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Beijing's fiscal transfer reforms are step in right direction, analysts say

Greater emphasis on 'general transfers' from the central government to the local level will lead to better allocation of resources, analysts say

Reforms to the mainland government's central-to-local fiscal transfers system will help to address an imbalanced allocation of resources, bridge regional development gaps and curb the misuse of funds by improving transparency, analysts say.

Under new guidelines by the State Council, more than 60 per cent of fiscal transfers by the central government will be "general transfers" aimed at balancing regional development. Last year the share of general transfers was about 58 per cent, up from about 53 per cent in 2012.

General transfers are seen as more transparent than "designated transfers" as they are calculated based on local fiscal and tax revenues, land sales and the funding needs of various regions. The central government adjusts the transfers to ensure resources reach the country's most needy areas.

Designated transfers, on the other hand, are approved on a case-by-case basis by the central government and go towards financing designated local authority projects. They have become a major source of corruption, as assessments of need are made without unified or transparent criteria.

Authorities in wealthier regions or those with better relations with central finance officials have a better chance of winning such transfers; poorer regions are at a disadvantage.

Last year, overall fiscal transfers amounted to 4.7 trillion yuan (HK$5.9 trillion); general transfers accounted for about 2.7 trillion yuan of this. National fiscal revenues totalled 14 trillion yuan.

"It is a right step to improve the structure of central and local fiscal resources," said Tsinghua University researcher Yuan Gangming, who said fiscal reform would be a policy priority this year.

The leadership has vowed to overhaul its fiscal system, under which local authorities are responsible for about 85 per cent of total public spending but receive about half of national fiscal revenues. To fill the gap, local governments have relied heavily on land sales, which have been used as collateral to obtain bank loans to finance investment projects.

The system has been blamed for inefficiency and for fuelling property bubbles, which have been brought under control recently only because of tightened regulations on bank lending.

"Long seen as one of the key issues on the fiscal reform agenda, the fiscal transfer system lies at the heart of the construction of a more balanced budget system," said HSBC economists Julia Wang and Qu Hongbin in a research note.

As part of local budget and fiscal reforms, the government has been reclassifying local government debt.

It is also considering a property tax, though no timetable has been set, in part due to fears it could exacerbate a slump in the property market.

Wang said the overhaul of the fiscal transfers system would aid redistribution across provinces and boost local governments' spending flexibility. This in turn would pave the way for social reforms on household registration and the pension and healthcare systems.

This article appeared in the South China Morning Post print edition as: Fiscal transfer reforms 'step in right direction'
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