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Introduction
With China’s transition from a highly centralized system to a quasi-federal state, the
power relationship between the Chinese central and local governments has undergone substantial
changes. The distribution of fiscal recourses between the central and local governments is an
essential dimension of this relationship, as the abundance or shortage of fiscal resources directly
or indirectly influences their bargaining power against each other. Throughout the 1980s till the
early 1990s, fiscal resources were divided between the center and provinces according to
individually negotiated and signed fiscal contracts in an unsystematic way. However, after the
1994 Tax Reform, the central-local revenue-sharing scheme was more institutionalized and a
fiscal transfer system was established as a formal and important channel of redistributing fiscal
revenues. An examination of China’s central-provincial fiscal transfers after 1994 shows a
pattern of wild cross-regional variations: some provinces submitted huge amounts of revenue to
the center; while other provinces received considerable central subsidies. Some provinces saw
relatively stable fiscal flows with the center, while other provinces experienced more
fluctuations. The logic questions that follow are: why were there such variations? What factors
determined the pattern?
Two schools of theories stand out as prevailing explanations of central-local fiscal
transfers: The need-based theory argues that fiscal resources should flow to where they are
mostly needed. This argument emphasizes on the equalization function of central-local transfers:
The central state, by transferring funds from rich to poor regions, can address the problem of
spatial inequality. Differing from this normative argument, the pressure-based theory takes on
the political interplay between the central and local states. It argues that localities can impose
political pressure on the center, either through constituent support (or the withdrawal of it) or by
centrifugal tendencies. In the distribution of fiscal resources, the central state tends to favor those
localities with strong political bargaining powers.
In this paper, I test these arguments against the empirical data on China’s central-local
fiscal transfers in the post-reform era. Through a longitudinal and cross-regional data analysis I
find that both theories fall short of telling the whole story about central-local fiscal transfers in
China. They only look at the exogenous influences on the central government’s decision
regarding fiscal transfers. An alternative explanation highlights the central government’s cost-
benefit calculations. My statistical analysis suggests that the Chinese central government tended
to make larger fiscal transfers to localities that used their revenues more efficiently and achieved
higher economic development level. In this way, fiscal transfer essentially functioned as an
investment: By transferring more fiscal revenues to localities where they were efficiently used to
yield high returns, the center could harvest more fiscal revenue in the future.
My study spans from 1995 to 2002. The data used in this paper come from a number of
statistical yearbooks published in China, including Statistical Yearbook of China (Zhongguo
Tongji Nianjian),
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Finance Year Book of China (Zhongguo Caizheng Nianjian), Local Fiscal
Statistics (Difang Caizheng Tongji Ziliao), China Population Statistics Yearbook (Zhongguo
Renkou Tongji Nianjian), and China Labor Statistical Yearbook (Zhongguo Laodong Tongji
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I also thank Cindy Fan for sharing with me her data collection from Statistical Yearbook of China,
which provides me with some crucial statistics.
Convention