Fourth, we worked out and implemented fiscal and tax policies to encourage energy conservation and development of new energy resources. Responding to the high oil prices, we carried out a great deal of research on how to stimulate development of oil substitutes, formulated the policy to support the development of bioenergy, and set up the basics for a system of fiscal and tax policies to promote the development of alternative energy sources. In addition, we overhauled the mechanism for setting oil prices and introduced a special surcharge on oil sales. The above measures, along with other control measures, played an important role in maintaining the direction for economic development expected under the guidance of macroeconomic regulation.

3. Budgetary support for agriculture, rural areas and farmers was increased and a good start was made in efforts to build a new socialist countryside. Effective policies, numerous measures and new mechanisms were introduced to give budgetary support for agriculture, rural areas and farmers in 2006. As a result, the countryside began to feel more and more warmth from increased public spending. A total of 339.7 billion yuan (excluding the 12 billion yuan paid to grain farmers in direct subsidies from special surcharge on oil sales) from the central budget was allocated in 2006 for agriculture, rural areas and farmers, 42.2 billion yuan or 14.2% more than the amount for 2005.

First, the agricultural tax was rescinded nationwide. In addition, taxes on special agricultural products were rescinded and the Interim Tax Regulations for Tobacco Leaf were formulated and introduced. This move marks a fundamental change in the traditional income distribution arrangement between the government and farmers, and helps reduce the burden on farmers, increase farmer incomes and nourish farmers as well as promotes sustained development of agriculture. The central government allocated 78.2 billion yuan and local governments 25 billion yuan in transfer payments in 2006. The burden on rural residents was reduced by about 125 billion yuan, or 140 yuan per capita, over the level of 1999, the year before reforms were introduced, and the burden on farm laborers was also reduced. Reform of rural taxes and fees entered a new period in overall rural reforms.

Second, subsidies were increased. The central government allocated an additional 12 billion yuan in funding to grant 728 million grain farmers timely general direct subsidies to help meet increased expenses for agricultural supplies due to price rises. Another 8.59 billion yuan in subsidies was granted to the fishing industry and other industries to offset higher petroleum prices. Direct subsidies to grain farmers nationwide totaled 14.2 billion yuan, 1 billion yuan more than total grain subsidies in 2005, of which 12.68 billion yuan went to the 13 major grain-producing provinces and autonomous regions, accounting for more than 50% of the grain risk funds of those provinces and regions. The central government appropriated 4.15 billion yuan in subsidies for growing superior varieties and 600 million yuan in subsidies for purchasing agricultural machinery and tools, an increase of 100% over 2005. To improve the policy governing the price floors for the purchase of grain, 5.9 billion yuan was distributed in timely subsidies. We instituted the use of the all-in-one account across the country, enabling subsidies to be put directly into the bankcard or passbook account of farmers. We also began to set up a website for subsidies for farmers and tightened management of these subsidies. We set up the framework for an agricultural subsidy policy system suited to China's conditions with a combination of general and special subsidies and standardized management to ensure and promote security in grain production.

Third, smooth progress was made in reform of the mechanism for guaranteeing funding for rural compulsory education. The western region took the lead in the country in the reform to exempt all rural students receiving compulsory education from paying tuition and miscellaneous fees beginning with the spring semester of 2006.The region also provided textbooks free to students from economically disadvantaged households and granted living allowances to poor boarding students. The central government granted general subsidies for compulsory education expenses in rural primary and middle schools in the western region and launched a permanent mechanism to fund repair and rebuilding of all rural primary and secondary school buildings used for compulsory education across the country. Every province in the central region also chose one of its counties to launch the above trial reforms beginning with the fall semester of 2006. Most provinces in the eastern region also carried out similar reforms on their own initiative. The central government appropriated 15 billion yuan and local governments 21.1 billion yuan for this purpose. Some special funds were handled through the centralized treasury payment system so that they reached the schools directly. This measure reduced the burden on primary school students by an average of 140 yuan per student per school year and on junior middle school students by 180 yuan. This reform enabled us to gradually incorporate expenditures for rural compulsory education into the public finance system and shows that profound changes are taking place in the way public goods are delivered in rural areas. On the basis of this reform, we strongly supported implementation of the plan to attract exemplary teachers to work in rural schools providing compulsory education and launched a pilot project to build new schools with improved sanitation facilities in the new countryside of ten provincial-level localities. All this has helped increase momentum in the development of rural compulsory education.

Fourth, the trial reform to introduce a new type of rural cooperative medical care system was carried out in more areas. Statistics indicate that the trial reform was carried out in 50.7%of the country's counties, county-level cities and city districts, involving 410 million rural participants. The central government increased assistance to participants from 10 yuan per person to 20yuan per person in 2006 and governments at the provincial level made similar increases. The central government allocated 4.27 billion yuan to fund subsidies. This reform changed institutions and mechanisms to ease the problem of rural residents being driven into poverty or back into poverty because of medical problems.

Fifth, strong support was given to agricultural production and long-term development of the countryside. Support was focused on carrying out six types of small rural projects [water-efficient irrigation, potable water supplies, road building, methane production facilities, hydroelectric plants and pasture enclosure,Tr.] to improve working and living conditions in rural areas. We promoted comprehensive agricultural development, upgraded low- and medium-yield farmland and supported industrialization of agriculture, resulting in an estimated increase of 2.91 billion kilograms in grain production capacity. The central government has decided to write off 4.486 billion yuan worth of the debt accumulated for comprehensive agricultural development within a four-year period beginning in 2006 to give farmers greater incentive to develop production. The focus of spending of the 13.7billion yuan in poverty relief funds from the central budget was on infrastructure development in poor villages, job training for poor farm laborers looking for urban employment and industrialization of agriculture. We strongly supported efforts to promote greater application of agricultural technology, to develop professional farmer cooperatives, to train rural workers seeking nonagricultural employment in the cities, to launch the project to spread knowledge of science and technology and create a new type of farmer and the plan to help farmers and villages prosper through science, and to promote the action plan for helping farmers and counties prosper through science and technology.

Sixth, strong support was given to the establishment of a mechanism for diversified funding to support agriculture. We carried out a pilot project to integrate government funding to support agriculture in 162 counties in the country to improve the performance of government funds. We actively explored various mechanisms such as projects run by the local people and subsidized by the government to increase local farmer investment. We strongly supported the development of a rural financial system. In 2006 the central government appropriated 2.931 billion yuan in inflation-proof interest subsidies for rural credit cooperatives in selected areas and extended the policy on income tax reductions and exemptions by three years to credit cooperatives in selected areas to gradually reduce their longstanding debts, help drive their future development and give more play to their role as a major force in building a new socialist countryside. All these measures promoted agricultural production, increased rural incomes and stepped up progress toward balanced development between urban and rural areas.