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Interprovincial Effects of Fiscal Decentralization on Financial Decentralization in China
He Dexu (何德旭) and Miao Wenlong (苗文龙)
National Academy of Economic Strategy, Chinese Academy of Social Sciences, Beijing, China
International Business School, Shaanxi Normal University, Xi’an, China
Abstract: By motivating local governments to fight for financial resources, China’s tax
sharing reform has affected the structure of financial decentralization and inflated local
financial systems, thus spawning regional financial risks. Based on theoretical analysis
and empirical evidence, this paper has arrived at the following findings: due to different
policy objectives, central and local governments exhibit different fiscal and financial
behaviors; public finance and financial sector have become financing instruments with
certain convertibility under local economic growth framework; fiscal decentralization
inevitably affects financial decentralization and lays the foundation for provincial fiscal
disparities, resulting in a certain spatial effect of interprovincial fiscal variable; financial
explicit centralization/implicit decentralization and fiscal centralization have fueled local
competition for financial resources and resulted in correlation between the spatial effects
of provincial financial and fiscal variables, and moreover, their mismatch has also spawned
fiscal and financial risks on various fronts. Hence, setting clear boundaries of financial
centralization and decentralization and ensuring local government fiscal accountability is
the key to the prevention and mitigation of fiscal and financial risks in China.
Keywords: fiscal decentralization, financial decentralization, financial risks, spatial effect
JEL Classification: E61, G28, H11
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