medical Insurance Funding Standards" (Guanyu tigao 2014 nian xinxing nongcun hezuo yiliao he chengzhen jumin jiben yiliao baoxian chouzi biaozhun di tongzhi), Ministry of Finance, National Health and Family Planning Commission and Ministry of Human Resources and Social Security Document 14 (2014), issued 25 April 2014, at <http://sbs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201405/t20140527_1084649.html> [22 May 2021].
58. The amount of transfers for the 18 subtasks cannot be calculated exactly with current available information. The categories are broader in the transfers classification, so that the 18 subtasks fit under 12 transfers categories but are not always the whole category. See Ministry of Finance of the PRC, "Transfer Payments in General Public Budget from Central Government to Local Governments", at <http://yss.mof.gov.cn/2019qgczjs/202007/t20200706_3544608.htm> [1 August 2020].
59. Calculated from the Ministry of Finance final accounts. The main reason for the low share is that salary payments are not included in this category of transfers.
60. Apart from tax rebates, which are excluded from net transfers, only the equalisation transfer (approximately 25 per cent of net transfers), has a dedicated revenue source—the corporate income tax receipts of the central government. All other transfers are at the discretion of the central government.
61. Zhang Jing, "Lou Jiwei Outlines Direction of Tax Reform and the Slight Change in Central–Local Fiscal Relations", Yicai Daily, 26 July 2013, at <http://www.yicai.com/news/2013/07/2890331.html> [10 April 2020].
62. These include reduced tax rates for agriculture and construction at 10 per cent and 13 per cent, respectively.
63. See State Taxation Administration of the PRC, "Financial Director of a State Enterprise Shares the Impacts of the Tax and Fee Reductions", at <http://www.chinatax.gov.cn/chinatax/n4016721/c5140976/content.html> [12 April 2021].
64. Receipts of personal income tax were expected to fall by more than 25 per cent in 2019. See <https://m.chinanews.com/wap/detail/zw/cj/2020/02-10/9086173.shtml> [13 April 2021].
65. See Ministry of Finance of the PRC, "How to Accelerate the Establishment of the Modern Fiscal and Tax System in the '14th Five-Year Plan'? An Authoritative Interpretation from the Ministry of Finance", 8 April 2021, at <http://www.mof.gov.cn/zhengwuxinxi/caijingshidian/xinhuanet/202104/t20210408_3682731.htm> [9 April 2021].
66. Officials in a county in Hunan estimated that the 2019 tax and fee cuts would reduce county revenues by 13.5 per cent, compared to an expected reduction of 10 per cent at the national level and 11 per cent at the provincial level; see Cheng Siwei, "What to Do to Make Ends Meet? Local Governments Find Their Own Way Out", 2019, at <http://weekly.caixin.com/2019-07-27/101444418.html> [12 April 2020].
67. Huang Lina, "Guangdong Provincial Audit Department: 4,138 Public Rental Houses in a City Have Been Vacant for Over One Year", Yangcheng Evening News, 26 July 2016, at <http://www.chinanews.com/gn/2016/07-26/7952050.shtml> [31 July 2016].
68. See, for example, Auditor-General Hu Zejun's report to the NPC Standing Committee on the rectification of problems identified in the 2017 central budget implementation, 24 December 2018, at <http://www.gov.cn/xinwen/2018-12/24/content_5351524.htm> [2 November 2019].
69. Based on estimates by the Ministry of Finance, even after shutting down 74,000 fiscal special accounts, more than 150,000 remained in 2014. See <http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201410/t20141008_1146864.html> [4 September 2018].
70. "With nearly 60 per cent of the Counties in Financial Difficulties, will the Real Estate Tax Be a 'Life-Saving Straw'?" (Jin liucheng xianji caizheng kunnan, fangdichanshui cheng 'u jiuming daocao'?), Sohu, 14 June 2019, at <http://www.sohu.com/a/320355843_827756> [3 September 2019].
71. See "Outlook: County Treasury Accounts on Red Alert, Grassroots Finance Cadres Face Problem Dealing With It", at <https://news.sina.com.cn/c/2020-05-02/doc-iircuyvi0946886.shtml> [11 May 2020].
72. Christine Wong and Qian Jiwei, "COVID-19 Highlights Need to Strengthen China's Social Safety Net (II): The Social Assistance Programmes", EAI Background Brief no. 1573, 24 December 2020, East Asian Institute, National University of Singapore.
73. Official statements began calling on provinces to ensure that more fiscal resources are assigned to the lower levels. See, for example, Finance Minister Liu Kun's report on the 2018 final accounts, at <http://www.mof.gov.cn/zhengwuxinxi/caizhengxinwen/201906/t20190627_3286107.htm> [7 July 2019]. In 2020 emphasis was shifted to prioritising the "three guarantees".
74. The four budgets are the general budget, government fund budget, state capital operating budget (SCOB) and the social security fund (SSF) budget. Since 2015, a number of government funds (GFs) have been abolished and their revenue streams moved into the general budget; also, sunset clauses have been placed on balances in the remaining funds, with "expired" balances swept into the budget; and the share of the SCOB remitted to the general budget has been incrementally raised to 30 per cent by 2020. Despite these changes, RMB3 trillion, equivalent to 35 per cent of the combined revenues of the GF and SCOB, were moved into the budget in 2020 to finance the deficit spending for the stimulus programme. In addition, the stimulus measures offered waivers of social security contributions that cut revenues to the social security fund by about RMB1.7 trillion; see Christine Wong, "China's Post-Covid Goldilocks Budget—How Big Should It Be?", EAI Commentary no. 27, 18 March 2021, East Asian Institute, National University of Singapore.
75. This is one of the tools the Ministry of Finance uses to ensure local governments have sufficient funds to meet payroll expenses. See, for example, "Outlook: County Treasury Accounts on Red Alert, Grassroots Finance Cadres Face Problem Dealing With It"", Liaowang Weekly (Outlook), at <https://news.sina.com.cn/c/2020-05-02/doc-iircuyvi0946886.shtml> [11 May 2020].
76. Sun Binbin and Tan Yiming, "How to Resolve Hidden Debts and What is the Progress?", Tianfeng Research, 4 September 2020, at <https://zhuanlan.zhihu.com/p/215419428> [4 January 2021]; He Wei, "The Next Steps on Hidden Local Debt", GaveKal Dragonomics, 16 February 2021.
77. Wong and Qian, "COVID-19 Highlights Need to Strengthen China's Social Safety Net (II)"; Christine Wong and Qian Jiwei, "COVID-19 Highlights Need to Strengthen China's Social Safety Net (I): The Unemployment Insurance Scheme", EAI Background Brief no. 1572, 24 December 2020, East Asian Institute, National University of Singapore.
78. World Bank, China: National Development and Subnational Finance, A Review of Provincial Expenditures.
79. Estimates of hidden debt ranged from 21 to 50 per cent of GDP; see Wang Dehua and Liu Lipin, "Local Hidden Debt and Risk Resolution", Zhongguo jinrong (China Finance), no. 22, 2019, at <http://ipft.ruc.edu.cn/xzgd/128f7aed4ccd49d7928e4b288252ecc0.htm> [7 June 2021]; International Monetary Fund, "People's Republic of China: 2020 Article IV Consultation Staff Report", 8 January 2021, at <https://www.imf.org/en/Publications/CR/Issues/2021/01/06/Peoples-Republic-of-China-2020-Article-IVConsultation-Press-Release-Staff-Report-and-49992> [5 June 2021]. The official debt was RMB25.7 trillion at end-2020 or 25.2 per cent of GDP. Ministry of Finance of the PRC, "General Debt Balances of Local Governments for 2020 and 2021", 23 March 2021, at <http://yss.mof.gov.cn/2021zyys/202103/t20210323_3674864.htm> [9 June 21].
80. Lou Jiwei, "Fiscal Reform and Development Towards 2035", speech delivered at the Fifth Forum on Finance and National Governance and the 40th Anniversary Seminar of the Journal Fiscal Research, 22 December 2020, at <https://finance.sina.com.cn/china/gncj/2021-02-09/doc-ikftssap5019447.shtml> [3 March 2021].
81. The State Council of the PRC, "Opinions of the State Council on Further Deepening the Reform of the Budget Management System", Document no. 5, 7 March 2021, at <http://www.gov.cn/zhengce/content/2021-04/13/content_5599346.htm> [14 April 2021].
