IMF Working Papers

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

By Fei Han, Grace Li Bin, Chenqi Zhou

September 20, 2024

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Format: Chicago

Fei Han, Grace Li Bin, and Chenqi Zhou. "Fiscal Risk Sharing in China: Is It Significant and How to Further Improve It?", IMF Working Papers 2024, 200 (2024), accessed September 26, 2024, https://doi.org/10.5089/9798400289835.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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: Intergovernmental reform, Local government, Redistribution, Risk sharing

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