Faced with Beijing’s treasury running on empty, Zhu Rongji forced the 1994 tax-sharing system (分税制), flipping the central revenue take from 22% to 55%. However, local expenditure obligations were left largely unaddressed at ~85%.
Zhu laid off tens of millions of unviable SOE workers, privatized housing, and forced city mayors into entrepreneurial survival. To bridge their yawning fiscal deficits, municipalities turned to commercializing agricultural land rights.
WTO entry unleashed extraordinary manufacturing export windfalls. Yet municipal reliance on off-balance-sheet Local Government Financing Vehicles (LGFVs) built the modern property and infrastructure over-leverage crisis.