The leadership agreed to grant local governments more “autonomous fiscal capacity”, allowing them to increase their tax sources and “appropriately” expand their management authority relating to taxation, the document revealed.

The policy measures from the four-day, closed-door plenary session – aimed at laying out China’s economic road map for the medium term – come as local authorities battle a cash drain, with the risk of waves of defaults on trillions of dollars worth of debt casting a shadow over prospects for the Chinese economy.

Meanwhile, the gulf between central and local wallets is widely regarded as one of the fundamental contradictions in the country’s allegedly uneven development. Tackling the issue could be crucial for a sustainable path forward in an increasingly fraught global geopolitical scenario.

The financial crunch at local levels has also contributed to lukewarm consumer demand. These authorities are the main spenders on various local public services like education and healthcare. Lacking their continued input, the high cost of these services deters households from spending more on other areas.

Insufficient demand at home to absorb domestic production has been broadly viewed as the flip side of the so-called “overcapacity” in China, grounds cited by the United States, the European Union and many Asia-Pacific neighbours in seeking more trade restrictions on Chinese products.

The decisions document of the third plenum, which lists a wide range of reform objectives to be completed by 2029 with more than 300 policy measures, pledges that the central budget will take on more expenditure and reduce the delegation of spending responsibilities to localities.

“I think the objective is to help local governments to make their fiscal positions sustainable by adding more revenue sources and relocating some expenditures to the central government,” he wrote in a note on Sunday.

Zhang expects the local government bond programme to play a more effective role, with the rules eased so that the funds can be utilised more freely.

He said that the third plenum did not change the government’s policy objectives, but it introduced new measures to achieve such objectives

Since Beijing began market reforms over four decades ago, taxation and central-local relationship reforms have long been regarded as the thorniest and most fundamental elements of a true overhaul of China’s economic system.

In the 1980s, China set up a de facto tax contracting system, with high revenue retention rates for local governments. However, that weakened the central authorities’ fiscal capacity, making many reforms difficult to implement.

The tax-sharing reform in 1994, launched by then-premier Zhu Rongji, eased the central government’s revenue shortfall but was blamed for leading to issues such as increased burdens on local governments.

As a result, local governments turned to auctioning land use rights for more revenue, which helped to create a real estate bubble.

The free fall in the property sector over the past few years has been a key reason for the financial difficulties faced by local governments.

Last year, local government fiscal revenues accounted for 54 per cent of the national total, while they shouldered as much as 86 per cent of the total expenditure, according to data from the finance ministry.

The funds crunch amid a post-pandemic economic slowdown and real estate crisis had added to concerns about the financial risks from China’s over 300 prefecture-level and about 3,000 county-level jurisdictions, some of them mired in crippling debt.

The third plenum has decided that the country will set up a “long-term mechanism” to defuse hidden debt risk, and “reasonably” expand the usage of money raised from local government special bonds.

Measures in the pipeline also include increasing the general transfer payments from the central government to local authorities, handing over consumption tax collection to local governments and improving the central-local split for shared tax revenue – such as value-added taxes.

The central government will also delegate some of its non-tax revenue management authority, according to the plenary document.