Ni Hongri

In a strictly narrow sense, China’s inter-governmental financial transfer payment system was established in 1994 when the tax-sharing system was introduced. Therefore, the history of this financial transfer payment system is not long. Although the inter-governmental financial system before 1994 also embodied subsidies from higher governments to lower ones, that system was not an internationally accepted transfer payment system in its strictest sense.

I. The Establishment and Status of China’s Inter-Governmental Financial Transfer Payment System

1． The features and results of the 1994 tax-sharing reform

The 1994 tax-sharing reform laid a basic framework for the formation of the inter-governmental financial relations that conform to the socialist market economy. As it was difficult to change the original pattern of interests of the local governments, the 1994 reform failed to adjust the base figures of the financial outlays of various regions and to establish a scientific and standard inter-governmental financial transfer payment system. Instead, the reform adopted the principle of "keeping the stock intact and adjusting the increment". The aim was to gradually expand the increment controlled by central finance through a progressive reform and use the increment for inter-local redistribution of financial resources designed to balance the levels of public services. By so doing, a scientific and standard financial transfer payment system will be established. This progressive reform has yielded some results. The main methods and results are as follows.

(1) Various measures were adopted to gradually expand the increment of the financial revenue of the central government and as a result the proportion of the central financial revenue in the country’s total rose year after year.

An important condition for introducing a progressive reform of inter-governmental financial transfer payment is to constantly expand the increment of the central financial revenue. The expansion of this increment was relatively slow from 1994 to 1997. From 1998 on, the growth of central financial revenue outpaced that of local financial revenue in most cases. As a result the increase of the central financial increment was visibly higher. As a relative indicator to reflect the growth of the central financial strength, the proportion of the central financial revenue in the country’s total went up year after year, and so did the refund and subsidies of central finance to the local finance (including tax refund, special subsidies and general transfer payments) (see Table 1 for details).

In 1995, the Minister of Finance began to formulate and implement the regulations on transfer payments for the transitional period. This document was worked out by drawing on foreign experiences and giving full consideration to China’s national conditions. The transfer payment system for the transitional period was made up of two parts: the general transfer payments and the transfer payments based on preferential treatment for ethnic groups. The former was set up on the basis of the standard spending, financial resources and revenue shortfall and calculated on the general transfer payment coefficient. The latter was a transfer payment allowance in addition to the general transfer payment. After 1996, the Ministry of Finance made some amendments and additions to improve this transfer payment system for the transitional period. In 2002, this transitional transfer payment system changed into the general transfer payment. The basic method was that the standard financial revenue and expending of various regions were worked out by drawing on international experiences, in accordance with the principle of standards and fairness and on the basis of objective factors, and then were taken as the basis for financial transfer payments. The amount of general transfer payments increased annually, from 2.1 billion yuan in 1995 to 27.9 billion yuan in 2002.

In addition, central finance arranged special transfer payments to some local governments in order to support the adjustment of wage policy, the reform of the rural tax system, the implementation of the western development strategy and the protection of the ecosystem. Along with the general transfer payment, these transfer payments are called the financial resource transfer payment to local finance, which is generally called equilibrium transfer payment in the world. The total amount of this transfer payment was 134 billion yuan in 2002.

In order to support the implementation of the central macro policies, a special transfer payment was established exclusively for local infrastructure construction, the protection of natural forests and compulsory education in poor regions. The size of these transfer payments rose from 36 billion yuan in 1993 to 240 billion yuan in 2002.

3. Adjust and improve the financial management system below the provincial level

After the 1994 tax-sharing reform, the financial management system below the provincial level was mainly set by the provincial government in keeping with the requirements of the tax-sharing financial management system and local conditions. In recent years, the financial difficulties of the grass-roots governments at the county and township levels have become acute. In view of this, the State Council relayed in 2002 a Ministry of Finance document, entitled "Opinions on Improving the Financial Management System below the Provincial Level". The document requested all local governments to adjust and improve the financial management system below the provincial level in conjunction with the tax-sharing reform. Overall, the imbalance of intra-regional financial resource distribution was eased somewhat after the adjustment.

The integrated result of all the above measures is that both the size and intensity of the transfer payment from central finance designed to achieve horizontal inter-regional balance of public services have been gradually increased and that an embryonic form of a scientific and standard inter-governmental transfer payment system that conforms to China’s national conditions has taken shape and has been expanded and improved step by step.

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