Public spending is one of the Chinese government's key tools to shape national development. Currently, public expenditure policies are undergoing a major transformation to meet the changing requirements of the market economy. However, major challenges remain: to develop more effective institutions and practices for planning, implementing and controlling spending; to improve the allocation of spending so that it better meets China's needs; and to reform the relations among levels of government. This study draws extensively on Chinese government and other sources to provide a detailed and up-to-date picture of the current state of China's public expenditure policies, the main reforms that are being undertaken, and the problems that remain to be resolved. The first and second chapters discuss the main elements of China's public expenditures, the factors underlying their rapid growth over the past 10 years, and efforts to improve the effectiveness with which public expenditures are planned, implemented, and evaluated. These chapters also provide an overview of the fiscal relations among levels of government in China and analyse the allocation of public spending among major areas. The third chapter gives an extensive analysis of a key problem in China's public expenditure policies: the widespread gaps between expenditure responsibilities and the fiscal resources available to pay for them for provincial and lower levels of government. Reforms to address these gaps are likely to be critical to improving the allocation of public spending and its overall effectiveness, as well as to restrain the illicit spending and borrowing by local governments that has become a matter of great concern in recent years.