This annex is about the possibilities and needs for reforming the intergovernmental fiscal system to support the general economic reform in China. In the first section, the norms for deciding on the right amount of fiscal-decentralization and the right structure of local finances are discussed, and the international experience is reviewed. A brief description of the present system of local financing in China, some evidence about its performance, and a review of the problems encountered follows. The final section of the annex presents the broad outlines of the reform options.