The determinants of fiscal transparency in Chinese city-level governments

ABSTRACT

The transparency of the fiscal performance of governments has attracted attention from researchers, policy-makers and practitioners around the world. This study examines the determinants of fiscal transparency in the city-level governments of China, which has become a key issue in the drive to modernise the Chinese state. Employing cross-sectional data from the 2017 Statistical Yearbooks published by the official statistical institutions and the 2017 Fiscal transparency report of city-level governments edited by the Tsinghua University, this study finds that economic development, economic openness, and dependence on transfer payments are associated with weaker fiscal transparency. Large cities, those with high levels of internet usage and cities higher up within the Chinese administrative hierarchy are associated with stronger fiscal transparency. The theoretical and practical implications of these findings are discussed.

KEYWORDS:

• Fiscal transparency
• local government
• China
• principal–agent theory

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. There are five main subnational administrative divisions in China. The highest level includes the provinces and the four municipalities directly under the Central government. Fifteen sub-provincial cities and 294 prefecture-level cities are located at the second and third level. Counties, townships, and villages are classified into the third, fourth, and fifth levels. Cities in this study therefore refer to municipalities, sub-provincial and prefecture-level cities.

2. The FT report classifies fiscal information into the following four categories: i) basic information on the city government and public institutions (maximum possible score = 50); ii) annual budget plan and the budget report for the last fiscal year (maximum possible score = 340); iii) other significant fiscal information such as audit reports (maximum possible score = 250); and, iv) the three advanced principles – the ‘one-stop service’ principle, the ‘sufficiency’ principle, and the ‘user-friendly’ principle (maximum possible score = 30).

3. A city’s transfer payment revenues in China include revenues from unconditional transfer payments (‘general transfer payments’ or financial grants in Chinese), specific transfers (grants for specific projects or purposes), and tax rebates (Zhang and Wu 2009). Transfer payment revenues are not included in public finance revenue and are listed separately in financial statements.

4. The Durbin-Wu-Hausman (DWH) test suggests that all the explanatory variables are exogenous. However, previous studies (e.g., Hameed 2005) found that a high level of FT in governments can bring in more foreign investment. Hence, to evaluate in more depth whether the relationship between FT and FDIGDP is endogenous, the values for FDIGDP for 2016, 2015, and 2014 were employed as instrumental variables in a two-stage least squares (2SLS) regression model. The F statistic derived from the first stage of the 2SLS regression is large enough to prove that the three instrumental variables were highly correlated with the potentially endogenous variable, but the subsequent DWH test did not reject the null hypothesis of exogeneity, meaning that we find no evidence of an endogenous relationship between FDI and FT.

Additional information

Notes on contributors

Shuo Sun

Shuo Sun is a PhD student in Cardiff Business School, and an affiliate of the School of Public Finance and Taxation, Zhongnan University of Economics and Law. His research interests include public finance policy and public service performance. His current research focuses on public service efficiency and inequality in China.

Rhys Andrews

Rhys Andrews is Professor of Public Management in Cardiff Business School. His research interests focus on the management and performance of public organisations. He is co-author of Strategic Management and Public Service Performance and Public Service Efficiency: Reframing the Debate.