Prior to economic reforms, the tax base of China dependedlargely on a few thousand large state enterprises (Naughton, 1992).With the early 1980s reform opening, the development of TVEsin the rural area greatly boosted the Chinese economy, and theirshare in national industrial output increased from 11.11% in 1980 to 30.82% in 1991 (China Statistics Yearbook, 1992). During theperiod from 1978 to 1993, the fiscal contracting system grantedlocal governments residual rights over local revenue (Oi, 1992), andTVEs had become a major income source for townships and villages.Under the new tax-sharing fiscal scheme in 1994, the tax revenuewas shared among the city/county government, the provincial gov-ernment and the central government, with the central governmenttaking the largest share.