China’s central-local fiscal structure is effective in driving sustainable growth
China's local government debt periodically makes headlines in Western media outlets. Some Western commentators criticize the so-called "problematic balance" in China's central-local fiscal relationship, claiming it adds to the challenges facing the Chinese economy. Such voices are absurd and completely run counter to China's economic reality.
The fiscal relationship between China's central and local governments consists of three main parts. The first is the division of fiscal revenues. The second is the division of expenditure responsibilities. The third is the transfer payment system, under which higher-level governments allocate funds to lower-level governments, with the aim of addressing regional fiscal imbalances and realizing inter-regional equalization of basic public services.
Some Western analysts claim that the central government specifies the services that local governments must provide, yet declines to hand over the revenue sources that fund them. Such analysts criticize the so-called mismatch between revenue and expenditure, which they claim makes the local government debt problem worse.
That sounds absurd since those analysts ignore a fact: transfer payments are an important part of China's fiscal system, serving as an important means for the government to realize the equalization of public services. It would be imprudent to analyze the fiscal relationship between the central and local governments without taking transfer payments into account.
Transfer payments from the central government to local governments rose from 4.5 trillion yuan ($631.6 billion) in 2012 to 10.2 trillion yuan in 2024, vigorously promoting regional coordinated development and the equalization of basic public services, the Xinhua News Agency reported, citing official data.
China has done a lot to sort out the central-local fiscal relationship, and such efforts will continue. Chinese officials have made it clear that the country will deepen reform of the fiscal and tax systems, accelerate the building of a fiscal system compatible with Chinese modernization, and establish a fiscal relationship between the central and local governments that features a clear division of responsibilities, coordinated financial resources and regional balance.
China's economy has shifted toward high-quality development, and the country is now at a critical period of transforming its economic development model. As China's economic transition continues, it is necessary to continue to improve the central-local fiscal relationship, optimizing the fiscal structure to meet the needs of high-quality development. This is just a normal part of economic progress.
Some Western observers claim it is difficult to solve the local government debt problem, because the issue has its roots in China's system of revenue sharing between the central and local governments. Those accusations are groundless and untenable.
China's local government debt risk is controllable, and the country's overall debt level is still significantly lower than that of many other economies.
However, some Western media outlets are keen to hype the local government debt problem in China. They choose to neglect the facts as well as the efforts of the Chinese central government and local governments in resolving debt. For instance, the Chinese central government has stepped up the regulation of hidden local government debt to prevent and resolve financial risks. China is capable of ensuring financial stability and preventing systemic risk.
Last but not least, China's economic and financial stability provides the best condition for facilitating the reform of its fiscal and tax systems. Officials have said that the reform will focus on three areas: enhancing the budget system, refining the tax system, and improving the fiscal relationship between the central and local governments, according to Xinhua.
Official figures showed the country's fiscal revenue nearly doubled from 11.7 trillion yuan in 2012 to 21.7 trillion yuan in 2023. China's fiscal strength leaves substantial room to further reform its fiscal and tax systems and optimize its fiscal structure.