Continued urban—rural income disparity poses a serious policy challenge in China’s economic transition. As the Chinese economy booms and the state’s fiscal capacity grows, there should be a corresponding increase in the center’s capacity to redress urban—rural inequality. However, it seems that the stronger state extractive capacity since the mid-1990s has not translated into better urban—rural disparity outcomes. Based on a panel data set covering 270 prefectures in China between 1994 and 2003, the article evaluates the impact of local fiscal spending on urban—rural income disparity. Findings reveal a strong urban bias in China’s local fiscal system under an increasingly centralized fiscal system. The centralized fiscal model has in fact reinforced this tendency and ironically weakened the capacity of the central state in achieving the policy goal of reducing the urban—rural divide.
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