1. See Donnithorne, Audrey, “Centre-Provincial Economic Relations in China,” Contemporary China Papers, No. 16 (Canberra: Contemporary China Centre, Australian National University, 1981)Google Scholar; Hsiao, Katherine Huang, The Government Budget and Fiscal Policy in Mainland China (Taipei: Chung-Hua Institution for Economic Research, 1987)Google Scholar; Lardy, Nicholas, “Centralization and decentralization in China's fiscal management,” The China Quarterly, No. 61 (03 1975), pp. 26–60CrossRefGoogle Scholar, and Economic Growth and Distribution in China (Cambridge: Cambridge University Press, 1978)Google Scholar; and Oksenberg, Michel and Tong, James, “The evolution of central-provincial fiscal relations in China, 1971–1984: the formal system,” The China Quarterly, No. 125 (03 1991), pp. 1–32CrossRefGoogle Scholar.

2. Unless otherwise noted, fiscal data used in this article are from the Ministry of Finance, General Planning Office, Zhongguo Caizheng Tongji, 1950–1988 (Chinese Financial Statistics) (Beijing: Chinese Finance and Economics Press, 1989)Google Scholar (hereafter abbreviated as CFS). Because Chinese budgetary accounting employs some nonstandard practices, I have substantially reworked the data reported in CFS to make them conform to international convention. These adjustments are presented and explained in the Appendix. The consolidated budget consists of the sum total for all levels of government, from the central government down to township governments.

3. This is true for all levels of government below the central level, though the extent probably varies. To disaggregate and examine the impact of reform on each level of government is an important part of the larger study I am conducting. For this article, however, I will use the term “local government” to refer primarily to the provincial level.

4. The view that fiscal decentralization had transferred more resources to local governments is ubiquitous in Chinese writings. For examples of a similar western interpretation, see Oksenberg, and Tong, , “Central-provisional fiscal relations,” and The World Bank, China: Macroeconomic Stability and Industrial Growth under Decentralized Socialism (Washington, D.C.: The World Bank, 1990)Google Scholar.

5. In computer programming parlance, the distinction would be to call it a “bug” rather than a “feature.”

6. Zhongguo Tongji Zhaiyao 1991, pp. 7, 34.

7. See Wanless, P.T., Taxation in Centrally Planned Economies (New York: St Martin Press, 1985)Google Scholar.

8. The share of agricultural tax in total tax revenues fell from 6.9% during the 1970s to 3.0% during 1979–88 (CFS, pp. 38–39).

9. According to the 1985 industrial census, between 1980 and 1985 the total rate of return to capital (profits plus taxes divided by fixed assets) in large and medium enterprises fell from 25.7 to 23.1% for all industry, but from 64.0 to 38.8% for light industry, and from 76.3 to 43.6% in light industry based on agricultural inputs (State Statistical Bureau, Zhonghua Renmin Gongheguo Yijiubawunian Gongye Pucha Ziliao (Data from the People's Republic of China's 1985 Industrial Census), No. 1 (1988), pp. 548–559)Google Scholar. Since 1985, declines in profit rates have been even steeper. Data on state-owned independent accounting enterprises show total return on fixed assets falling from 24.3% in 1980 to 22.4% in 1985, to 17.5% in 1989 (Chinese Industrial Statistics (1986), p. 271, and Chinese Statistical Yearbooks, passim).

10. While all relative price shifts represent income transfers out of industry into other sectors, not all are lost to the budget. For example, levying interest charges on capital shifts money from industry to the banking sector, which is also state-owned. Similarly, raising energy prices transfers profits from industry to the extractive sector, which is also partly state-owned. It is not possible at this point to estimate the portion so “retrieved.” The general point here is that these changes have eroded industry's revenue-producing capability.

11. Since the 55% income tax and the variable adjustment tax were designed to shift profit-remittances to taxes, these two new taxes capture the profits that would have been remitted as enterprise incomes. As a result of this change, budgetary revenues from “enterprise incomes” have fallen from over 50% of total revenues to less than 2% in 1988 (CFS, p. 19).

12. Data from the 1985 Industrial Census, p. 380.

13. Bingqian, Wang, “Report on the implementation of the 1989 state budget,” Caizheng, No. 10 (1989), pp. 33–36Google Scholar.

14. Barry Naughton, “Macroeconomic obstacles to reform in China: the role of fiscal and monetary policy,” mimeo, forthcoming.

15. Bingqian, Wang, “Report on the implementation of the 1989 state budget and the 1990 draft budget, at the Third Plenary Session of the Seventh National People's Congress, 21 March 1990,” Renmirt ribao, 8 04 1990Google Scholar. Unfortunately, his “Report” on the 1990 budget and 1991 draft budget did not offer the same level of detail on the central-local breakdown (RMRB, 12 April 1991, pp. 3–4).

16. In Chinese writings, estimates of the local share of the budget vary from 60% to over 70%. Much confusion is caused by writers who do not specify whether they are referring to revenue or expenditure shares. It is also often unclear whether these figures are net of transfers.

17. According to unadjusted data from CFS (pp. 58 and 96), in 1981 local governments collected 86.47 billion yuan in revenues and spent 51.28 billion. The gap of 35.2 billion is assumed to be the upper limit for remittance to the central level, equal to 40.7% of collected revenues.

18. CFS, p. 96.

19. Unadjusted figures, CFS, p. 97.

20. Some “central” revenues are directly collected by central agents who are stationed in the centrally-owned enterprises.

21. This is a highly simplified description of the system applied to the majority of provinces. The exceptions were the three municipalities of Shanghai, Tianjin and Beijing, where revenue-sharing was applied to all revenues, not just the adjustment incomes. At the other extreme, the two coastal provinces of Guangdong and Fujian paid a lump sum to the central government each year, and their revenues were otherwise not subject to sharing. For more details, see Wong, Christine P.W., “Fiscal reform and local industrialization: the problematic sequencing of reform in post-Mao China,” Modern China, Vol. 18, No. 2 (04 1992)CrossRefGoogle Scholar; and Oksenberg and Tong, “Central-provincial fiscal relations.”

22. Reported by Shirk, Susan in “Playing to the provinces: Deng Xiaoping's political strategy of economic reform,” paper presented at the Annual Meeting of the American Political Science Association, San Francisco, 09 1990, p. 17Google Scholar.

23. For details of the myriad changes in central-local fiscal interactions, see Ministry of Finance, Caishui Gaige Shinian (Beijing, 1988)Google Scholar; and Oksenberg and Tong, “Central-provincial fiscal relations.”

24. Even after the 1983–84 tax-for-profit reform shifted profit remittances to direct taxes, local governments continue to treat revenues from direct taxes differently from revenues from indirect taxes. In some localities, direct tax revenues go to fiscal departments, while indirect tax revenues go to the newly-established tax bureaus (The World Bank, Revenue Mobilization, Annex 2). For a more detailed discussion of changes in fiscal regimes and how they affected central-local revenue divisions, see Wong, “Fiscal reform and local industrialization.”

25. CFS, pp. 72–73.

26. During 1950–83, “economic construction” accounted for 56.2% of total budgetary expenditures. Caizheng Gongzuo Sanshiwunian (Thirty-five Years of Work in Finance) (Beijing: Chinese Finance and Economics Press, 1984), p. 99Google Scholar.

27. Lardy, Nicholas R., Economic Growth and Distribution in China (Cambridge: Cambridge University Press, 1978)CrossRefGoogle Scholar, ch. 2; and Hua, Xing, “Frequent changes in the fiscal system during the ten years of chaos,” Caizheng, No. 9 (1983), p. 8Google Scholar.

28. Wang Bingqian, “Report,” 1990. These respective shares are remarkably similar to those during the 1950s (see Lardy, “Economic Growth,” table 2.4).

29. National defence cutbacks are also consistent with the reform programme, since they reflect the same world view that made possible the reform programme and the “open door” policy in the first place.

30. This information is based on Rulong, Chen, Contemporary Chinese Finance (Dangdai zhongguo caizheng) (Beijing: Chinese Academy of Social Sciences Press, 1988), No. 1, pp. 64–71, 74–80Google Scholar; and Naughton, “Macroeconomic obstacles to reform.” Some additional information is available in Lardy, Nicholas R., “China's interprovincial grain marketing and import demand,” (U.S. Department of Agriculture, Economic Research Service, Staff Report No. AGES 9059)Google Scholar.

31. For example, many cities provide subsidized grain to city-run pig and poultry farms to help hold down the price of urban meat supplies.

32. Caizheng, No. 2 (1990), p. 12Google Scholar.

33. Heli, Hu, “Estimating rents in our prices in 1988,” Bijiao, No. 5 (1989), p. 11Google Scholar.

34. According to a report from Jilin Province, these losses were transferred to local budgets in 1971. Under the pre-reform budgetary process, however, they did not necessarily affect local expenditures, since the linkage between local revenues and expenditures was weak. In the post-reform system, where self-financing is held to a greater extent, their burden on local expenditure and consumption has increased. Jilin Shengqing (1987), p. 448.

35. By Chinese accounting, virtually all of the losses associated with urban food supplies accrue to the commercial sector. In 1986 and 1987, industries losses were only 17.4 and 17.6% of total enterprise losses. Weizhong, Fang and Jiajun, Wu (eds.), Gongye Qiye Kuisun Diaocha Yanjiu (An Investigation of Industrial Enterprise Losses) (Beijing: Economic Management Press, 1989), p. 15Google Scholar. Even with the rapid growth of losses in coal-mining and crude oil extraction, loss subsidies for food supply probably still account for over three-quarters of the total.

36. Guangxi Nianjian (1986), pp. 458–59.

37. Sichuan Jingji Nianjian (1986), p. 132.

38. Ministry of Finance, Caishui Gaige Shinian, p. 206Google Scholar.

39. Hong Yung Lee has called the campaign to reduce the bureaucracy a “failure” at the provincial level and below (Lee, Hong Yung, “China's new bureaucracy?” Paper presented at the conference “State and Society in China: the Consequences of Reform, 1978–1990,” Claremont McKenna College, 16–1702 1990)Google Scholar.

40. Rulong, Chen, Contemporary Chinese Finance, pp. 376–77Google Scholar.

41. Bingqian, Wang, “Maintain budgetary balance to serve economic development and system reform,” Caizheng Yanjiu, No. 9 (1986), pp. 1–6Google Scholar, reprinted in Caizheng Jinrong, Vol. 12 (1986).

42. Zhongguo Jingji Nianjian (1989), p. 111–3.

43. This situation is similar to problems faced by many local governments in the U.S. under the Reagan administration's “New Federalism,” where federal cuts in spending were often affected by transferring fiscal burdens to the local level.

44. In these respects, local governments have less fiscal autonomy than most of their counterparts in other countries (see Bahl, Roy, “The design of intergovernmental transfers in industrialized countries,” Public Budgeting and Finance, Vol. 6, No. 4 (Winter 1986), pp. 3–22)CrossRefGoogle Scholar. The issue of informal levies is discussed later in this section.

45. Buoyancy is a measure of the income-elasticity of fiscal revenues and is defined as the percentage growth in revenues divided by the percentage growth in income. From 1952 to 1978 revenue buoyancy was 1.2, as revenues grew at an annual rate of 7.9%, compared to national income growth of 6.5%. Revenue buoyancy had fallen to 0.6 during 1978–89, when annual growth rates for revenues and national income were 9.1 and 14.3%, respectively.

46. Mengfei, Ji and Xiaobo, Li, Ministry of Finance Budget Management Office, “The key principles in state budget management,” in Caizheng Gongzuo Sanshiwunian (1984), p. 36Google Scholar.

47. Most of this antagonism is aimed at the coastal provinces, especially Guangdong, which have received preferential treatment under the programme to make selected coastal areas low-cost, low-tax havens attracting foreign capital.

48. Author interview, May 1988.

49. See articles in Caizheng and elsewhere in the Chinese press.

50. Caizheng Jinrong, No. 7 (1987), p. 50Google Scholar.

51. CFS, p. 105.

52. Clarke, Donald C., “The legal background to the behavior of state-owned enterprises,” mimeo, 12 1989Google Scholar.

53. Bokun, Zhao and Hongbing, Zhang, “From investigating the situation in Anhui and Jiangsu Provinces to discussing some issues in building xiang (zhen) fiscal organs,” Caizheng, No. 2 (1985), pp. 22–23Google Scholar.

54. In 1986, Guangxi paid out subsidies totalling 29.85 million yuan to support production of what they called “keypoint, high-tax products” in the tobacco-drying and cigarette industries (Guangxi Nianjian (1987), p. 554).

55. Recently Xinjiang Province reportedly banned some 48 types of “imports” from other regions, including colour televisions, bicycles and soap (New York Times, 26 August 1990).

56. Riqing, Xu, “Some thoughts on local government fiscal contracting,” Caimao Jingji (Finance and Trade Economics), No. 11 (1988), pp. 53–54Google Scholar.

57. See Wong, Christine P.W., “Between plan and market: the role of the local sector in post-Mao China,” Journal of Comparative Economics, No. 11 (1987) pp. 385–398CrossRefGoogle Scholar.

58. Walder, Andrew G., “Factory and manager in an era of reform,” The China Quarterly, No. 118 (06 1989), pp. 242–264CrossRefGoogle Scholar.

59. For a description of the earlier decentralization process, see Wong, Christine, “Material allocation and decentralization: impact of the local sector on industrial reforms,” in Perry, Elizabeth and Wong, Christine (eds.), The Political Economy of Reform in Post-Mao China (Cambridge, Mass.: Harvard University Press, 1985)Google Scholar.

60. The “economic partnership” characterization is from Tong, James, “Fiscal reform, elite turnover and central-provincial relations in post-Mao China,” The Australian Journal of Chinese Affairs, No. 22 (07 1989), p. 27CrossRefGoogle Scholar.

61. Naughton estimates that surplus revenues from industry net of capital allocations and subsidies to industry fell from about 6% of GNP in 1978 to 0.5% in 1988 (Naughton, “Macroeconomic obstacles to reform”).

62. Lardy, Economic Growth, and “Centralization and decentralization in China's fiscal management,” The China Quarterly, No. 61 (03 1975), pp. 26–60Google Scholar.

63. Again, much of this hostility is directed toward Guangdong and other coastal provinces that have developed processing industries at rapid rates and are able to outbid inland producers for raw materials.

64. Author interviews with government officials in Xian, Yangzhou and Shanghai, June 1991.