CHINA’S FISCAL DECENTRALIZATION Prepared by

1. China has a population of 1.2 billion people and covers an area of 9.6 million square kilometers. Administratively, the country is divided into 31 provincial-level localities, including 22 provinces, 4 municipalities directly under the central government, and 5 autonomous regions (unless otherwise stated, we hereafter refer to the 31 provincial level localities as provinces).1 The average population size of a province is 40 million, larger than most states and provinces in other large countries. Below the provincial level, there are three administrative levels. They include: 335 prefectures and municipalities at the prefectural level; 2,142 counties, autonomous counties, and cities at the county level; and several tens of thousands of townships, towns and city districts.2 China’s vast population and territory, as well as its geographical and economic diversity, suggest the great importance of policy coordination between the central and subnational governments. 2. Over the past 20 years, China has made substantial efforts to decentralize its formerly high centralized fiscal management system. The objective of the decentralization was to increase the local governments ’ responsibility for local economic development and their autonomy in carrying out fiscal functions to achieve this goal, while preserving an adequate degree of fiscal control for the central government. However, while fiscal decentralization promoted growth in many regions, it also brough