A recent body of literature with the paradigm of market preserving federalism at its core contends that China is a de facto federalist state. With the autonomy and tax rights of local governments entrenched in the reform era, local governments have allegedly become decentralized engines of growth. Scrutinizing the underlying premises of the above paradigm, this article arrives at a picture of China's local governments as less autonomous and the system of vertical bureaucratic control as more potent than that painted by the above paradigm. Emerging from our findings is an alternative interpretation of China's central–local fiscal relations that may help us understand such recent phenomena as the proliferation of arbitrary charges.