China’s Budgeting and Audit System: Reforms and Implementation

China’s fiscal landscape has transformed dramatically over the past three decades. From a centrally planned economy where budgets were opaque instruments of state control, the country has evolved into a system that embraces, at least on paper, modern principles of transparency, accountability, and efficiency. At the heart of this transformation lie sweeping budgetary reforms and a powerful national audit institution that together shape how public money is raised, spent, and scrutinized.

The backdrop: why China needed budget reforms 🔗

Before the 1990s, China’s budgeting process was fragmented, secretive, and heavily dominated by line-item traditions inherited from Soviet-style planning. Government departments routinely received funds based on historical allocations rather than actual needs, and off-budget expenditures flourished outside any meaningful oversight. As market reforms deepened, this system became untenable. Corruption, wasteful spending, and weak fiscal control threatened the credibility of the state itself.

The turning point came with the 1994 fiscal reform, which restructured central-local revenue sharing and laid the groundwork for a more modern budgetary architecture. But the real transformation unfolded in the late 1990s and early 2000s, when a series of interconnected reforms began reshaping how money moved through the Chinese state.

Departmental budgeting: ending the era of hidden money 🔗

One of the earliest and most consequential reforms was the introduction of departmental budgeting. Traditionally, Chinese government agencies compiled budgets in a piecemeal fashion, with revenues and expenditures scattered across multiple accounts and funds. This made it nearly impossible for legislators or citizens to see the full financial picture of any single department.

Departmental budgeting changed that. Under the new approach, every government department must consolidate all revenue and expenditure into a single, comprehensive departmental budget. This brought previously hidden funds into the open and established a clearer link between what a ministry was supposed to do and the resources it received to do it.

Why this mattered for accountability 🔗

Consolidating budgets was not just an accounting exercise. It created, for the first time, a document that legislators at the National People’s Congress could meaningfully review. It also reduced the opportunities for departments to maintain slush funds or parallel financial operations outside the scrutiny of the Ministry of Finance.

Zero-based budgeting: starting from scratch 🔗

The second major reform was the adoption of zero-based budgeting (ZBB). Pioneered in Peter Pyhrr’s work at Texas Instruments in the 1970s and later popularized in the United States, ZBB requires every expense to be justified from zero at the start of each budget cycle, rather than simply adjusting last year’s allocation upward.

ZBB was introduced to China in the early 1990s, with Hubei Province serving as the primary testing ground. The intent was ambitious: break the inertia of incremental budgeting and force every department to demonstrate the value of its spending each year. In practice, however, the Chinese experiment evolved into something more hybrid. Researchers describe it as a target-based budgeting approach that incorporates ZBB principles for certain expenditure categories rather than applying them universally.

The reform’s revival has been striking. In 2024, the Third Plenary Session of the 20th Central Committee of the Communist Party of China included a directive to advance zero-based budgeting reforms, with Anhui Province emerging as a high-profile pilot. Officials there reportedly discovered “zombie policies” from the 1990s that were still consuming funds without delivering results, illustrating exactly why ZBB remains politically attractive.

The persistent challenges of ZBB 🔗

Despite its appeal, ZBB has proven difficult to implement fully. Departments resist having to justify every line item annually, the administrative burden is heavy, and political interests often protect certain programs from serious review. The Anhui experience shows that reform requires sustained political will at the highest levels, not just technical guidelines.

Treasury reforms: the single account revolution 🔗

Perhaps the most technically transformative reform was the overhaul of treasury management. Before 2001, Chinese government bank accounts were notoriously fragmented, with agencies at every level maintaining their own commercial bank accounts. This hindered budget execution, enabled corruption, and made it nearly impossible for the Ministry of Finance to know how much cash the state actually held at any given moment.

The centerpiece of reform was the establishment of the Treasury Single Account (TSA) system, launched in 2001 under the Ministry of Finance’s leadership to centralize the disbursement of budgetary funds and strengthen expenditure controls. A TSA is essentially a unified structure of government bank accounts that gives fiscal authorities a consolidated, real-time view of the state’s cash resources.

Alongside the TSA, China introduced a centralized procurement system to replace the old decentralized purchasing practices that had enabled so much waste and favoritism. These changes, taken together, represented a fundamental shift from fragmented, opaque cash management toward something resembling modern public financial management.

The ongoing evolution of treasury management 🔗

The TSA reform has not been fully completed. Local governments, in particular, have accumulated large cash reserves – by some estimates amounting to 3-4 percent of GDP – reflecting both under-execution of budgets and the partial success of TSA structures at central, provincial, and municipal levels. The Ministry of Finance continues to push for more integrated cash management, and recent government reports emphasize building a modern treasury management system as an ongoing priority.

The 2014 Budget Law and beyond 🔗

The next major milestone came with the revision of the Budget Law in 2014, which took effect in 2015. This was the most significant reform of China’s fiscal system since 1994, with stated goals of improving the budgeting process and enhancing the transparency and accountability of local government financing. The law required adoption of multi-year budgets, set clearer rules for managing deficits and surpluses, and for the first time permitted provincial governments to issue bonds under strict central oversight.

More recently, China has pursued a Government Accounting Reform, which since 2019 has transitioned the country from a purely cash-basis accounting system to one that integrates both cash (budgetary) and accrual (financial) accounting. This change requires governments to prepare comprehensive financial statements disclosing assets, liabilities, and other fiscal information – a significant step toward modern public sector accounting practice.

The National Audit Office of China (CNAO) 🔗

Budget reforms only work if someone is watching. In China, that role belongs primarily to the National Audit Office (CNAO), formally established on September 15, 1983, following the audit provisions of the 1982 Constitution.

The CNAO is unusual among supreme audit institutions globally. Unlike audit offices in Australia, the United Kingdom, or the United States, which report primarily to parliaments, the CNAO operates under the leadership of the Premier of the State Council and submits its audit reports on central budget implementation directly to the Premier. This places it within the executive branch rather than serving as a fully independent parliamentary watchdog.

What the CNAO audits 🔗

The scope of CNAO’s work is vast. It audits the implementation of the central government budget and other revenues and expenditures, and reports the results to the Premier. Local audit institutions at each administrative level mirror this structure for local budgets, reporting both upward to higher-level audit bodies and outward to their corresponding governments.

Beyond central budget implementation, CNAO’s mandate extends to:

State-owned enterprises: Audits of major SOEs, financial institutions, and their leadership form a core part of CNAO’s work, given the enormous role state enterprises play in China’s economy.

Projects funded by international loans: The CNAO serves as the external auditor for projects financed by the World Bank, Asian Development Bank, and other international lenders. CNAO has been the external auditor of all World Bank-financed projects in China since 1984, conducting audits under both Chinese government auditing standards and International Standards on Auditing.

Economic accountability audits: These examine the financial decisions made by leading officials during their tenure, including heads of central and local Party and government departments, public institutions, and state enterprises. This category has become increasingly important in China’s anti-corruption campaigns.

Social security, environmental, and livelihood funds: In recent years CNAO has expanded its reach to examine employment, elderly care, medical care, housing, education, and poverty alleviation funds, reflecting a broader definition of fiscal oversight.

The CNAO’s reporting cycle 🔗

The Auditor-General, entrusted by the State Council, reports twice a year to the National People’s Congress Standing Committee – in June on the results of audits from the previous fiscal year, and in December on progress made in rectifying the problems identified. This dual reporting creates both transparency and pressure for follow-up, though the real teeth of the system depend on how seriously rectification is pursued.

Follow-up audits: closing the loop 🔗

A recurring weakness in many audit systems worldwide is the gap between identifying problems and actually fixing them. The CNAO has increasingly focused on this challenge. Between 2021 and 2023, follow-up audit efforts led to over 9,700 regulations being made or improved and roughly 27,000 people being held accountable, with more than 68 billion yuan recovered or saved through asset recovery and cost reduction measures.

This follow-up architecture involves coordination between the CNAO, the NPC Standing Committee, the State Council, and provincial governments. Rectification reports are due by the end of September each year, and the results feed into the December report that the Auditor-General presents back to the Standing Committee.

The limits of reform 🔗

For all this progress, China’s budget and audit system still faces significant structural constraints. The 2025 Fiscal Transparency Report from the U.S. State Department notes that China’s supreme audit institution does not meet international standards of independence, although it does review government accounts and make audit reports publicly available within a reasonable period.

The executive-led nature of both budgeting and auditing means that the National People’s Congress, in practice, has limited power to shape or challenge the budgets drafted by the Ministry of Finance. Budget transparency also remains uneven. A survey of three departments across 36 Chinese municipalities found significant inconsistency in whether and how budgetary information is disclosed, with state-secrecy considerations often cited as grounds for non-disclosure.

Local governments, meanwhile, have struggled with hidden debt, budget uncertainty, and perverse incentives like year-end spending rushes driven by use-it-or-lose-it rules. These are not unique to China, but they complicate any simple narrative of steady progress.

Why this matters beyond China 🔗

China’s fiscal reforms offer important lessons for public administration students and practitioners. They demonstrate how a large, hierarchical, single-party state can adopt technical reforms borrowed from Western public financial management – TSA, ZBB, accrual accounting, performance budgeting – while adapting them to its own political logic. They also show the limits of technical fixes in the absence of robust legislative oversight and independent audit institutions.

For comparative studies within the BRICS context, China’s trajectory sits in interesting tension with Brazil’s more legislatively driven budget processes, India’s parliamentary audit model under the Comptroller and Auditor General, and South Africa’s constitutionally entrenched Auditor-General. Each system reflects different choices about where to locate accountability and how much independence to grant fiscal watchdogs.

What do you think? Can technical reforms like zero-based budgeting and treasury single accounts deliver genuine accountability without stronger legislative oversight of the executive? And how should audit institutions balance independence from government with the practical need to work closely with the departments they audit?

References

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