The gap is partially addressed by the central government transferring some funds to local governments, but local governments, especially at the county-level, are still heavily under-funded.

Much of the transfer payment system is made up of earmarked funds, the number of which, according to Wang, now stands at 219.

The arbitrary figure has prompted local governments to rely on lobby activities to win more earmarked funds from central ministries, a situation that has led to corruption.

The fiscal gap has also prompted local governments to raise their debts, which have surged in recent years, developing into a major source of worry.

Responding to questions over local debt, Wang said the risk of local debt is still "under control", emphasizing most of local governments' liabilities are based on productive projects, which produced sustained returns.

The Organization for Economic Cooperation and Development said in its latest report that China's downside risks mostly stem from local public debt.

In addition to central-local fiscal relations, Wang said the future reform would also take on the current budget and taxation system.

According to Wang, the country's fiscal power is constrained by many rigid spending responsibilities such as funding education and agriculture. Seven categories pegged with revenue growth accounted for 48 percent of fiscal expenditure.

"For example, education expenditure should be no less than 4 percent of GDP and many other expenditures should grow faster than total revenue growth. This rigidity has constrained the adjustment of fiscal policy in the economy," Wang said.