The decisions document of the third plenum, which lists a wide range of reform objectives to be completed by 2029 with more than 300 policy measures, pledges that the central budget will take on more expenditure and reduce the delegation of spending responsibilities to localities.
“The document seems to indicate an important fiscal reform (is) coming,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
“I think the objective is to help local governments to make their fiscal positions sustainable by adding more revenue sources and relocating some expenditures to the central government,” he wrote in a note on Sunday.
Zhang expects the local government bond programme to play a more effective role, with the rules eased so that the funds can be utilised more freely.
He said that the third plenum did not change the government’s policy objectives, but it introduced new measures to achieve such objectives
Since Beijing began market reforms over four decades ago, taxation and central-local relationship reforms have long been regarded as the thorniest and most fundamental elements of a true overhaul of China’s economic system.
In the 1980s, China set up a de facto tax contracting system, with high revenue retention rates for local governments. However, that weakened the central authorities’ fiscal capacity, making many reforms difficult to implement.
The tax-sharing reform in 1994, launched by then-premier Zhu Rongji, eased the central government’s revenue shortfall but was blamed for leading to issues such as increased burdens on local governments.
As a result, local governments turned to auctioning land use rights for more revenue, which helped to create a real estate bubble.
