Fiscal Risk Sharing in China: Is It Significant and How to Further Improve It?

Fei Han, Grace Li Bin and Chenqi Zhou

No 2024/200, IMF Working Papers from International Monetary Fund

Abstract: The COVID-19 pandemic has weakened the fiscal positions of local governments in China, while the recent stress in the Chinese property market has further compounded this issue, calling for stronger fiscal risk sharing among provinces. This paper examines the existing central to local governmental transfer system and its effect on interprovincial risk sharing and redistribution in China. We show that the fiscal transfers have played an important role in risk sharing although their main purpose is still redistribution. We also propose an alternative transfer mechanism with the size of transfers to each province linked to the shocks that the province is facing to enhance the fiscal risk-sharing effect. Using counterfactual simulations, we show that such an alternative mechanism can significantly enhance risk sharing among all provinces against idiosyncratic shocks while maintaining a comparable level of redistribution effect. Intergovernmental reforms and other structural measures could also be considered to further improve policy efficiency and effectiveness.

Keywords: Risk sharing; redistribution; intergovernmental reform; local government; counterfactual simulation; Annex I. data description; IMF working paper 24/200; LG bond issuance; Fiscal transfers; Fiscal union; COVID-19; Tax refunds (search for similar items in EconPapers)
Pages: 33
Date: 2024-09-20
New Economics Papers: this item is included in nep-cna and nep-ure
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