China's fiscal system will adapt as economy transforms

Subject

Fiscal reform in China.

Significance

President Xi Jinping's administration has conducted a gradual but sweeping reform of China's fiscal system. It has rationalised centre-local fiscal dynamics, strengthened fiscal regulation, cracked down on risky local government borrowing and introduced green taxes. It has granted companies significant tax cuts and has pledged even more.

Impacts

• Debates about fairness will delay reform of personal income tax.
• Despite institutional reforms, consequential rebalancing of central-local fiscal relationships is unlikely in the medium term.
• Local government debt will grow, but in the less risky form of bonds rather than bank loans to 'financing vehicles'.