Reforms in key areas continued to deepen. Trials in comprehensive rural reform were carried out throughout eight provinces (autonomous regions and municipalities directly under the central government), including Beijing and Inner Mongolia, as well as in some counties and cities in other provinces. A system of a board of directors was introduced in 19 wholly state-funded corporations on a trial basis. Work was basically completed to relieve a second group of 74 central government enterprises of their obligation to run social programs. Good progress was made in the reform of the management system of monopoly industries and in the initial phase of work to separate government functions from enterprise management in the postal service system. The Bank of China and the Industrial and Commercial Bank of China were successfully listed on the stock exchange and requirements for market access were lowered for rural financial institutions. The quality of assets of banks and their capital adequacy rates were further improved. Reform of the shareholder structure of listed companies was completed by and large, resulting in a rise in direct financing in such companies. Improvements were made in the foreign exchange management system and the mechanism for setting the Renminbi exchange rate. Reform to reclassify government revenue and expenditure items proceeded smoothly, and reform of the budgetary management system was deepened. Adjustments were made to improve policies on the sales tax, tax on natural resources and taxes relating to real estate, and the threshold for personal income tax was raised. Progress was made in reform of the investment system, with 30 provinces (autonomous regions and municipalities directly under the central government) working out rules for managing the approval and recording for projects funded by enterprises and more than 80% of enterprise-funded projects now on official record. In addition, the central government also moved to standardize management procedures for its investment projects. Positive results were achieved in the reform of the pricing mechanism for resource products and factors of production; the oil price reform and its support measures and the program to adjust electricity prices were implemented smoothly; fees for using water resources were introduced in 30 provinces, autonomous regions and municipalities directly under the central government; a progressive water pricing system was adopted for households in 15 cities; and a unified system for publishing minimum prices for the transfer of land to be used for industrial purposes was instituted. Work to deepen reform of the pharmaceutical and health care system was launched. An initiative to nurture small and medium-sized enterprises was implemented, thereby further improving conditions for the development of the non-public sector of the economy.

Vigorous efforts were made to change the pattern of growth of China's foreign trade. The country's export and import volume reached US$1.76 trillion in 2006, up 23.8% from the year before. The mix of exports and imports was improved with an increase in electromechanical exports of 28.8%, an increase in export of new and high technology products of 29% and in increase in the percentage of exports in the general trade that have high domestic innovation content and high added value. At the same time, excessive growth in the export of certain products whose manufacture requires large amounts of energy or results in serious pollution was curbed. Foreign direct investment in China over the year totaled US$69.5 billion. Further progress was made in the implementation of the "go global" strategy, with direct foreign investment by Chinese enterprises, excluding pure financial investment, hitting US$ 16.1 billion, a rise of 31.6% as compared to the figure for the previous year.

Although progress has been made in social and economic development, China is still faced with many difficulties and challenges. Certain deep-seated problems, including an unbalanced economic structure, an extensive pattern of growth and systems and mechanisms that require further improvement, have yet to be fundamentally solved. Although development of China's economy is still moving towards the expected goals of macroeconomic regulation, the foundation of economic performance is still not solid, the price of economic growth is too high and there are quite a few uncertainties and imbalances. The most serious issues are as follows:

First, the problem of the country's inherently weak agricultural infrastructure has yet to be changed fundamentally, making it ever more difficult to increase rural incomes. The impact of the sector's vulnerability to natural disasters is exacerbated by inadequate application of modern agricultural science and technology. Returns from growing grain are relatively low, the use of subsidies to raise grower incomes is not particularly effective and there are many factors restricting rises in income for rural migrant workers in cities. Moreover, institutional barriers hindering increase in rural incomes have still not been eliminated completely.

Second, China still faces the risk of a rebound in investment that could trigger major economic fluctuations. Investment is growing too quickly, there are too many projects now unde rway and too many new ones being launched due to the fact that the problems in systems and mechanisms leading to overheated investment have not been fundamentally resolved and pressure to increase investment is still great in some regions and sectors. Furthermore, the banking system continues to have too much liquidity and strong capacity and willingness to make loans. Moreover, China's trade surplus continues to grow.

Third, the need to save energy and reduce pollution is extremely pressing as pressures on resources and the environment continue to grow. Targets for energy saving and pollution reduction set at the beginning of 2006 were not met. The main reasons for this were as follows. Progress in adjustment of the industrial structure has been too slow, with the service sector of the economy still too small and continued excessively rapid growth in heavy industry, especially in certain industries that are high in energy consumption and cause serious pollution, added to the fact that many backward production facilities that should have been shut down are still in operation. Furthermore, related laws, regulations, standards, and management systems need to be improved and better coordinated, investment in projects to save energy and reduce pollution is inadequate, and fiscal, tax, pricing, financial and other policy measures to support such efforts have not been put in place. Few enterprises are motivated to upgrade their technologies to save energy and cut pollutant emission, and it will take some time before energy-saving and environmental protection projects are completed and produce results. The relevant laws and regulations are not being strictly enforced and the cost of breaking the law is too low, resulting in a great deal of wasting of resources and environmental damage in violation of laws and regulations in spite of repeated attempts to curb such behavior. People's awareness of the importance of saving energy and protecting the environment and the urgency of doing so still needs to be raised and practices persist that show too much value placed on economic growth at the cost of environmental protection in some regions. All the above means that the government's work to achieve targets set for 2007 will be daunting. Pressure on shortages of coal, electricity, petroleum and transportation is still evident from time to time in some regions and sectors, despite the fact that supplies actually increased in 2006.