Video: China's fiscal reforms needed

Fiscal and tax reform is the entry point and main thread of the overall deepening of the financial reforms.

China's third plenary session of the 18th CPC Central Committee revealed the direction of state sector reforms and the shift in local governments' financing power, as currently, local governments' spending right and powers are not matching.

Matching loval governments' spending with their financing power is the key of China's fiscal reforms. Huang Yiping, Professor at China Center for Economic Research, said local government should give up certain spending responsibilities.

"Now the central government wants to take back some of spending responsibilities, particularly things like pension, responsibilities for police, healthcare, education and so on. I think it is a good idea for it is better for these functions to have a uniformed standard in the country," Huang said.

On the other hand, the central government should give the local governments more financing power. China's local governments still have the big problem of soft budget constraints which means they are not responsible for their borrowing.

Local governments' borrowing has been rising rapidly regarless of their balance sheet. Many assume that if they cannot pay back, the central governmet will step in.

Huang says that the current situation is very dangerous and can easily lead to fiscal and financial crisis.

"I think before we give the local authorities more responsibilities, more revenue, we need to establish independent balance sheet. So they can raise their own taxes, sell bonds. The central gov't to step back, otherwise," Huang said.

China's local government are responsible for 80% of spending while getting 40% of tax revenue according to the World Bank data. Striking a healthy balance between the local governments' spending and income is the next big step in China's fiscal reform.