China's central and local governments must seek a fairer share of the fiscal burden

Winston Mok says fundamental changes to the way China's central and local governments divide resources and responsibilities are long overdue

PUBLISHED : Tuesday, 29 September, 2015, 3:46pm
UPDATED : Tuesday, 29 September, 2015, 3:46pm

In discussing the 13th five-year plan at the Communist Party's fifth plenum next month, fiscal reforms are likely to be a key topic. Central to that is the realignment of resources and responsibilities for the central and local governments. Local governments currently receive little more than half the fiscal revenue, while being responsible for more than 80 per cent of the expenditure.

Such a mismatch has resulted in major problems, such as high local government debt.

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To fix these imbalances, local governments could be given more tax revenues. Further, some responsibilities could be transferred to the central government to alleviate the local fiscal burden. Given the corporatism of local governments in pursuit of development, the "nationalisation" of certain social functions may be a realistic way to improve their delivery.

China's decentralised governance has been great for growth but less good in delivering consistent social benefits

For example, the Balkanisation of the pension system has resulted in significant imbalances from province to province. The fragmented system is ill-suited to deal with the mass migration that is part of industrialisation and urbanisation. A national system can correct the imbalances.

Meanwhile, escalating housing prices in major cities have become a problem. Relying on local governments to build adequate social housing is unrealistic, given their dependence on land sales. Social housing can succeed only if financed by the central government.

Likewise, with education. Currently, except for about 130 universities under the Ministry of Education and other ministries or departments, the financing of education is mostly decentralised. Universities are supposed to receive subsidies from provincial governments in most cases. But this is not consistent.

The "nationalisation" of selected social welfare responsibilities does not mean Beijing must set up huge central machineries to administer all such programmes. For pensions, Beijing may indeed set up a national board, but there are alternatives. For social housing, much of the work can be subcontracted to local governments, with Beijing's key role as that of lead financier. And the central government can be the central buyer of education services at all levels, paying similar subsidies per student, whether in big cities or rural areas.

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China's decentralised governance has been great for growth but less good in delivering consistent social benefits.

Beijing has set a target to achieve xiaokang - that is, a moderately good standard of living for its citizens - by 2020. The centralisation of certain social functions would be a big step towards that goal.

Winston Mok is a private investor, a former private equity investor and McKinsey consultant. An MIT alumnus, he studied under three Nobel laureates in economics