Local Public Finance Management in the People's Republic of China: Challenges and Opportunities

By Asian Development Bank

The People's Republic of China is a highly decentralized unitary state with local governments having a dominant share of public service delivery responsibility. Local governance is critically linked to a local public finance system that creates incentives and accountability mechanisms. To ensure the policy response, this project focused on the three interrelated areas in local public finance management, i.e., local budgeting, local debt management and local taxation, and produced policy options in the short, medium and long terms. The overall purpose of the reforms is to improve local accountability and transparency, strengthen local fiscal capacity, and institutionalize formal frameworks for local public debt management.

• Language: English
• Publisher: Asian Development Bank
• Release date: Jul 1, 2014
• ISBN: 9789292545673

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LOCAL PUBLIC FINANCE MANAGEMENT IN THE PEOPLE’S REPUBLIC OF CHINA

CHALLENGES AND OPPORTUNITIES

© 2014 Asian Development Bank

All rights reserved. Published in 2014.

Printed in the Philippines.

ISBN 978-92-9254-566-6 (Print), 978-92-9254-567-3 (PDF)

Publication Stock No. RPT146570-2

Cataloging-in-Publication Data.

Asian Development Bank.

Local public finance management in the People’s Republic of China: Challenges and opportunities.

Mandaluyong City, Philippines: Asian Development Bank, 2014.

1. Fiscal administration.  2. Tax reforms.  3. Public finance.  4. Local finance.  I. Asian Development Bank.

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Contents

Tables, Figures, and Boxes

Foreword

The People’s Republic of China (PRC) has a long history of recognizing good local governance as a catalyst for economic growth and to improve local economies and social outcomes. Local governments in PRC have had a stellar record of delivering growth and reducing poverty. These achievements, however, came at the lack of attention to fiscal transparency in budgeting; fiscal responsibility in borrowing; and underprovision of public goods such as environmental protection, orderly urban growth, and social inclusion.

This report grew out of an Asian Development Bank (ADB)-financed technical assistance project to ensure an adequate policy response to local public finance management and to achieve medium-term fiscal reforms in PRC. It analyzes the bottlenecks in local public finance management by focusing on local budgeting, debt management and taxation, and suggestions for policy options.

Local budgeting, debt management, and taxation have important bearings on local public finance management. Linking local budgeting with fiscal planning and medium-term priorities is key for accountability, whereas comprehensiveness in budgeting and its execution is vital for transparency. Strengthening local fiscal capacity is also necessary to balance spending powers with expenditure responsibility. To meet local investment needs with fiscal discipline, local borrowing needs to be formalized by institutionalizing ex-ante and ex-post regulatory frameworks.

ADB will continue to support the government’s initiatives since it believes that the adaption of the policy options proposed will ensure effective local public finance management for the continued inclusive growth of PRC, overcoming fiscal risks. Also, ADB is pleased to have contributed to PRC’s efforts in strengthening the fiscal management capacity of its local governments. Through this report, ADB hopes to contribute to a better understanding of the current reform status and an agenda for future reform options in local public finance management and their impacts on the economy.

Ayumi Konishi

Director General

East Asia Department

Asian Development Bank

Foreword

The reform of fiscal and taxation systems is one of the key priorities in the People’s Republic of China (PRC). Over the past 30 years, the PRC has taken incremental reform in fiscal and taxation systems to adapt to its economic development. It has significantly contributed to the economic growth and accumulated valuable experience for the subsequent reform in fiscal and taxation systems in the PRC.

After 30 years of rapid economic growth, the PRC now faces challenges in economic transformation and sustainable development. To address the challenge, the PRC needs to make continued efforts to further improve its fiscal and taxation systems, while drawing upon international experience and building on its own successful practice in the past. The fiscal and taxation systems