In 1975, in what turned out to be the valedictory speech of his long and tumultuous career, Zhou Enlai, the first premier of the People’s Republic of China, declared proudly that his government was free of all debt. “In contrast to the economic turmoil and inflation in the capitalist world,” he told the National People’s Congress, “we have maintained a balance between our national revenue and expenditure and contracted no external or internal debts.”
Almost half a century later, that attitude is still written on the hearts of finance ministry bureaucrats in Beijing. China’s central government debt has crept up to about 24 per cent of gross domestic product, which is minimal by global standards, and the leadership is deeply reluctant to let it climb higher. Yet in contrast, the debts of China’s local governments are vast — 93 per cent of GDP according to IMF figures, which are probably an underestimate — and rising. This division between central and local government, and the desire of one to have control but not responsibility with respect to the other, is fundamental to the economic challenges of China today.
A basic fact about China’s fiscal system is that local governments do almost all of the spending, but rely on the centre for revenue to an extent that is rare elsewhere in the world. Localities bear most of the responsibility for education, health, social security and housing, in addition to obvious local duties such as roads, parks and rubbish collection, and spend about 85 per cent of the government total. They directly collect only around 55 per cent of government revenues. The system is balanced by transfers from the centre to the regions.