Evolution of China’s Central-LocalFiscal Relations: A TheoreticalFramework

Lv Bingyang1, 2, Hu Shen*3

1 China Financial Policy Research Center, Renmin University of China (RUC), Beijing, China

2 School of Finance, Renmin University of China (RUC), Beijing, China

3 School of International Trade and Economics, University of International Business and Economics (SITE-UIBE), Beijing, China

Abstract: China’s path to modernization, which embodies a unique developmental modelcharacterized by high-quality development, common prosperity, harmony with nature, andpeaceful coexistence, is a multifaceted process that advances progress on multiple fronts.This paper applies two analytical lenses to the study of intergovernmental fiscal relations:multi-level governance, where different levels of government interact, and multi-objectivedecision-making, where multiple goals are pursued simultaneously. From this perspective,it puts forward three core propositions. First, the evolution of fiscal relations is shapedprimarily by the central government’s need to balance incentivization, coordination, andcontrol. Second, these relations are constrained by objective factors such as the outputelasticity of loacl government actions, cost coefficients, externalities, and uncertainty.Third, the effectiveness of both central and local governments depends on the design offiscal relations, as well as on their objectives, the output elasticity of actions, and costs. Inessence, effective intergovernmental fiscal relations require a balance between centralizedleadership and local initiative. Using this framework, the paper examines how changesin China’s fiscal system have influenced modernization across different historical periods,offering a theoretical model tailored to China’s national context.

Keywords: Intergovernmental fiscal relations; Economic growth; Economic modernization

JEL Classification Codes: H10; H77

DOI: 10.19602/j.chinaeconomist.2025.09.04