The tax-sharing system reform since 1994 has hardened budgetary constraints on localgovernments, but has not derailed the fiscal decentralization trend since China started thereform and opening up. This fiscal decentralization has provided a strong impetus to localfinance, so that local governments have become quite enthusiastic in pursuing local economicdevelopment and improving local economic efficiency. As market competition intensifies, thepublic-owned enterprises have gradually become a financial burden on local finance.Meanwhile, the non-state sector has made an increasing contribution to the local economyand to local coffers. Therefore, it has become the optimal choice for local governments, inpursuit of their own interests, to reform the ownership structure of public-owned enterprises. The tax-sharing system reform since 1994 has hardened budgetary constraints on local governances, but not notrailed the fiscal decentralization trend since China started thereform and opening up. This fiscal decentralization has provided a strong impetus to localfinance, so that local governments have become quite enthusiastic in pursuing local economic development and improving local economic efficiency. As market competition intensifies, the public-owned enterprises have gradually become a financial burden on local finance.Meanwhile, the non-state sector has made an increasing contribution to local economy and to local coffers. , it has become the optimal choice for local governments, inpursuit of their own interests, to reform the ownership structure of public-owned enterprises.