Handling the relationship between the central and local governments is a key issue in the modernization of China’s national governance. The financial system arrangement is the foundation of the relationship between the central and local governments, and it is also the main means of adjusting the relationship between the central and local governments in history. The lagging reform of the division of powers and expenditure responsibilities in the distribution area has led to poor performance of government functions, excessive transfer payments, and chaotic management, which are outstanding issues facing China’s fiscal system reform. The core of the division of powers and expenditure responsibilities is to build a standardized and effective government governance model. The implementation of reforms to adjust the division of powers and expenditure responsibilities must be promoted by external authority and the establishment of special institutions. The Central Committee or the Standing Committee of the National People’s Congress can take the lead to form a special committee. The market economy inherently requires the central and local governments to carry out division of labor and cooperation in accordance with economic laws. Centralization and decentralization should be coordinated with each other. The central and local governments should work together to create a good institutional environment, and let the market play a decisive role in the allocation of resources.
