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Inter‐governmental fiscal relations are crucial to understanding government behavior and policy instruments. Chinese style fiscal federalism with the absence of division of political power is regarded as central to understanding China's economic growth and governance. However, there is much debate about how exactly to measure China's fiscal decentralization. This paper develops a comprehensive framework to measure the level of Chinese fiscal decentralization across the tiers of government in the past two decades. This study finds that China is decentralized at both provincial and sub‐provincial levels as a whole (the local level), but not at the xianqu level (the lowest levels of counties/districts and townships). There has been a slight decrease in fiscal independence at the provincial level, but it has been increasing at both local and xianqu levels, contributing to more accountable sub‐national governments. However, the author argues for a stronger monitoring and evaluating capacity at the central level in order to build a performance‐based fiscal decentralization system. A more transparent and rule‐based fiscal transfer system should also be established to reduce regional disparity in China.

Fiscal decentralization and personnel decentralization do not fully explain China's continuing expansion of local autonomy and economic growth. Administrative decentralization is a separate and important element in the restructuring of vertical intergovernmental relations in China after 1978. By delegating socioeconomic decision‐making and management powers to local governments in a gradual manner, the central government has successfully promoted economic growth without taking too much risk. The case study of the expansion of county government powers in Zhejiang Province demonstrates how administrative decentralization can be implemented independently of fiscal and personnel decentralization, and can also effectively expand local autonomy and stimulate regional economic growth. The case study of administrative decentralization in China not only adds to our understanding of decentralization in the former centrally‐planned command economy, but also offers a possible model for other transitional countries to initiate market reform.