Thirty years after reform, China's public financial system remains “work in progress.” China's Local Public Finance in Transition is the product of a conference jointly organized by Peking University and the Lincoln Institute Center for Urban Development and Land Policy in 2008. The essays address issues that are outstanding in Chinese public finance following implementation of the tax-sharing reform in 1994. The authors explore a range of topics against a common backdrop: although the 1994 tax reform successfully streamlined and recentralized taxes, it left a huge vertical fiscal imbalance. Sub-provincial governments are saddled with heavy expenditure assignments, including those of health, education and infrastructure development; yet, they have no right to set taxes or borrow. Meanwhile, China's fiscal transfers system has not fully realized its equalizing function. Facing intensified fiscal pressure, local governments turned to land leasing and indirect borrowing in the last decade. Consequently, the scope of public finance in China has become, post-1994, more fuzzy, less transparent and, worryingly, more risky.
The volume is divided into four parts with 13 chapters in total. Following an introductory chapter, part two consists of essays on expenditure assignment and infrastructure financing. Part three discusses local revenue patterns and introduction of the property tax. Part four focuses on the distribution of fiscal transfers. In the conclusion, Roy Bahl offers directions for future reform of China's public finance.
Several chapters deserve further elaboration. First, in a chapter by Weiping Wu, it is noted that despite local fiscal constraints, China has seen a dramatic expansion of infrastructural development recently. While public infrastructure is normally funded in other countries by issuing bonds, Chinese local governments cannot borrow. Thus, besides budget allocation from the central and local governments, infrastructure has been funded by land leasing, indirect borrowing, user charges, and self-raised funds. Focusing on Guangdong province, John Mikesell et al discuss self-raising in greater detail. According to them, self-raising can take place through government and propriety funds, private bank loans obtained by state-owned enterprises and public institutions (shiye danwei), and foreign direct investment. These strategies contributed to an impressive growth of capital investment in Guangdong. However, they lack transparency and pose significant liability and risk. One example was the bankruptcy of the Guangdong International Investment Company in 1998. Such risks are exacerbated by the absence of a specialized government office to manage local public debts.
Land leasing is another major theme of the volume. In an informative chapter, Susan Whiting examines the meteoric rise of “land public finance” in the aftermath of fiscal recentralization. She notes that, first, land transfer fees had become a major portion of local public finance. Second, land finance easily shades into corruption, as developers can offer kickbacks to acquire land cheaply. Third, despite the association of land financing with corruption, land transfer fees have indeed spun infrastructural development. Although leasing land could generate revenue in the short term, a pressing question ensues: what will local governments do when there is no more land to sell? Further, land transfers have led to sky-rocketing housing prices, land seizures, and over-rapid urbanization. These problems have pushed central leaders to consider introducing a local property tax. The property tax would consolidate various land- and property-related fees and taxes into a single annual tax and would be levied on top of land transfer fees. It was supposed to be implemented in 2008 but has since been postponed indefinitely. Hong and Brubaker ponder the politics of property tax by asking: why should existing land users who have already paid their leasing fee for using land be liable for additional property tax payments? If the property tax reduces land value, why would interest groups, such as developers, support such a policy? These are theoretically and practically interesting questions that call for more attention.
In sum, students of public finance, both in and beyond China, will find this a timely volume. Before 1994, public finance was centred on taxes and fees. After 1994, the scope of public finance has widened and blurred. And yet, data is hardly available on these new sources of public finance and instruments of oversight remain under-developed. Future research on public finance will thus be more challenging than before, and this volume offers useful signposts. That said, the volume would be more user-friendly if it provided Chinese characters or pinyin for technical public financial terms that appeared numerously. Several authors also continued to use the terms “extra-budget” (yusuanwai) and “off-budget” rather than the term “nontax revenue” (feishui shouru). The latter is the term now widely adopted by Ministry of Finance and local budgetary officials. In two chapters, the authors classify all fees and levies collected by government agencies as extra-budgetary – in fact, this is not always the case. Nontax and extra-budget revenue are not synonymous. Fees and levies are nontax revenue, which in turn is divided into extra-budget and within-budget categories. As extra-budgetary revenue traditionally connotes arbitrariness and lack of oversight, a failure to distinguish between nontax revenue and extra-budget revenue can mislead readers to neglect important institutional reforms in the budgetary control of certain nontax revenue streams. However, these comments do not diminish the value of the volume. I heartily recommend it for those who interested in a new era of Chinese public finance.
