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Keywords:

  • financial risk;
  • fiscal system;
  • local government borrowing;
  • public debt
  • H61;
  • H63;
  • H74

This paper analyses and assesses China's current fiscal system, including its basic institutional arrangements, the relationship between central and local governments, and the fiscal balance and public debt. This paper pays special attention to the local government borrowings that have increased dramatically in recent years, and tries to measure the “overall public debt risk” by including all kinds of eligible debts. This paper finds that although the large expansion of local government debt during the fiscal stimulation response to the global financial crisis was devastating, the all-inclusive total public debt to gross domestic product ratio remains under 50%, and as long as the local debt stops growing, the risk is quite manageable. This paper also points out that more attention should be paid to improving and reforming the Chinese fiscal system, particularly the reform of the fiscal relationship between central and local governments, and the legal framework for local government debt management.