Social Sciences in China (Chinese Edition)

No. 4, 2025

Improving Central-Local Fiscal Relations—A Theoretical and Empirical Analysis Based on Central Transfer Payments

(Abstract)

Jia Junxue, Zhang Kewei and Liu Wenbin

This paper employs a unified central-local analytical framework to examine the strategic, goal-oriented interactions between central and local governments embedded in the system of central transfer payments following China’s tax-sharing reform. The analysis, both theoretical and empirical, reveals that under the performance-based governance system focused on economic growth, local governments have actively sought increased central transfers to raise investment levels while partially absorbing the associated development costs. In response, the central government has adjusted and optimized transfer mechanisms to provide conditional support for this behavior. This goal-oriented strategic interaction between the central and local governments effectively constrains and incentivizes local initiatives, thereby facilitating the implementation of national development strategies, promoting market development and economic growth, and ultimately fostering a virtuous cycle in central-local relations. The findings offer a fresh perspective on the institutional logic underpinning central-local fiscal dynamics in the post-tax-sharing reform era and provide useful insights for refining these relations and developing a modern fiscal system aligned with Chinese path to modernization.