On June 23, Chief Auditor Li Jinhua submitted a report to the 10th National People’s Congress (NPC) Standing Committee that shocked the nation. The National Audit Office had uncovered misuse of some 1.4 billion yuan (US$170 million) from the 2003 budget.

The audit office report summarizes five main problems:

• Fraud, embezzlement and misuse of government funds allocated to disaster relief, education, the Olympics and treasury bonds, by organizations of both the central and local governments.
• Financial irregularities at banks resulting from inadequate supervision.
• Tax irregularities, with some tax bureaus failing to collect taxes or failing to suspend or terminate levies when so ordered.
• Illegal requisitioning of land for development, with some local governments abusing authority in order to obtain profits.
• Misrepresentation and fraud employed by private enterprises to obtain bank loans. 

The violators are primarily government departments and officials and state-owned enterprise executives, followed by employees of state-owned financial institutions and private enterprises. The funds targeted were mainly fiscal appropriations, tax revenue, bank loans and land.

Despite the enormity of the misappropriations revealed in the report, it should be remembered that these were discovered only through spot checks. Clearly there has been a failure in the government administrative system and laws, and the NPC Standing Committee has already asked for thorough investigation of the departments involved.

In recent months, a number of macro-control measures have been implemented to avoid economic overheating. The main cause for concern has been excessive government investment, including development zone expansion and “vanity” construction projects. Another major problem area is sizzling growth in the real estate sector, which transfers the cost of demolitions to the government.

Local government interests have hindered the implementation of the central government’s macroeconomic measures. The potential for danger inherent in this situation is huge. If such corruption spreads, the central government’s control will be further loosened. The use of government power to amass wealth from public funds will widen the gap between the rich and the poor, with a negative impact on social stability.

In addition to curbing overheated investment, it is imperative for the government to establish a new order: to administrate the nation according to law. Without this, China’s development cannot be sustained.

When the country’s top leaders took office last year, the core of the new order was to restore the dignity of the law and govern according to law. To this end, the NPC Standing Committee has established an office to review all laws and regulations. Leading scholars have been gathered to form a Constitution Committee.

At the beginning of this year, the Communist Party of China promulgated a Party supervision and punishment regulation that includes regular assessment and reporting of performance and integrity. The Administrative Licensing Law that came into effect on July 1, 2004, will help to regulate government departments. A number of high-ranking officials have already left their positions pursuant to the implementation of the take-responsibility-and-resign system. Meanwhile, the anti-corruption drive is moving ahead.

The central government is also working to reform the financial sector. At the beginning of this year, it injected massive capital from its forex reserve into the state-owned Bank of China and China Construction Bank to assist them in eliminating bad debt and restructuring. Recently, China’s central bank, the People’s Bank of China (PBOC), also bought US$100 billion worth of bad loans through a bill issue. The reorganization and planned IPOs of the two state-owned commercial banks are also accelerating. PBOC Governor Zhou Xiaochuan said that it was impossible to further split the bad assets from commercial banks. The legislature is now considering a law on bankruptcies of financial institutions.

A new round of tax reform will be initiated and enterprise taxation will be standardized. The State Administration of Taxation recently called for stronger controls over tax defaults and collection of taxes in arrears. It also asked for the establishment of a system to speed collection and improve records of tax defaults.

State capital will gradually exit from the domestic capital market. In the future, market influences and laws will resolve problems in the market. Stock markets will integrate international standards of operation.

In early June, the Ministry of Commerce (MOFCOM) released guidelines for improving the legal system, accelerating market reform, strengthening macroeconomic management and forming a unified domestic market. Seven ministries, including MOFCOM, recently released directives to eliminate local protectionism.

The land acquisition system must be strictly implemented and proper disposal made of all illegally acquired land. The central government will eventually set property taxes and local governments will not be permitted to pilot their own schemes.

The reform of SOEs is accelerating. The bankruptcy bill was sent to NPC Standing Committee for examination on June 21. When it becomes law, it is expected that over 2,000 state-owned enterprises that have been operating in the red will exit the market through bankruptcy.

Recently, with regard to illegal demolitions the State Council affirmed the importance of the media as a supervisory body. When the Law on Government Information Transparency is completed, government administration will become more open and accessible to media supervision.

The publication of the audit report is a clear example of the central government’s determination to face the facts and promote reform.

(China Business Post, translated by Tang Fuchun for china.org.cn, July 9, 2004)