China's highly centralized and hierarchical fiscal system means tier-two local regional governments (LRGs) will follow the direction indicated by the central government and promoted through their tier-one LRGs. Tier-two LRGs mostly refer to prefecture-level cities in provinces, and districts/counties in four municipalities under direct central government management and five municipalities that are under special state-planning--see the hierarchy chart below for details about the various government tiers. We expect tier-two LRGs will somewhat offset their debt burden through revenue growth and upper-tier transfers. At the same time, tier-two LRGs will steer through reforms to derisk debts embedded in local SOEs. We believe central government and provincial governments will provide exceptional support to ensure tier two's systemic financial stability and long-term fiscal
