Operational-first Finance: How China’s Financially Distressed Counties Generate Revenue Amid Fiscal Insolvency

Amid economic crises and the collapse of land-based fiscal revenue, China’s county governments face severe fiscal insolvency. The emergence of the “operational-first finance” approach comprises informal coping strategies developed by financially distressed county governments to circumvent the constraints of formal institutions. Some of these strategies have evolved into adaptive informal institutions. To open this black box, our in-depth investigation identifies three principal approaches. First, vertical bargaining – manifested in the manipulation of transfer payments, project packaging, and debt transfers – leverages shared interests and has become the dominant strategy for fiscal survival. Second, market profiteering – reflected in the promotion of new land-based fiscal revenue mechanisms and the sale of public resources – operates in quasi-legal grey zones but proves insufficient to remedy funding shortfalls. Third, societal extraction – implemented through heightened taxes and non-tax revenues and often perceived as “civilian plundering” – involves practices characterised by overt illegality or excessive social costs that prevent them from becoming widespread, given considerations of organisational and individual rationality.