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Hainan Island has developed for years within a centrally planned economic system. The Chinese government has decided to make Hainan a separate province and a special economic zone with a charter to build a market-oriented, outward-looking economy with mixed forms of ownership. This Note examines one aspect of the changes that the province must make in order to make a successful transition to a market-oriented economy &mash; the fiscal structure. It discusses the shifts needed in taxation, public expenditures, overall fiscal balance, autonomy, and accountability necessary to move away from its current fiscal structure. In addition, it examines the relationships between fiscal reform and other reforms. The author suggests that the current tax system on Hainan must be supplemented or replaced during the transition to a market economy. The current pattern of public expenditures is likely to change as well, and Hainan's provincial budget must be brought into balance. Finally, Hainan needs additional autonomy from the ministries of the central government if it is to successfully implement its reform program.

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