SUMMARY While many developing countries experience a short period of economic boom and then spiral quickly into periods of deficit, currency fluctuation, and indebtedness, China has been able to sustain rapid economic growth and maintain solid fiscal capacity for the past 30 years, even during the Asian financial crisis in the late 1990s and the global recession in the beginning of the 21st century. This article examines three key strategies behind China's fiscal success — its flexibility in adapting tax policies to the changing economic and social conditions, its success in realigning the intergovernmental fiscal relationship in 1994 and forcing subnational governments to become more entrepreneurial in revenue generation, and its pursuit of institutional reforms since the mid‐1990s to improve the government's capacity in budgeting and financial management. The article evaluates the implications of the Chinese experience for other developing countries and discusses the future challenges of fiscal reforms in China. Copyright © 2012 John Wiley & Sons, Ltd.

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In an era when public debt is soaring worldwide, the debt risks in China, the world's second largest economy, are a crucial issue to be examined. This study uses both the conventional approach and the balance sheet approach to measure governmental debt in China. Our updated assessment suggests that it is unlikely that there will be a debt crisis in the near future although governmental debts have piled up to a historically high level. However, China faces daunting challenges in ensuring fiscal sustainability in the coming decades. To overcome these challenges, it is urgent for China to significantly restructure its newly developed budgeting system in order to improve its capacity to manage fiscal risks.

Rapid urban growth has become a global phenomenon. As these city populations expand, urban governance is even more of a daunting challenge in many countries. China is not an exception. It is at once a transitional state still undergoing urbanization and economic development; it is also currently experiencing a slowing economy. China's cities must simultaneously continue to improve the quality of urban life while maintaining social stability. Using the city of Guangzhou as an example of China's mega‐cities, this study explores the financing strategies used by Chinese cities to manage urban growth. While economic growth has always been the main priority, Guangzhou's strategy has not followed China's traditional approach of growth for growth's sake; instead, it is relying on investment in innovation and transportation to promote the local economy. Education is also being stressed as a means of fostering human resources. However, undisciplined infrastructure financing and ineffective intergovernmental fiscal relations are jeopardizing the city's fiscal sustainability. To correct this will require further reforms of China's fiscal system and a careful sequencing of reforms to maintain a sustainable growth in the urban area.