The message in this paper, written only last month, is clear. The present system of local government finance is unsustainable. Fan Ziying and Wang Guanghua from the Shanghai University of Finance and Economics and the Director of Research of the Asian Development Bank Institute respectively trace the problem back to a major overhaul of the tax system in 1994.
At that time a system of weak central but strong local finances was reversed. The well meaning intention was to allow for more balanced regional expenditure and development. The unintended consequence has been to make local governments highly sensitive to local revenues from property and to seek ways to circumnavigate tight controls on local government bond issuance.
This is a very dense paper (and, apologies to the authors, but quite badly written) and only serious wonks should consider reading it in its entirety. Easier to jump to the conclusions on P.20 about how best to reform the current system. Chief among these is for a property tax that would provide more stable revenue than the series of one-off gains that many administrations have become too reliant on.
As the authors point out though trial property tax systems in Shanghai and Chongqing have so far shown only piffling returns. A much stronger resolve will be necessary if these schemes are to be fully implemented and effective. However, higher property taxes may put a damper on local property prices; a Christmas local administrative-turkeys are unlikely to be keen voting for. A thorny problem for sure, but one which must, and this being China will, be grasped in time.
You can access the paper in full via the following link Fiscal Risk of Local Government Revenues in China
Happy Sunday