The 2010 budget rightly implies a broadly neutral fiscal stance. Given the remaining uncertainty about the world economy, flexibility in its implementation is important. Inflation expectations can be contained by a tighter monetary stance and a stronger exchange rate, while monetary policy also has a key role to play in containing asset price inflation risks.

With regard to the property market, stability calls for an appropriate macro stance and improving the functioning of markets. Meanwhile, concerns about the affordability of housing for lower income people would be best addressed by a long-term government support framework.

The government has attached importance to structural reforms. In the coming years, two key challenges stand out. The first is playing the basis for continued rapid development. This requires bold efforts to reform and open up the economy, undertake needed public investments and create new sustainable sources of demand and supply. The second challenge is sustaining recent progress in moving towards a "harmonious society." Specific challenges include creating conditions to generate employment and improve "primary income distribution," in the quality of and access to public services, in expanded social security and other means to reduce vulnerability, and in efforts to create a less resource-intensive and more environmentally friendly form of growth.

Meeting these challenges will require a range of reforms and policy adjustments, most of which already featured prominently in the speeches and policy documents presented at the recent session of the National People's Congress. Implementing them effectively will be the key to success. These reforms aim to achieve the following five inter-related objectives:

First, further progress in rebalancing the economy must be made. Speeding the shift from a model led by exports, investment and industry to one led by domestic demand, consumption and service sectors, has become more critical than ever.

Second, efficiency gains in all sectors and spheres of activity should be enhanced. While recent growth of Total Factor Productivity (TFP) has by no means been low, the main driver of China's GDP growth has been physical capital accumulation. However, if rapid growth is to be maintained, TFP will have to play an increased role. Reforms to the pricing of capital, energy, and other natural resources will also lead to more efficient use of resources. Financial sector reform can also improve the efficiency of capital. Further policies to support innovation can help China's export enterprises move up the value chain.

Third, a more spatial transformation of economic activity and employment must be pursued. While the core of this agenda is about moving to a more permanent and successful form of urbanization, it also includes the shift of economic activities—for example, from coastal toward inland areas. Further urbanization is inevitable as China continues to develop. It can also be a positive source of sustained consumption growth, and creating demand for major investments in productive activities, infrastructure and housing. The resulting agglomeration effects can further raise productivity, especially if backed by investments to connect urban centers.

Fourth, further changes are necessary to the role of the state concerning the economy. In sectors like the financial sector and the broader service sector, it is necessary to expand the role of the market, with the state shifting from the use of direct controls or dominant ownership stakes toward a greater focus on incentives, appropriate regulation and other indirect means of governance. But in some other areas, the direct role of the state could be enhanced. These include the provision of health and education services and various dimensions of reducing vulnerability.

Fifth, China's interaction with the rest of the world must be taken into account. As China's role in the global economy increases, including through increased outward investment, its development and policies will have increasing impacts on global markets and other countries, which needs to be factored into policymaking. Meanwhile, working in concert with other countries, China will be involved in tackling a range of issues on global and regional public goods, including matters concerning the environment.