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5. Resources were concentrated to ease the financial difficulties of counties and townships and make basic public services more uniform. We conscientiously implemented preferential fiscal and tax policies to promote balanced development among regions. We also continued to increase transfer payments to help township- and county-level governments overcome their financial difficulties.

First, we stepped up efforts to implement the "three rewards and one subsidy" policy. We allocated 23.5 billion yuan for this purpose in 2006, an increase of 8.5 billion yuan over the amount for 2005 and improved the mechanism for granting rewards and subsidies. Progress in alleviating financial difficulties of counties and townships was consolidated and expanded, with reduction in the number of counties identified by the government with financial difficulties from the 791 of early 2005 to the current 200 or so, and continued progress will be made in this regard. Innovations were made in the way public finance is managed at and below the provincial level. The reform to put township finance under county administration was carried out in 28 provincial-level localities, and the reform to put county finance under direct provincial administration was carried out in 18 provincial-level localities, thus providing institutional and structural guarantees for funding to alleviate the financial difficulties of counties and townships. Stronger encouragement was given to major grain-producing counties to grow crops, thus helping safeguard food security for the country. Improvement in the governance capacity of county and township governments has helped maintain social stability.

Second, we improved the permanent mechanism for ensuring a stable increase in general transfer payments. The central government allocated 152.7 billion yuan in 2006 for general transfer payments to local governments, mainly those in the central and western regions. This is an increase of 40.7 billion yuan over the 2005 figure.

Third, we improved the rules on transfer payments to ethnic minority areas. These transfer payments totaled 15.563 billion yuan in 2006 and ethnic autonomous counties that are not located in an ethnic autonomous region or prefecture were included in the scope of these payments. We improved the rules on transfer payments to financially strapped areas such as old revolutionary areas, border areas, and Tibet.

Fourth, we supported the strengthening of government authority at the county and township levels. Funds totaling 5.93 billion yuan were set aside in the central budget in 2006 to help lower-level procuratorial, judicial and public security departments to further improve conditions for processing cases. Funds totaling 925 million yuan were earmarked to reform the prison system. The central government will start a two-year campaign beginning in 2006 to help solve the problem of 98,086 villager committees in the country without meeting facilities, for which 490 million yuan has been set aside in the 2006 budget. In addition, follow-up policies were united for the first time to support people relocated to make way for large or medium-sized reservoirs and strong support was given to economic development in areas around the reservoirs and areas where displaced people have been resettled. These measures improved the ability of local authorities, especially at the county and township levels, to provide basic public services.

6. All reforms were strongly supported and constant improvement was made in the socialist market economy. Significant progress was made in the reform of the budgetary management system and in support for reforms in other key areas and crucial links.

First, salary reform and standardization of income distribution for civil servants progressed smoothly. Reform of the salary system for civil servants, military personnel, embassy and consulate personnel working overseas and personnel assigned to work in Hong Kong and Macao was implemented. The salaries and benefits were raised accordingly for people who have retired from government departments, public service institutions and enterprises and personnel sent abroad to participate in foreign-aid programs. The level of benefits and living allowances was raised for entitled groups and recipients of urban basic cost of living allowances. Special consideration was given to personnel retired from enterprises who hold senior professional titles and some retirees who retired early or whose basic retirement pension is relatively small. This represents the highest increase and the largest total amount ever spent by the central government for social welfare programs in history. In addition, we reviewed all allowances and subsidies for civil servants and set up and gradually improved oversight and constraint mechanisms.

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