Fiscal Decentralization in China Revisited

Inter-governmental fiscal relations are crucial to understanding government behavior and policy instruments. Chinese style fiscal federalism with the absence of division of political power is regarded as central to understanding China's economic growth and governance. However, there is much debate about how exactly to measure China's fiscal decentralization. This paper develops a comprehensive framework to measure the level of Chinese fiscal decentralization across the tiers of government in the past two decades. This study finds that China is decentralized at both provincial and sub-provincial levels as a whole (the local level), but not at the xianqu level (the lowest levels of counties/districts and townships). There has been a slight decrease in fiscal independence at the provincial level, but it has been increasing at both local and xianqu levels, contributing to more accountable sub-national governments. However, the author argues for a stronger monitoring and evaluating capacity at the central level in order to build a performance-based fiscal decentralization system. A more transparent and rule-based fiscal transfer system should also be established to reduce regional disparity in China.