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China's fiscal system in the 1980s and 1990s has not been stable and has experienced some major changes particularly with respect to central-local fiscal relations. The alternating centralization and decentralization of fiscal power in recent years suggests that a stable fiscal system that fulfills the needs of both the central and local governments has yet to be found. As will be shown in this thesis, the current fiscal system has resulted in a decline in the share of financial resources mobilized by the central government. The economic and political implications of deteriorating central-local fiscal relations could be profound. There is therefore the need for better understanding of what and how the relations have evolved. This thesis explains why and how central-local fiscal relations have evolved in a particular trajectory in the period 1980- 1994. Specifically, the study addresses the following issues: What were the characteristics of the fiscal system in the pre-reform period? How has the system evolved since 1980? What major factors underlied these changes? What impacts these changes might have on the economic transition in general? Underlying the central-local fiscal relations is the central issue of compatibility of central and local interests. The analytical framework used to address this issue is the principal-agent theory. It is suggested that incompatible interests between the central and local governments constitute the main force for frequent changes in central-local fiscal relations.