CHINA

The People’s Republic of China is a unitary country that has been governed by the Chinese Communist Party since 1949. China has a unicameral national legislature, the National People’s Congress (NPC) and its Standing Committee, which operates under the leadership of the Communist Party and is defined by the constitution as “the highest organ of state power”. The state cabinet, the State Council headed by a prime minister, and “people’s governments” at lower levels of governments implement and execute policy.

The constitution recognises three levels of subnational government: provinces, prefectures and counties. However, a fourth level, composed of townships and villages at sub-municipal level, is addressed in the Budget Law and in the fiscal system. Historically, subnational governments have a relatively high degree of autonomy, but the political system remains highly centralised. Local people’s congresses at all subnational levels ensure the observance and implementation of the Constitution, laws, rules and regulations in their respective administrative areas.

Each subnational government unit is governed jointly by a secretary from the communist party, appointed by party local committees from higher levels of government, and by a mayor, or governor in the case of provinces, who are selected and appointed by the local people’s congress, but higher levels of government often influence this selection. Central government ministries have offices in each province, which report both to their ministry in Beijing and to the provincial leadership, even though they tend to increasingly interact directly with their line ministries on specific topics (e.g. environment). Provinces have the right to pass their own regulations to adapt to regional political, economic and cultural characteristics. Provincial regulations may supplement national laws and regulations, so long as they do not conflict.

The multi-level governance framework has evolved since 1983 with the aim to enhance coordination between levels of government. In 1983, the government adopted a Municipality-Managing-County (MMC) system to enhance rural–urban interdependence and integration. Under this system, a prefecture-level municipality has jurisdiction over a central city and surrounding rural counties or districts. Yet this system often led to an ambiguous division of government functions, fund diversions, and resource rivalry between different levels of government. The MMC system has been replaced in a number of provinces since the 2000s by the Province-Managing-County system (PMC), which allows provincial governments to deal directly with county governments on almost all fiscal affairs, and to free themselves from the subordinate relationship with prefectures. Moreover, a decree regarding the management of administrative divisions (enforced in January 2019) focuses on urban integration and coordination between rural and urban areas where administrative divisions need to be adjusted.

Regional development stands out as one major component of China’s recently released 14^th Five-Year Plan for National and Social Development (2021-25). The 14^th Five Year Plan focuses, among other topics, on low carbon development and integration of urban–rural areas with deeper social inclusion. China’s provinces and line ministries are required to draw their own Five-Year Plan, based on the national one, providing details on implementation, monitoring and evaluations of proposals.

TERRITORIAL ORGANISATION
Municipal Level [1]	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
Counties (县级行政区)	Prefectures (地级行政区)	Provinces (省级行政区)
2 844	333	31	3 208

Note: These statistics cover mainland China only, without the special administrative regions of Hong Kong (China), Macau (China), and Chinese Taipei.

[1] Name and number of sub-municipal entities: 38 721 townships

OVERALL DESCRIPTION: China is a unitary country with four layers of subnational government: provincial, prefectural, county and township/village levels. China has also encompassed two independent Special Administrative Regions (SARs), namely Hong Kong (China) and Macau (China), since 1997 and 1999, respectively.

China has experienced rapid urbanisation since 1978, and between 1978 and 2020, the residents-based urbanisation rate increased from 18% to 64%, still below the urbanisation rate of most other advanced and emerging economies. Despite the emergence of a number of megacities and urban regions, metropolitan areas and megacity regions are not designated as specific administrative units, and their management and coordination across jurisdictions is taken up by the upper level of government, most often provinces. Similarly, cities are a geographical concept, not an administrative one, and they exist at each of the three administrative levels. Disparities are large between cities in terms of wealth. As of 2020, the per capita disposable income in Shanghai was four times higher than that in the province of Heilongjiang. In an effort to promote urbanisation, several waves of city mergers have occurred. Between 2000 and 2017, a total of 174 county-level cities were merged with 119 prefecture-level cities.

REGIONAL LEVEL: At the provincial level, the country is divided into 22 provinces, five autonomous regions and four centrally administered municipalities as of 2021.

INTERMEDIATE LEVEL: The intermediary level is composed of 333 prefectures, including 293 prefecture-level municipalities.

MUNICIPAL LEVEL: The municipal level of subnational government is made up of 2 844 municipal districts, county-level municipalities and autonomous counties.

Townships, towns and districts form the fourth level of subnational government, the lowest level of administration (there were 38 721 according to the 2021 census, down from 39 862 in 2016). They are further divided into villages in towns, or neighbourhood (jie dao) units in urban areas at the township level, that serve as a channel of communication to the population.

HORIZONTAL COOPERATION: Inter-municipal cooperation (IMC) is allowed in China, although in the absence of specific legal or regulatory documents specifying the framework for IMC, it mostly takes place in the forms of agreements contracted directly between local governments. In practice, IMC can be initiated by higher-level governments (either provincial or central); by local governments themselves; or can be a joint initiative from intermediate and local governments.

In recent years, the focus of IMC in China has been on large urban agglomerations. There are 19 urban agglomerations mentioned in the 14^th Five-Year Plan. Urban agglomerations can be created following three types of development: (i) coordinated development, which focus on coordination in sectors such as industry, transport, and environment (e.g. the Beijijng-Tianjing-Jibei agglomeration); (ii) regional integration, centred on facilitating the movement of people and goods and creating common internal markets (e.g. Guangdong-Kong Kong-Macao); (iii) regional cooperation, which corresponds to administrative cooperation.

Intergovernmental organisation and the allocation of functions to each level of government in China have mainly emerged through economic reform, instead of emerging from national law, the constitution of any other dedicated legal basis. The 2016 Guiding Opinion by the State Council aimed at clarifying spending assignments between the central and sub-national levels. It gives the central government responsibilities for issues of national scope (i.e. international relations, defence, the use of key natural resources and national security). The Comprehensive Fiscal Reform (1994), Budget Law (1995), and Tax Sharing System (1994) further define the role of subnational governments.

Governments at each level are all-purpose governments, responsible for public service and local affairs, as well as economic development, judicial administration and urbanisation. In principle, subnational governments are agents of the central government, tasked with implementing national policy objectives within their jurisdictions. The allocation of responsibilities and expenditure to the various tiers of subnational government is uneven and varies among provinces, which have considerable regulatory control over lower levels. In 2020, measures were taken to clarify responsibilities, especially shared responsibilities between provincial and local levels and to reinforce the coordinating role of provincial governments. Asymmetrical arrangements are currently being discussed to adapt responsibilities to the fiscal capacity of local governments within each province.

In many cases, prefectural and county governments have very broad and overlapping expenditure responsibilities, and deliver about 90% of major public services. Then, local governments are devolved not only pre-determined subnational responsibilities, such as urban maintenance and construction, but also the incremental part of service provision for education and healthcare spending. Unemployment insurance is also managed at the local level. Recent changes have been made in the allocation of responsibilities in the health sector, a competence that was previously almost exclusively the responsibility of local governments. Since 2018, basic public health service provision is a shared responsibility of the central and local governments, and major public health services (e.g. contagious diseases that cross regional boundaries) were put under the responsibility of the central government.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Intermediate level	Municipal level
1. General public services (administration)	Civil affairsJudicial administration	Judicial administration	Civil affairs; Ethnic affairs; Judicial administrations
2. Public order and safety
3. Economic affairs / transports	Infrastructure constructionn;Agricultural production (shared)	Infrastructure constructionn;Agricultural production (shared)	Infrastructure constructionn;Agricultural production (shared)
4. Environment protection
5. Housing and community amenities			Urban and rural development
6. Health	Health infrastructure and equipment	Public health services (shared)	Public health services (shared)
7. Culture & Recreation
8. Education	Education	Compulsory education	Compulsory education
9. Social Welfare	Unemployment insurance;Social security and welfare	Social welfare	Social welfare

Scope of fiscal data: Provinces at the regional level (encompassing autonomous regions, provinces and municipalities), prefectures at the intermediary-tier of government, and counties, townships and villages at the lower-tier. The SARs of Hong Kong, China, Macau, China and Chinese Taipei are not included in these data.

IMF-GFS

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION. Provinces, prefectures and counties in China are fiscal units with their own revenue, budget and expenditure assignments. Villages and townships, at the sub-county level, have their own budget but they have no own revenue source, and rely exclusively on transfers from higher-levels of government. There exists no consolidated budget document in China that contains all the expenditures and revenues of local governments, which are divided between four separate budgets, the largest ones being the Public Finance budget and the Government Funds budgets, being used in this country profile. On the revenue side, they include all local tax revenue and the local portion of shared taxes, non-tax revenues from user charges, administrative fees, and other sources, as well as most intergovernmental transfers. Regarding expenditure, they include almost all current expenditures, in addition to some capital expenditures. Other budgets are the Social Security budget, and the State-Owned Enterprises Operating Fund budget.

China's fiscal system is characterised by a strict vertical hierarchical relationship between different tiers of government, similar to its administrative system. Provinces bear the largest share of fiscal mandate among Chinese subnational governments. China’s local governments, on the other hand, do not have taxing power, have limited access to borrowing, and are often overloaded with unfunded mandates. However, they had, until recently, a considerable degree of autonomy over land concession revenues, and may engage in indirect borrowing from banks or the bond market through local government financing vehicles, to finance infrastructure investment and local economic development. The last comprehensive change in inter-governmental fiscal relations dates back to 1994, with the introduction of a tax sharing reform, which allocated a greater revenue share to the central government level. Since 2004, provinces that chose to implement the PMC system have the power to determine the assignment of both counties’ revenues and expenditures, bypassing the prefectural level, which introduced greater spending autonomy for county governments.

Since 2016, the need for fiscal reforms has been raised to address the long-standing misalignment of revenue and spending across levels of government. In particular, the central government aims at improving fiscal frameworks below the provincial level, for strengthening local governments’ finance. This need has been even more acute since 2020 and the COVID-19 crisis, which led local governments to undertake a wider range of spending responsibilities, hence the need to provide them with a more stable revenue base. Since 2021, the central government aims to optimise the tax sharing system between provincial and local governments, in an attempt to standardise it across provinces, and to enhance the fiscal transfer systems within provinces by basing it on fixed quantitative indicators (e.g. population) and making it match with devolved responsibilities.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	4 270	24.8%	72.5%	100%
Inc. current expenditure	-	-	-	-
Compensation of employees	-	-	-	-
Intermediate consumption	-	-	-	-
Social expenditure	-	-	-	-
Subsidies and current transfers	-	-	-	-
Financial charges	-	-	-	-
Others	-	-	-	-
Incl. capital expenditure	-	-	-	-
Capital transfers	-	-	-	-
Direct investment (or GFCF)	-	-	-	-

EXPENDITURE: Subnational government expenditure in China in 2020 amounted to 72.5% of total public expenditure and 24.8% of GDP. In many sectors, local governments are “spending agents” acting on behalf of the State, spending according to the objectives and priorities set by the central government. Their spending autonomy, and in particular counties’ leeway, is still largely constrained, as the system remains highly centralised through the use of laws, regulations and directives. In addition, expenditure arrangements of Chinese local governments are more decentralised than revenue arrangements, generating high fiscal pressure for local governments.

DIRECT INVESTMENT: Infrastructure investment in China is mainly the responsibility of subnational governments, even though strategic projects of national and interregional nature are financed by the central level. In the wake of the 2007/08 global financial crisis, most of the economic stimulus package, whose major components were urban and rural infrastructure projects, was implemented through China’s local governments. Overall, the central government gives provinces considerable leeway in adopting policies to boost investment and economic growth, and encourages them to undertake approved policy experiments.

Infrastructure investment relies strongly on government funds and to a lesser extent, on PPPs financed by banks and local government special bonds (which have an annual ceiling for new issuances). To promote the use of PPPs, the central government set up an integrated PPP information platform in 2015 and released Regulations on PPP in Infrastructure and Public Services in 2017.

The 14^th Five-Year Plan of the PRC for 2021–2025 promotes better coordination and clarification of responsibilities in order to make investment more efficient. Priority subnational investment areas are transportation, science and technology and regional innovations, agriculture, education and ecological progress, as well as lessening regional disparities. The approval and management of investment projects are supervised through the National Investment Project Online Approval and Regulatory Platform, launched in 2017, which is a cross-department online system involving the central as well as local governments, under the guidance of the National Development and Reform Commission.

Subnational government expenditure by functional classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	4 270	24.8%	-	100.0%
1. General public services	395	2;3%	73.5%	9.2%
2. Defence	4	0.0%	1.8%	0.1%
3. Security and public order	204	1.2%	86.8%	4.8%
4. Economic affairs/transports	1 501	8.7%	89.2%	35.2%
5. Environmental protection	123	0.7%	96.6%	2.9%
6. Housing and community amenities	380	2.2%	99.2%	8.9%
7. Health	329	1.9%	66.2%	7.7%
8. Recreation, culture and religion	68	0.4%	94.1%	1.6%
9. Education	591	3.4%	95.2%	13.8%
10. Social protection	676	3.9%	44.5%	15.8%

Main subnational areas of spending in 2020 were economic affairs and transports, social protection and education, which are fast-growing expenditure categories at the country level, because of ageing and urbanisation dynamics. In the health and social protection sectors, the share of subnational government spending in total public expenditure has decreased in recent years, following recent notices from the central government, that recentralised part of these competences. Subnational governments are responsible for more than 80% of total public expenditure in several key economic functions (except for defence).

Chinese provinces in particular are responsible for the lion’s share of subnational expenditure, including almost all public spending on education. Local governments keep being devolved additional assignments related to local development and infrastructure.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	3 386	19.7%	79.4%	100.0%
Tax revenue	1 438	8.4%	50.9%	42.5%
Grants and subsidies	1 541	9.0%	-	45.5%
Tariffs and fees	0	0.0%	-	0.0%
Income from assets	0	0.0%	-	0.0%
Other revenues	408	2.4%	-	12.0%

OVERALL DESCRIPTION: In 2020, subnational government revenue amounted to 19.7% of GDP, compared to 17.1% on average in the OECD. This is well below the level of subnational expenditure, hence the existence of large fiscal imbalances at the subnational level.

China has a multi-level financing structure based on the Tax Sharing System Reform put in place in 1994, which removed control of subnational governments over local tax revenues, recentralised tax revenues collection and reallocated them to the subnational level through a system of tax sharing and transfers. Resources can also be transferred from rich provinces to poorer ones through an equalisation transfer system. Tax sharing rules were last modified significantly in 2016, with the transformation of the business tax levied on services into a VAT tax, incurring reduced budget revenues at the subnational level. A process is also on-going to reform the property tax.

Chinese provinces have their own revenue streams, whereas local governments are mostly dependent on transfers from the central administration, tax-sharing agreements which differ across provinces, and land concessions as sources of subnational revenue (land rights sales constitute the bulk of the revenues of prefecture-level cities).

TAX REVENUE: The central government is the sole legislative tax authority, enacting laws or provisional regulations for all types of taxes. Subnational governments collect more than half of subnational taxes, but they have very limited powers of their own to set the rate or define the base, and the heavy reliance on revenue sharing exposes them to uncertainty and limits their fiscal autonomy. Each provincial government determines the revenue‐sharing rules within their respective prefectures; each prefecture then determines the revenue‐sharing rules within their counties. In the provinces that adopted PMC, county governments no longer share subnational tax revenue with prefectures but only with provincial governments, which leaves them with a higher proportion of the tax revenues generated in their jurisdictions.

The National Taxation Bureau and Local Taxation Offices merged in 2018 to form a single Tax Administration Agency, responsible for both collecting central taxes (VAT and CIT) under the direct administration of the central government, and collecting subnational taxes, PIT (under the direct administration of subnational governments) and social security contributions. Since 2013, the country is engaged in a new fiscal policy reform, still on-going, to optimise the tax structure, and increase direct tax revenues, in particular the PIT, the private residential property tax, and a future property tax. In 2016, the business tax, formerly levied exclusively by subnational governments on services, was transformed into a VAT (also encompassing finance, construction, real estate and personal services), shared across levels of government. This transformation reduced subnational government revenues stream.

Shared taxes, which altogether amounted to 54.5% of subnational tax revenues in 2020, comprise the subnational component of the VAT, the PIT and the CIT. Fixed ratios set the shares received by subnational governments to 50% of the VAT (in 2020, the subnational share of the VAT accounted for 14.2% of subnational government revenue and 33.5% of their tax revenue), 40% of the PIT (2.3% of total subnational government revenue and 5.5% of tax revenue) and around 35% of the CIT (6.6% of subnational government revenue and 15.5% of tax revenue). In addition, they also receive 50% of security and exchange tax revenues.

Several subnational own-source taxes are related to real-estate properties: urban and township land use tax, arable land occupancy tax, the real estate tax, the deed tax and the land appreciation tax. They account for a total for 9.9% of total subnational government revenue, 23.3% of subnational tax revenue and 1.9% of GDP. However, these taxes are based on physical area and transaction values of properties, instead of recurrent assessments based on properties’ market value. A scheme for introducing a recurrent property tax is underway in the pilot cities of Shanghai and Chongqing. The trial scheme applies at purchase to a relatively narrow range of property owners. According to estimates from Fitch Ratings, it generated revenue equivalent to 6.7% and 3.3% of land sales in the respective cities. In October 2021, the Standing Committee of the National People’s Congress authorized the State Council to expand pilot schemes for a property tax in some regions, with the State Council determining the locations to be involved and other details.

Finally, subnational governments also collect a vehicle and vessel tax, a tobacco tax, and social security contributions to finance local insurance systems.

GRANTS AND SUBSIDIES: In addition to the tax-sharing system, subnational governments receive current transfers from the central government, which can be divided between earmarked transfers and general-purpose transfers. Intergovernmental transfers have grown in China since 1994, to compensate for the delivery of public services in urban areas. The 2018 Notice on the Reform of the Central-Local Split of Spending Responsibilities in the Area of Basic Public Services introduced a graduated burden sharing scheme to support poorer provinces. Based on this Notice, the central government assumes 80% of financing of specific services (i.e. assistance to basic healthcare insurance, basic public health services and birth control support) in the 12 poorest provinces, 60% in ten provinces, 50% in three, 30% in four and the five province-level cities, and just 10% in Beijing and Shanghai. In the case of five other services (including medical emergency services and services for the disabled), central transfers are determined by the fiscal situation of the local government.

Among subnational governments themselves, upper‐level governments generally provide transfers to all levels of government that are below them. Since the PMC reform, county governments may receive fiscal transfers directly from provincial governments.

General-purpose transfers include tax rebates, which were established after the 1994 tax-sharing system reform, to compensate for falling subnational government revenue resulting from the reform, and to ensure local governments have enough revenue to cover for their basic needs. Tax rebates include VAT rebates, excise tax rebates, income tax rebates, and tax rebates from the reform of taxes and fees on refined oil products. General transfers also include an equalisation transfer, which aims to ease disparities across provinces. Other general transfers are used to finance social security and pensions and government wages. Conditional earmarked transfers, on the other hand, are granted by the central government to subsidise local programmes, mainly in the fields of transportation, social housing, education, energy saving and pollution reduction. Overall, the system of conditional transfers is relatively opaque and complex, with high administrative costs.

OTHER REVENUE: Chinese subnational governments, counties and prefectures in particular, receive revenues from the sale of land-use rights for periods of 30 to 70 years. According to the Chinese constitution, urban land is owned by the central government and rural land is owned collectively by village communities. The Land Administration Law provides all levels of governments with the power to control and regulate land use, to convert rural land into urban land, and to sell land rights to real estate developers, within the limits set by the national farmland preservation policy. Land is often used as collateral for the LGFV to borrow from commercial banks, and the net revenue from land sales must be dedicated to investments.

However, the volatility in land sales has recently slowed down local governments revenue, and new regulations impeding the use of land as collateral for borrowing has led to a decrease of the reliance of subnational governments on land-based revenue. Other local non-tax revenues include fees, levies, penalties and profits from local State-Owned Enterprises (SOEs). In contrast with the situation in most countries, tariffs are exclusively assigned to the central level.

ⓘ No detailed data available for this country

FISCAL RULES: Chinese subnational government financing is subject to soft budget constraints. In 2014, the China State Council issued Rule no. 43, which laid out less strict guidelines for the supervision of local government debt and operating procedures for the public release of local budgets and financial accounts. However, subnational borrowing through off-budget local government financing vehicles (LGFV) is being widely used by subnational governments in China to finance massive infrastructure construction until today. The Chinese government has multiplied its efforts in recent years to bring local debt under control, enhance financial stability and reduce outstanding debt. In 2017, a Financial Stability and Development Committee was established, and in October 2020, the Implementing Regulations of the Budget Law was enacted to improve budget transparency. Several issues related to the consolidation of the four budgetary accounts, at all levels of governments, as well as to the classification of rising local government bonds, are still main obstacles to ensuring sound fiscal health at subnational government level.

DEBT: The amended 2014 budget law allowed provinces and cities to issue bonds for investment projects (subjected to the approval of the central government and the local people’s congresses), within approved debt limits. The total debt limit is set by the NPC and debt ceilings for different provinces are approved by the State Council, linked to subnational government revenue. A few wealthier municipalities have been allowed direct access to capital markets under central government supervision. However, the Public Finance and Public Funds Budgets do not encompass the debt accumulated by LGFV, classified as State-Owned Enterprises’ debt, which has been increasing strongly over the past decade.

Following a bailout of LGFVs by the government in 2014, the 2014 Budget Law aimed to close the “back-door” on local governments’ off-budget activities by prohibiting guarantees and any source of financing other than approved bonds. However, due to the persistence of the underlying fiscal pressure, some local governments have kept piling up debt in ways not permitted by regulations, including through the use of public welfare assets (roads, sewage systems) and land as collateral to borrow from banks and financial institutions. As of 2019, the amounts of debt issued by LGFV was exceeding subnational government debt in most provinces. In August 2021, to mitigate the risks associated with the increase in subnational government debt, the China Banking and Insurance Regulatory Commission issued document 2021/15 which prohibits the undertaking of infrastructure investment on behalf of local governments until it is budgeted with corresponding funding.

By the end of 2020, according to data from the Ministry of Finance, China’s subnational government debt accounted for CNY 25.66 trillion, a strong increase compared to CNY 18.26 trillion by the end of 2018. This amount remained below the CNY 28.81 trillion debt ceiling set by the national People’s Congress for 2020. A debt swap programme was set up to facilitate the transition from LGFV debt to local government bonds. In parallel, the issuance by subnational governments of special bonds is being promoted to drive investment, as well as green bonds. In 2015, China published a set of guidelines on green bonds, as well as a catalogue of standards for green bonds eligibility, updated annually. In 2020, CNY 3.65 trillion of local government special bonds were planned to be arranged. Almost the entirety of subnational government debt was held in the form of bonds (99%) in 2020, an increase from 88% in 2016.

TERRITORIAL MANAGEMENT OF THE CRISIS: China’s public health reporting system relies on local Centres for Disease Control (CDCs), under the authority of local governments (there were around 3 403 local CDCs in 2019), which then report to the central CDC. This decentralised system was developed in 2002 based on lessons learned from the SARS epidemic, which resulted in the Regulations for Public Health Emergency. The efficiency of this system is hindered by the lack of funding and staffing of some local CDCs, as well as the lack of communication and transparency of information between the central and local CDCs.

Regarding financial and fiscal support, China’s National Audit Office (NAO) is responsible for the audit of funds, the good implementation of central government policies and decisions regarding pandemic prevention and control and the implementation of policies on tax and fee cuts, fiscal subsidized and preferential loans. A single digital health application was also developed for the whole territory (HealthCode).

Several measures were taken to adapt China’s COVID-19 response (based on a “zero-COVID strategy”) to local specificities, such as local lockdowns, inter-provincial travel restrictions in response to localised COVID-19 outbreaks.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Shortly after the COVID-19 outbreak, a series of tax reductions and exemptions were announced at the central and subnational government levels, which were sustained in 2021 and continued as of 2022 to support the economy. Subnational governments enacted several measures to support firms, such as delays in the collection of social security contributions, temporary exemption measures, and reduced contribution rates to pensions. State-Owned Enterprises also contributed to emergency measures, through the donation of goods, supporting of SMEs along their supply chains and ensuring rapid resumption of production - thus responding to the appeal made to them by the central government and many local governments.

On the other hand, the central government supported subnational governments to face the consequences of the crisis, and in particular to cope with the impact of tax rebates, which caused local fiscal gaps. The central government increased its transfer payments to subnational governments by about CNY 1.5 trillion in 2020, with a scale of nearly CNY 9.8 trillion, a significant increase of 18% compared to the previous year, and this support is to continue until 2023. Although these transfers were allocated to the provincial level, notices issued by the Ministry of Finance specified that these additional revenues should be distributed to, and used by, county level governments, through raising their revenue reserves, or directly allocating to them, and cannot stay in the provincial government budget. Horizontal fiscal transfers among provinces and cities, without central government intermediation, have also occurred between wealthier areas and other cities in crisis-hit provinces.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The crisis had a severe impact on subnational governments finance in China, in 2020, 2021 and until 2022 . On the revenue side, subnational revenue was hit by a decrease in tax revenue, mainly due to tax exemptions measures and a decrease in revenue from the VAT. For instance, based on data from Shenzhen Municipal Bureau of Finance, the tax revenue of Shenzhen decreased by 12.6% between 2020 and 2019. This impacted subnational governments to various extents, with a slighter impact on counties less reliant on taxes on enterprises, mostly located in the northeast. In addition, 23 provincial governments saw a decrease in revenue from land sales between 2020 and 2021, which created further subnational finance challenges. This led subnational governments to stop expenditures that were to be funded via land transfer fees. In addition, some local governments have been forced to reduce the provision of public services in 2022 due to this tight fiscal pressure (e.g. suspension of bus services).

On the other hand, expenditure has risen, due to the pressure in the health and education sectors, and the continuous enforcement of COVID-19 controls until 2022 such as regular mass testing, which led governments at all levels to initiate emergency measures. Whereas at the beginning of the crisis, all equipment for massive testing was funded by the central pension funds, the government strategy recently shifted and local governments are now required to fund this expenditure from their local resources, adding extra expenditure to their planned budgets for 2022.

As a result of COVID-19 incurred expenditure and related stimulus measures, subnational governments and state-owned enterprises’ debt has increased since 2019. According to estimates from China’s National Bureau of Statistics, the local government debt balance was CNY 25.66 trillion in 2020, a year-on-year increase of +20.44%. To adapt to this situation, the maximum ceiling of special local bonds that could be issued by subnational governments as a countermeasure for the crisis was raised, from CNY 1 trillion to CNY 1.29 trillion (out of the CNY 3.15 trillion quota for 2020). This as led, however, to a rapid increase in public debt and in particular subnational debt, as the central government is becoming more reluctant to expand the central government debt in 2022. As a result, as of April 2022, 26 out of the 31 provinces had subnational debt worth more than 100% of their total 2021 revenue.

ECONOMIC AND SOCIAL STIMULUS PLANS: The National People's Congress approved a fiscal stimulus package of CNY 6.35 trillion in May 2020, largely focused on construction and infrastructure investment, with a component dedicated to green recovery, encompassing renewable energy, green manufacturing and green consumption, and climate funding and investment. This package included an extra CNY 1 trillion in deficit funding, a special national bond issue of CNY 1 trillion, CNY 375 million in municipal bonds, and CNY 600 billion in investment from the central budget, corresponding to 6.4% of the country’s GDP in 2019. Out of the national and local bond issuances, it is estimated that 15% of the total are dedicated to green, sustainable or low-carbon projects, including green infrastructure, green transport, agriculture, forestry and waterways. Data varies between provinces, with provinces heavily reliant on coal mining and energy generation that have made very little investment in green initiatives.

For the post-COVID-19 recovery, China plans to support investment, in particular at the subnational level. In May 2022, the Chinese government published "Opinions on Further Activating Existing Assets and Expanding Effective Investments", which mentions revitalising existing assets and forming a virtuous investment cycle, in part for improving infrastructure. In addition, the government plans to enhance the role of the National Investment Project Online Approval and Regulatory Platform. China’s regional development strategy, as announced in the 14^th Five-Year Plan (2021-25), focuses on empowering the economically largest provinces (e.g. Beijing, Tianjin, Hebei) and urban clusters to strengthen their lead in the country forthcoming development.