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7. We continued to strengthen democracy and the legal system. Democracy at the community level made continued progress. Government-sponsored legislation was further improved. The State Council submitted seven bills to the Standing Committee of the National People's Congress (NPC) for deliberation, including the Law on Corporate Income Tax (draft), the Antitrust Law (draft), the Law on Response to Emergencies (draft) and the revised Compulsory Education Law (draft), and promulgated 29 sets of administrative regulations, including the Regulations on AIDS Prevention and Control and the Regulations on the Administration of Overseas-Funded Banks. We accelerated development of government by the rule of law and implemented the Administrative Permit Law, the Civil Service Law, and the Program for Advancing All Aspects of Government Administration in Accordance with the Law. Oversight in the form of supervision and auditing was strengthened. Steady progress was made in reform of the judicial administrative system and its working mechanisms. The work of addressing public complaints registered by means of letters and visits was strengthened. In public security, continued improvements were made in the crime prevention and control system and extensive efforts were made to promote peace and security. Significant progress was made in work focused on improving conditions in areas with poor public security and in addressing serious public security issues. An all-out effort was made to build clean government and combat corruption and a campaign to combat bribery in business was launched. A number of major cases involving government offices and their employees were investigated and dealt with, and a number of people guilty of corruption were punished to the full extent of the law.

Work related to ethnic groups, religions, Hong Kong, Macao, Taiwan and overseas Chinese was further improved. We continued to make progress in modernizing national defense and the army. Significant progress was made in China's diplomatic work.

Looking back on our practical experience, we have come to the following conclusion: We must free our minds, follow a realistic and pragmatic approach, keep pace with the times, work hard with a pioneering and innovative spirit, unswervingly take the road of Chinese socialism, adhere to the reform and opening up policy, pursue development according to scientific principles, maintain social harmony during development and ensure peaceful development. Only by doing so can we attain the ultimate objectives we have set for modernization.

We owe our successes to the correct overall leadership of the Central Committee of the Communist Party of China (CPC) with Comrade Hu Jintao as General Secretary and to the concerted efforts and hard work of cadres and the people across the country. On behalf of the State Council, I would like to express my sincere thanks to the people of all our ethnic groups, the democratic parties, people's organizations and persons from all walks of life. I would also like to sincerely thank our compatriots from the Hong Kong and Macao special administrative regions and Taiwan as well as overseas Chinese. My sincere thanks also go out to all the friends of China around the world who care about and support China's modernization.

However, we are clearly aware that there are still many difficulties and challenges in China's economic and social development and some shortcomings and inadequacies in the work of the government.

First, there are still serious structural problems in the economy. There is a lack of proper balance among primary, secondary and tertiary industry, urban and rural development and development among different regions are not balanced, and the pattern of investment does not reflect consumer demand. Agriculture, the base of the economy, remains weak, and it is now more difficult than ever to steadily increase grain production and keep rural incomes growing. The overall scale of investment in fixed assets is still too large, the problem of excess liquidity in the banking system is serious, and the factors causing overheated investment and excess credit still remain. The trade surplus has become large, and the imbalance in international payments has worsened.

Second, the pattern of economic growth is inefficient. This can be seen most clearly in excessive energy consumption and serious environmental pollution. The targets for saving energy and reducing pollutant emissions were set forth in the Eleventh Five-Year Plan. This is of vital importance in efforts to promote the change in the pattern of economic growth and increase energy conservation and environmental protection. All local governments and government offices did a great deal of work and made much headway in these areas over the past year. While energy consumption per unit of GDP for the previous three years rose by 4.9%, 5.5% and 0.2% respectively, it dropped by 1.2% in 2006. Growth in total emission of major pollutants declined, chemical oxygen demand rose 1.2%, down from an increase of 5.6% the year before, and discharge of sulfur dioxide rose 1.8%, down from a 13.1% gain in the previous year. However, we fell short of the targets set at the beginning of last year for cutting energy consumption per unit of GDP by about 4% and total discharge of major pollutants by 2%. The main reasons were: Industrial restructuring proceeded slowly, while growth in heavy industry, especially in sectors that are high in energy consumption or are highly polluting, was still overheated. Many backward production facilities that should have been closed down are still in operation. Finally, some local governments and enterprises failed to strictly comply with laws, regulations and standards for energy saving and environmental protection, and it will take time for relevant policies and measures to produce the desired results. Meeting these two mandatory targets in the Eleventh Five-Year Plan is very important. The targets cannot be revised, so we must work resolutely to reach them. The State Council will make annual reports on the progress made in saving energy and reducing emissions to the NPC starting this year, and at the end of the Eleventh Five-Year Plan period it will report on the overall progress made over the five years.

Third, a number of serious problems affecting the people's interests have not been properly addressed. Problems in food and drug safety, medical services, education charges, housing, income distribution, public security and production safety remain a source of public concern. Problems arising in land expropriation and requisition, housing demolition, transformation of enterprises into stock companies and environmental protection that harm the interests of the people have not been fundamentally solved. Life remains difficult for many low-income people.

Fourth, the government's efforts to improve its performance still have room for improvement. Moves to change the way the government functions have not made the expected progress, non-separation of government administration and enterprise management remains a problem, and the responsibilities of some government offices are not clear, leading to low productivity. Expenses related to carrying out official duties have not been standardized, and extravagance and waste are inflating administrative costs. In some local go

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