Public finance matters. It matters for sustained economic growth. It matters for economic stability. It matters for the distribution of income and wealth. It matters for the delivery of such basic services as education and health. It matters for political stability. These statements are as true in China as in any country. What differentiates China from other countries is not that its development is magically unrelated to what its public sector does and how it is financed but rather that the key to its public finance system lies in intergovernmental fiscal relations.

Unless China begins to tackle more systematically the serious problems that have emerged in the finances of its various levels of subnational government, the problems to which the present unsatisfactory system give rise will over time increasingly distort resource allocation, increase distributional tensions, and in all likelihood slow down the impressive recent growth of the Chinese economy. These statements may seem strong but as we show in this chapter, the evidence on hand – although far from fully satisfactory, given the lack of solid and reliable information on the size and nature of China's real fiscal system – is consistent with this pessimistic reading. China's fiscal and – in time – economic future rests, to a greater extent than generally seems to be understood, on the success achieved in strengthening and extending recent ad hoc reforms to key aspects of its fiscal system within a more consistent and purposive framework.