Chinese Central-provincial Fiscal Relationships, Budgetary Decline and the Impact of the 1994 Fiscal Reform: An Evaluation

The Chinese central-provincial fiscal relationship of the reform era has been at the centre of academic attention in the last few years. It is rapidly becoming one of the most researched areas regarding China. Despite numerous publications, however, there are still some crucial issues that have not been sufficiently elucidated. First, the emphasis of discussions so far has been on formal budgetary relations, particularly the distributive pattern of revenue collection. In reality, the scope and impact of the Chinese budget are very much smaller than those elsewhere and the pattern of revenue collection is only one aspect of the multi-faceted central-provincial fiscal relationship. An appreciation of these aspects and their implications requires a better understanding of the full range of arenas in which the Chinese central government interacts with the provinces over public finance than is currently available. Secondly, it is generally accepted that the Chinese central-provincial fiscal relationship has been decentralized during the reform era, and that this change has underpinned the growing strength of the provinces and the decline in central power. However, the change in the relationship is actually more complex than one-dimensional decentralization would suggest, and the link between fiscal decentralization and political decentralization is less straightforward from a comparative perspective. Thirdly, it is widely accepted that there has been a fiscal decline in China and that the revenue-sharing system – implemented up to 1993 – was the cause of this decline. From this understanding, erroneous conclusions have been drawn. On the one hand, some scholars suggest that this decline signifies a limit on the Chinese state in its relation to the economy, and it is this factor that has underpinned the success of the Chinese economy during the reform. On the other, this decline is considered to epitomize the emergence of a “weak centre, strong localities” situation in China that may eventually lead to the disintegration of the Chinese political system. But it is far from established that there has indeed been a fiscal decline in the true sense of the term. The same can be said on the question of this decline, if it exists, representing the limiting of the Chinese state in relation to the economy or the decline of the central power relative to that of the provinces. Fourthly, in 1994 the Chinese government launched important reforms to the central-provincial fiscal relationship, aiming to replace the previous revenue-sharing system with a tax-sharing system (TSS, or fenshuizhi ), and ultimately to stem so-called fiscal decline. Despite earlier reported problems, recent official reports have claimed substantial success of this reform in terms of improvement in the so-called “two ratios” – the ratio of budgetary revenue to GDP, and the ratio of central budgetary revenue to total budgetary revenue. What do these two ratios signify? How should we interpret such success? Does the success on the one hand confirm the allegation that the revenue-sharing system was the cause of the Chinese fiscal decline? And does it on the other hand indicate a strengthening in the centre's power relative to the provinces'?