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In recent years, the central government in China has been leading the re-establishment of itsrural health insurance system, but local government institutions have considerable flexibility inthe specific design and management of schemes. Maintaining a reasonable balance of funds iscritical to ensure that the schemes are sustainable and effective in offering financial protectionto members. This paper explores the financial management of the NCMS in China through acase study of the balance of funds and the factors influencing this, in six counties in twoChinese provinces. The main data source is NCMS management data from each county from2003 to 2005, supplemented by: a household questionnaire survey, qualitative interviews andfocus group discussions with all local stakeholders and policy document analysis. The studyfound that five out of six counties held a large fund surplus, whilst enrolees obtained onlypartial financial protection. However, in one county greater risk pooling for enrolees wasaccompanied by relatively high utilisation levels, resulting in a fund deficit. The opportunitiesto sustainably increase the financial protection offered to NCMS enrolees are limited by thefinancial pressures on local government, specific political incentives and low technicalcapacities at the county level and below. Our analysis suggests that in the short term, effortsshould be made to improve the management of the current NCMS design, which shouldbe supported through capacity building for NCMS offices. However, further medium-terminitiatives may be required including changes to the design of the schemes.