Regional Decentralization, Fiscal Incentives and Privatization of Public-Owned Enterprises

The tax-sharing system reform since 1994 has hardened budgetary constraints on local governments, but has not derailed the fiscal decentralization trend since China started the reform and opening up. This fiscal decentralization has provided a strong impetus to local finance, so that local governments have become quite enthusiastic in pursuing local economic development and improving local economic efficiency. As market competition intensifies, the public-owned enterprises have gradually become a financial burden on local finance. Meanwhile, the non-state sector has made an increasing contribution to the local economy and to local coffers. Therefore, it has become the optimal choice for local governments, in pursuit of their own interests, to reform the ownership structure of public-owned enterprises.