BEIJING -- Following is the full text of the report on the execution of the central and local budgets for 2016 and on the central and local draft budgets for 2017, which was submitted for review on March 5, 2017 at the Fifth Session of the 12th National People's Congress and was approved on March 15, 2017:

REPORT ON THE EXECUTION OF THE CENTRAL AND LOCAL BUDGETS FOR 2016 AND ON THE DRAFT CENTRAL AND LOCAL BUDGETS FOR 2017

Fifth Session of the 12th National People's Congress of the People's Republic of China

March 5, 2017

Ministry of Finance

Esteemed Deputies,

The Ministry of Finance has been entrusted by the State Council to submit this report on the execution of the central and local budgets for 2016 and on the draft central and local budgets for 2017 to the present Fifth Session of the 12th National People's Congress (NPC) for your deliberation and for comments from the members of the National Committee of the Chinese People's Political Consultative Conference (CPPCC).

I. Execution of the Central and Local Budgets for 2016

In 2016, we were faced with challenging and complicated environments both in China and abroad. However, under the leadership of the Central Committee of the Communist Party of China (CPC) with Xi Jinping at its core, all localities and departments strived for progress while working to keep performance stable, upheld China's new development philosophy, and focused on supply-side structural reform while seeking an appropriate expansion of aggregate demand. As a result, we achieved steady and sound economic and social development and kicked the 13th Five-Year Plan for Economic and Social Development (2016-2020) off to a good start. Execution of the budgets was satisfactory.

1. Implementation of the NPC resolution on the budgets

Departments of finance improved rule of law awareness in the execution of the budgets, actively performed our functions, and conscientiously implemented the resolution adopted at the Fourth Session of the 12th NPC on the budgets as well as the views given by the NPC Financial and Economic Affairs Commission on the budgets.

-- Implementing proactive fiscal policy

Large-scale cuts were made to taxes and fees. In extending trials to replace business tax with VAT to all industries, we carried out trials in the construction, real estate, financial, and consumer service industries, and made the value-added of the new immovable property in all enterprises eligible for VAT deductions. The tax burdens of all industries newly included in the trials were reduced as planned, while other industries already included in these trials and industries originally using VAT also saw a reduction in their tax burdens due to increased business VAT deductions. Over the year we reduced the tax burden on enterprises across all industries by 573.6 billion yuan.

We further expanded the scope of additional tax deductions for enterprises' spending on research and development; increased funding for high-technology enterprises; introduced policies on equity-based incentives for innovation and on deferred payment of individual income tax for research and development personnel who have become shareholders through their technology and innovation; and improved tax policies for technology business incubators. We abolished or suspended a number of government-managed funds and consolidated some of these funds, expanded the coverage of exemption from 18 kinds of administrative charges; and urged local governments to overhaul and regulate their administrative charges on enterprises, thereby lessening the financial burden on enterprises and individuals by 46 billion plus yuan.

Reasonable increases were made to government expenditures. The government deficit was appropriately increased primarily to make up for reduced government revenue resulting from reductions in taxes and fees, ensuring funding for government spending. We raised the ceiling for local government debt by 1.18 trillion yuan. Local government bonds issued to replace outstanding debt reached 4.9 trillion yuan. Adding in the 3.2 trillion yuan worth of local government bonds issued in 2015, the value of such bonds issued over the past two years totaled 8.1 trillion yuan. Over the course of the year, local governments have saved approximately 400 billion yuan in interest payments by issuing bonds.

Meanwhile, targeted policies and measures were implemented to address overcapacity, reduce excessive inventory, deleverage, lower costs, and bolster areas of weakness. In funding the resettling of workers laid off from the steel and coal industries as result of overcapacity cuts, we set up funds financed by the central government and promptly allocated appropriations from such funds as subsidies or rewards for restructuring industrial enterprises. We ensured subsidies were provided to address the issue of central government "zombie enterprises." We adjusted policies on deed transfer tax and business tax in the real estate industry with a view to boosting people's demand for housing for personal use and second homes and helping reduce commodity housing stock.

We developed clear policies on the swapping and cancellation of debt in debt-to-equity swaps to support market-based swapping of debt owed to banks for company shares. We introduced short-term reductions on social insurance premiums and overhauled guaranty funds relating to enterprises, thereby further lowering the costs of enterprises. We redoubled efforts to strengthen areas of weakness, considerably increased funding for poverty alleviation, and fully supported major tasks such as rebuilding in rundown urban areas and infrastructure development.

-- Working for progress in fiscal and tax reforms and legislation

We worked toward extending VAT to cover all goods and services. We continued the reform to apply ad valorem rates to all resource taxes, piloted the reform to introduce the water resource tax, and drove progress in legislation on an environmental protection tax. We developed measures for the management of non-tax government revenue. We issued guidelines on the reform to share fiscal authority and spending responsibilities between the central and local governments, making clear the requirements, the sharing principles, and the main content of the reform. We determined the appropriate ratio for sharing VAT revenue between the central and local governments following the application of VAT in all industries in order to ensure the stability currently enjoyed in the sharing of financial resources continues. We adjusted the methods for central government VAT rebates to local governments, and improved the revenue-sharing fiscal system. We issued and implemented fiscal policies on granting urban residency to people with rural household registration living in urban areas, and introduced related reward mechanisms.

We reformed and improved the system of central government transfer payments to local governments, cutting the number of items receiving special transfer payments from the central government to 94, and raising the proportion of general transfer payments against total transfer payments to 60.6 percent. We stepped up efforts to see that government budgets and final accounts are made available to the public, publishing for the first time a whole package of final accounts of central departments on http://www.gov.cn/and http://www.mof.gov.cn/index.htm and drawing up operating procedures for publicly releasing local budgets and final accounts.

-- Working to improve the performance of government funds

We promptly approved the appropriation of government funds in strict accordance with the budgets approved by the NPC. In strengthening budget performance administration, we applied performance target administration to all central department project expenditures, began for the first time to set performance targets and indicators for major projects at the same time as granting budgeted funds, and conducted performance evaluations in relation to expenditures for a portion of major policies on people's wellbeing and for key special projects. Information on the performance administration and performance evaluation results of some central department budgets were for the first time released to the public along with the final accounts of these departments.

Available government funds were put to work, in accordance with regulations, in pressing areas of economic and social development. We carried out trials to integrate and coordinate the use of government funds for rural development in poor counties, granting these counties the power to allocate and utilize the funds earmarked for such trials. We improved fund management for central government-funded research programs, expanding the authority of colleges and research institutions to manage research funds and expenses on related travel and meetings. We made a big push to expand the use of public-private partnership (PPP) models, and strengthened lifecycle financial regulation of PPP projects to ensure the quality of implementation. At year end 2016, 11,260 projects, with a total investment of 13.5 trillion yuan, were included on the national information platform for multiple PPP models; 1,351 of these projects, representing a total investment of 2.2 trillion yuan, have already been contracted and are in implementation.

We strengthened reform to encourage government procurement of services, and formulated guidelines on supporting the fostering and development of social organizations through government procurement of their services and on carrying out reform to introduce government procurement of services from public institutions. We worked to accelerate the operations of government-invested funds, and encouraged nongovernmental sources to invest.

-- Working to prevent risks posed by local government debt

We worked in strict accordance with the Budget Law, the Guarantee Law, and other relevant laws and regulations to take further steps to ensure standards were in place for the management of local government debt. At year end 2016, total outstanding local government debt stood at 15.32 trillion yuan, which was within the limit of 17.19 trillion yuan budgeted for the year. We improved the budgetary management system for general and special local government debt, and incorporated for the first time a full review of local government debt into the draft budgets, thereby proactively subjecting it to oversight.

We carried out risk assessments and provided early warnings on local-government debt risks and reported the results to the relevant authorities and local governments, urging high-risk regions to raise funds through multiple channels so as to defuse their debt risks. We introduced emergency response contingency plans for local government debt risks and guidelines on dealing with risks by type, building up our policy reserve for responding to risks and emergencies.

We issued the Provisional Measures for the Representative Offices of Supervisors from the Ministry of Finance in Localities to Conduct Oversight on Local Government Debt to make oversight regular. We also organized an investigation into illegal local government financing, and urged the regions and financial institutions concerned to rectify this problem in accordance with the law.

-- Ensuring budgets were managed in strict accordance with the Budget Law

We made the budgets more detailed, further scaled down the amount of tentative budgets prepared by the Ministry of Finance for other government offices or projects, and worked to ensure all projects were covered by central government department budgets. We cut the number of projects financed by government-managed funds to 23, and introduced a list and catalogue system to manage these projects. We expanded the scope of the central government's state capital operations budget, and formulated the provisional measures for the management of expenditures from this budget. We conducted a nationwide review of assets owned by administrative agencies and institutions.

We moved forward with the reform to establish a system for comprehensive government financial reporting based on accrual accounting, and issued four sets of regulations concerning government accounting principles including principles on fixed assets. We organized inspections on the implementation of subsidies for the use of new-energy vehicles, the disclosure of local budgets and final accounts, and the operations of government procurement agencies. During the inspections we investigated and exposed a number of cases of violations of the Budget Law and financial and economic discipline and held those responsible to account.

In 2016, the Ministry of Finance improved its services for the deputies to the NPC and members of the CPPCC National Committee. We dealt conscientiously with their suggestions and proposals, handling over the course of the year a total of 2,889 suggestions made by deputies and 1,323 proposals by members. We did more to improve communication with the deputies and members, soliciting and taking on board their opinions and suggestions in order to improve public finance work.

2. Adjustments to the 2016 budgets

To ensure VAT revenue was better shared between the central and local governments after trials to replace business tax with VAT came into effect across all industries on May 1, 2016, we began implementing a transitional plan at the same time to adjust the sharing of VAT revenue between the central and local governments. This adjustment did not affect the total budgetary revenue and expenditures in the 2016 general public budgets nationwide, but brought changes to the structure of the central and local government budgets. The revenue in the central government's general public budget was increased to 7.235 trillion yuan from 7.057 trillion yuan, and the 178 billion yuan increase was used in full for tax rebates to local governments. Accordingly expenditures in the central government's general public budget were increased to 8.7665 trillion yuan from 8.5885 trillion yuan. In accordance with the Budget Law, the plan for revising the central budget was submitted to the 24th Session of the Standing Committee of the 12th NPC for deliberation and approval.

3. Budgetary revenue and expenditures in 2016

1) General public budgets

Revenue in China's general public budgets reached 15.955208 trillion yuan, representing 101.5 percent of the budgeted figure and an increase of 4.5 percent over 2015, after allowing for, among other things, the inclusion into general public budgets of five government-managed funds. Adding in the 727.108 billion yuan of utilized carryover and surplus funds, plus funds from other sources, this revenue totaled 16.682316 trillion yuan.

Expenditures in China's general public budgets reached 18.784114 trillion yuan, representing 103.9 percent of the budgeted figure and an increase of 7.4 percent after deducting local governments' utilized carryover and surplus funds and funds from other sources. Including the 78.202 billion yuan used to replenish the Central Budget Stabilization Fund, these expenditures totaled 18.862316 trillion yuan. Expenditures therefore exceeded revenue, leaving a deficit of 2.18 trillion yuan, which is the same as the budgeted figure.

Revenue in the central government's general public budget reached 7.235731 trillion yuan, representing 100 percent of the adjusted budgeted figure and an increase of 1.2 percent over 2015. Adding in the 100 billion yuan contributed by the Central Budget Stabilization Fund and the 31.506 billion yuan from the budgets of central government-managed funds and central government state capital operations, this revenue totaled 7.367237 trillion yuan.

Expenditures in the central government's general public budget amounted to 8.689035 trillion yuan (this consists of 2.7404 trillion yuan in central government expenditures and 5.948635 trillion yuan in tax rebates and transfer payments from the central to local governments), representing 99.1 percent of the adjusted budgeted figure and an increase of 4.5 percent. Adding in the 78.202 billion yuan contributed to the Central Budget Stabilization Fund, these expenditures totaled 8.767237 trillion yuan. They exceeded revenue, leaving a deficit of 1.4 trillion yuan, which is the same as the budgeted figure. Central government reserve funds budgeted for 2016 were 50 billion yuan; of this, actual expenditures accounted for 14.61 billion yuan, and the remaining 35.39 billion yuan was transferred in full to the Central Budget Stabilization Fund. At year end 2016, outstanding central government debt was 12.006675 trillion yuan, well within the budgeted 12.590835 trillion yuan limit. The Central Budget Stabilization Fund had a balance of 267.806 billion yuan, including 150.183 billion yuan in recovered central government carryover funds.

Revenue in local government general public budgets reached 14.668112 trillion yuan. This figure consists of 8.719477 trillion yuan in local government revenue, an increase of 7.4 percent over 2015, and 5.948635 trillion yuan in central government tax rebates and transfer payments to local governments. Adding in the additional 595.602 billion yuan of utilized carryover and surplus funds and funds from other sources, this revenue totaled 15.263714 trillion yuan. Expenditures in local government general public budgets totaled 16.043714 trillion yuan, representing an increase of 7.4 percent after deducting utilized carryover and surplus funds and funds from other sources. Total expenditures exceeded total revenue, leaving a local government deficit of 780 billion yuan, which is the same as the budgeted figure.

2) Budgets for government-managed funds

In 2016, revenue into China's government-managed funds reached 4.661862 trillion yuan, up 11.9 percent. Adding in the 24.984 billion yuan carried over from 2015 and 400 billion yuan raised by local governments through the issuance of special bonds, this revenue totaled 5.086846 trillion yuan. Expenditures from these funds amounted to 4.685152 trillion yuan, an increase of 11.7 percent.

Figure 1

Revenue and Expenditures in the 2016 Central Government General Public Budget

Revenue into central government-managed funds reached 417.808 billion yuan, representing 97.8 percent of the budgeted figure and an increase of 2.6 percent. Adding in the 24.984 billion yuan carried forward from 2015 and the 759 million yuan turned over by local governments, this revenue totaled 443.551 billion yuan. Expenditures from central government-managed funds totaled 399.998 billion yuan, representing 88.5 percent of the budgeted figure and a 6.8 percent decrease. This figure breaks down as central government expenditures of 288.986 billion yuan and transfer payments to local governments totaling 111.012 billion yuan. Revenue into central government-managed funds exceeded expenditures by 43.553 billion yuan. Of this figure, 29.85 billion yuan was carried forward to 2017; 11.072 billion yuan from carryover funds of individual government-managed funds, which exceeded 30 percent of the revenue of their respective funds in 2016, was contributed to the Central Budget Stabilization Fund in accordance with regulations; and 2.631 billion yuan represented surplus funds from the three items to be transferred from government-managed fund budgets into the general public budget in 2017.

Revenue into funds managed by local governments reached 4.244054 trillion yuan, an increase of 12.9 percent, of which proceeds from selling state-owned land-use rights accounted for 3.745663 trillion yuan. Adding in the 111.012 billion yuan in transfer payments from central government-managed funds and the 400 billion yuan raised by local governments through the issuance of special bonds, this revenue totaled 4.755066 trillion yuan. Expenditures through local government-managed funds totaled 4.396166 trillion yuan, up 13 percent, which includes 3.840584 trillion yuan in expenditures funded using the proceeds from selling state-owned land-use rights.

3) Budgets for state capital operations

In 2016, budgetary revenue from China's state capital operations totaled 260.184 billion yuan, up 2 percent, and budgetary expenditures through these operations totaled 217.146 billion yuan, up 18.2 percent.

Budgetary revenue from central government state capital operations was 143.017 billion yuan, representing 102.2 percent of the budgeted figure and a decrease of 11.3 percent. Adding in the 39.447 billion yuan carried forward from 2015, the revenue totaled 182.464 billion yuan. Budgetary expenditures through these operations reached 145.061 billion yuan, representing 93.5 percent of the budgeted figure and an increase of 28.1 percent. These expenditures consisted of 93.708 billion yuan in central government expenditures and 51.353 billion yuan in transfer payments to local governments. A total of 24.6 billion yuan was transferred into the general public budget. A total of 12.803 billion yuan of budgetary revenue from these operations was carried over to 2017.

Budgetary revenue from the state capital operations of local governments reached 117.167 billion yuan, up 24.9 percent. Adding in the 51.353 billion yuan in transfer payments to local governments through the central government's state capital operations budget, the revenue totaled 168.52 billion yuan. Budgetary spending through local government state capital operations amounted to 123.438 billion yuan, up 48.5 percent. A total of 24.691 billion yuan was transferred into the general public budget.

4) Budgets for social security funds

In 2016, revenue into China's social security funds reached 4.827253 trillion yuan, representing 102.4 percent of the budgeted figure and an increase of 4.1 percent. This revenue includes 3.506586 trillion yuan from insurance premiums and 1.110434 trillion yuan from government subsidies. Expenditures from these funds amounted to 4.391894 trillion yuan, representing 100.9 percent of the budgeted figure and an increase of 12.3 percent. The social security fund surplus for 2016 was 435.359 billion yuan, which was rolled over to make the year-end balance 6.329467 trillion yuan.

In addition, in compliance with the State Council's requirement to strengthen overall coordination in the use of government funds, a number of items were transferred from local government-managed funds into local government general public budgets and the corresponding outstanding balance of special debt totaling 11.682 billion yuan and the ceiling for this balance were transferred to general debt, leaving the ceiling for local government debt unchanged.

4. Implementation of main policies regarding expenditures in 2016

-- Education

We established a unified benchmark for public funding per student in China's compulsory education schools. Eligible students from families with financial difficulties at regular senior secondary schools were exempted from tuition and miscellaneous fees. We funded improvements to basic conditions in more than 80,000 badly built or poorly operated schools providing compulsory education in poor areas. We established a funding system for secondary vocational schools based on student enrollment. We implemented a new budgetary appropriation system for institutions of higher learning directly under the central government. State financial assistance was granted to over 84 million students over the course of last year.

-- Scientific and technological innovation

We improved the structure of science and technology expenditures, giving high priority to funding science and technology activities for the public interest, and increasing funding for basic research. We finished improving central government plans, special programs, and funds for funding scientific and technological advancements. We improved the mechanism ensuring stable funding for the reform and development of research institutions. We funded both systematic pilot reforms focused on all-around innovation and the development of national innovation demonstration zones. We funded efforts to promote the transfer and commercialization of scientific and technological achievements.

-- Social security

Basic pension benefits for the retirees of enterprises, Party and government offices, and public institutions were increased by around 6.5 percent. We funded pilot reforms to develop at-home and community-based elderly care. Subsistence allowances for Chinese citizens were increased. We moved forward with the establishment of a sound system for providing assistance to people living in extreme poverty. We worked to ensure entitled groups received their benefits. Support was ensured for the proper settlement of demobilized military personnel. A system was put in place nationwide for granting living allowances to people with disabilities in financial difficulty and nursing subsidies to people with serious disabilities. We provided subsidies for social security programs and vocational training to encourage enterprises to employ those experiencing employment difficulties, to help workers improve their vocational skills, and to provide better public employment services.

-- Reform of the medical and health care system

Annual government subsidies for basic medical insurance for rural and non-working urban residents were increased from 380 to 420 yuan per person. Pilot reforms of urban public hospitals were expanded to 200 cities and reforms were carried out in all county-level public hospitals. We funded the standardized training of 190,000 resident physicians and the first batch of 5,000 assistant general practitioners. Per capita government spending on basic public health services was raised from 40 to 45 yuan per year. We continued to fund major public health service projects to, among other things, prevent and control diseases and provide maternal and child care.

-- Modern agriculture

We provided direct subsidies to grain growers, subsidies for purchasing superior crop varieties, and general subsidies for the purchase of agricultural supplies nationwide. We subsidized trials to shift from growing grain crops to producing soybeans on 333,300 hectares of farmland and from growing grain crops to cultivating feed crops on 400,000 hectares of cultivated land. We also subsidized trials in using systems of crop rotation and fallow land. More funds were made available for trials to restore cultivated land contaminated by heavy metals and adjust the agricultural production mix, as well as trials to deal comprehensively with the over-abstraction of groundwater in more areas.

We deepened reform of the purchase and storage system for important agricultural products. The policy on the temporary purchasing and stockpiling of corn was scrapped in favor of a new mechanism for purchasing corn at market prices plus subsidies, and a system was established for subsidizing corn production. We adopted a broad range of measures to reduce excess policy-supported stockpiles of grain, cotton, and edible oil. We provided support for the initiatives to foster new agricultural operational systems. Thanks to government funding, the area of cropland covered by efficient water-saving irrigation was increased by 1.33 million hectares, and efforts toward comprehensive agricultural development saw the addition of 1.87 million hectares of high-grade cropland. We financed the extension of trials to integrate the development of primary, secondary, and tertiary industries to more rural areas, and to support the development of collective village enterprises. Around 300,000 village-level public works projects launched on the basis of decision making by villagers were completed using government awards and subsidies.

-- Ecological conservation

Funds for the prevention and control of soil pollution were launched, and funding was made available for implementing the action plan for addressing soil pollution. We allocated more funds for addressing air pollution, with the focus on tackling key areas such as pollution from coal burning and industrial pollution. We continued to develop a reserve of projects for addressing water pollution, making additional funding available for the prevention and control of water pollution in key areas and major drainage basins. We launched a new round of policies to subsidize and reward grassland ecological conservation, covering 254.07 million hectares of grassland. We provided financial support for implementation of a new round of initiatives to turn a further 1.01 million hectares of marginal farmland into forest or grassland. We funded the implementation of the protective policies for all natural forests nationwide. We made funding available for four pilot projects for ecological conservation and restoration including the Beijing-Tianjin-Hebei Water Source Conservation Area in Hebei Province. Funding was also made available for the establishment of mechanisms for trans-regional and intra-watershed compensation for ecological conservation efforts in four drainage basins including the Jiuzhoujiang River, and for action in the Blue Bay environmental improvement initiative in 18 cities.