China: the Challenge of Fiscal

Decentralization in a Modernizing

Economy

Christine Wong

Centre for Contemporary Chinese Studies

OECD-Asian Senior Budget Officials Annual Meeting

Bangkok, Thailand

14-15 December, 2017

Start with a few stylized facts

• China has urbanized rapidly over the past three+ decades, and many

people in the cities are new migrants

• The new migrants find it often difficult and expensive to send their

children to school – especially state schools, in the cities

• This is in spite of the fact that the Education Law (2006) guarantees

every child the right of to receive nine years of education, and made it

free and compulsory

• This is a divisive issue in the debate on citizenship and social rights of

migrants, and one that is shaping the development of China’s labor

markets and intergenerational mobility

Background

China is a large country with great diversity across regions

Per capita income ranges from $4100 in Gansu to $17,000+ in Beijing

The fiscal system is highly decentralized, with responsibilities

disbursed throughout the administrative hierarchy

• Revenue-sharing is by tax assignment,

and local revenues come from local

taxes, shared taxes, and transfers

• The central government collects roughly

half the revenues but spend only 15% of

the national total.

• Transfers fill the large vertical fiscal gap,

but are not specifically designed to meet

expenditure requirements for any

services

• Responsibility for basic education is

assigned to local governments at the

grassroots level – counties and districts,

and it is the largest component of

expenditure at these levels

This framework of decentralized financing produces large

regional disparities in public expenditures

• Henan spent just ¥620

per student in the

budget, while Shanghai

spent ¥5225, a ratio of

9.6

Provincial average per student expenditure in primary school, 2004

China began to urbanize rapidly with market

reforms

• Since market reforms started in 1978, China’s urban

population has grown by 600 million

• The scale and pace of urbanization have been

unprecedented in human history

Urban

population

(million)

Increase

(million)

Urbanization

rate

1978 172.5 -- 17.9%

1990 302.0 129.5 26.4%

2000 459.1 157.1 36.2%

2010 669.8 210.7 49.9%

2015 771.2 101.4 56.1%

Salient characteristics of China’s urbanization

• It coincided with a steep fiscal decline in the 1980s that continued through

the 1990s, and transfers fell to just 1% of GDP in the mid-1990s

• Cities faced extraordinary pressure to provide infrastructure and services to

growing populations, while also absorbing the transfer of quasi-fiscal

functions from SOEs

• The process of urbanization was financed and managed by local

governments, with little assistance or guidance from higher levels

• To curb costs, cities limited eligibility for urban services to those with hukou,

excluding migrants.

• The 2010 census found that one-third of urban residents did not have local

hukou

– In Beijing and Shanghai the share was 40%

7

Urbanization had begun in an extremely harsh fiscal

environment

Fiscal decline from start of

transition to mid-1990s (% GDP)

Transfers dwindled with fiscal

decline

Since the turn of the century, the central government began

efforts to reverse these inequalities

• Education policies began to change:

– 2001-2007: migrant children gradually given expanded rights to

schooling in cities, and in public schools whenever possible, but still

on a discretionary basis, and self-financed

– Since 2008: migrant children have full rights to urban schools, with

entitlement now residence-based

• Third Plenum decisions in 2013 committed to providing

education rights to all urban resident, and gradually extend

other services

• But problems persist..

The paradox: the government is rich and powerful, and has

provided increased funding through transfers

• During 2000-2012, China’s real GDP grew at annual rate of

13.4%, and revenues grew 18.9% p.a.

• Central government has large fiscal surpluses to fund

initiatives. It has also increased transfers to more than 7% of

GDP, to ¥5.2 trillion in 2016

• Budget expenditures on education have grown at 24% p.a.

since 2000, and the national average spending per student in

primary school has risen from ¥1443 to ¥9181 in the decade

from 2004-2014

• Today central transfers finance roughly 40-50% of total

expenditure in compulsory education nationwide.

Implications of this framework for migrant children

Municipal governments are unwilling to take on “non-

citizens”:

• To curb the growth in demand for a costly service

• The much higher level of financing in urban schools spawns

fear of “benefit-migration” if doors are opened

• Under the current regime of central transfers, education for

migrant children remains an unfunded mandate for the

recipient cities

• The “hukou” identity provides a convenient mechanism for

discrimination

12

Salient characteristics of current transfers

• Strong regional targeting toward the poorer provinces in the

western and central regions

• Targeted almost entirely at rural schools. Urban schools are

considered municipal responsibility

• Big cities in coastal regions receive few transfers

• None were earmarked for migrant children until 2008 – only a

small incentive scheme

• The majority of transfers are to support teachers’ wages and

benefits, and not easy to move even when students have

moved to cities

13

The burden of financing migrant children education is unevenly

distributed, and heavily concentrated in big cities in coastal regions

14

In 2012, 23% and 20% of migrant workers were in Yangzi River Delta

and Pearl River Delta.

City

Education in

budget

expenditures

(2011, %)

Share of migrant

children in CE

(%)

Year of

enrolment

data

Dongguan 23.7 71.4 2010

Foshan 21.5 45.0 2011

Ningbo 15.7 42.6 2012

Beijing 16.0 40.0 2009

Hanghzou 17.7 38.9 2009

Shanghai 14.0 36.0 2009

Guangzhou 14.8 30.0 2011

Tianjin 17.2 17.9 2011

Chengdu 13.7 16.0 2010

Policy choices facing Chinese government

The cost of absorbing 200+ million migrants in urban public services is

daunting:

• The “overhang” of migrant children not currently in urban state schools may

be as large as 15 million, one-third of current urban enrolment

• Coverage of migrants in social insurance programs is currently less than

25%, compared to 85% for urban residents

• The rural cooperative medical scheme is funded at much lower levels than

urban health insurance schemes

• Rural pensions are currently 60 yuan/mo, a small fraction of urban pensions

Accepting decentralized solutions to emerging issues earlier has now left the

central government facing an inequality it does not want, and is finding very

difficult to reverse

15

© Copyright The University of Melbourne 2011

Thank you!