II. "Taking over, releasing and undertaking" responsibilities is key to the transformation of local government functions.

You may have noticed that we have included "transform government functions" in the title of the reform proposal of the State Council. This time, in the opinions on the reform of local governments, we have put "transform government functions" ahead of "institutional reform" in order to underscore the importance of transforming government functions. It is widely believed that the key to government reform lies in changing its functions. Without functional changes, institutional reform would not be able to serve its purpose. In transforming the functions of local governments this time, the priority should be placed on "taking over, releasing and undertaking" responsibilities. For local governments, "taking over" means allowing the market to take over responsibilities released by the central government, and taking over and assuming the responsibilities delegated to them by the central government; "releasing" means delegating all powers that ought to be delegated to the lower authorities in real earnest; and "undertaking" means assuming full responsibilities for matters that fall within their purview.

1. Local governments should properly take over or further release as required approval power delegated by the central government. Approval items that are phased out by the central government must be fully released to the market and the society, and local governments should not retain such approval power in any disguised form. The central government should also delegate certain responsibilities to the local governments for them to conduct more robust and effective economic and social management by taking advantage of their close knowledge of local communities. Where power is delegated to the provincial level, provincial governments should exercise it properly. Where power is delegated to the municipal or county level, provincial governments should not try to retain or block it, but delegate it promptly. CCTV Primetime News recently ran a story about the establishment of the national deep-sea center for the Jiaolong manned submersible. This project is funded by the central government. In the past, a number of reviews were required for such projects and dozens of seals needed to be stamped, which would take at least two years. Now that the central government has delegated the power of approval to the local government, it only took two months for the project to be approved. This example shows that delegating power can help to unleash productive forces and raise efficiency. We should also make sure that whenever power is to be given to the market and society, it must be delegated fully. Some social organizations are still overseen by the government. If power is delegated to them, it may in the end stay in government hands. This situation must be averted.

2. We should minimize the number of items subject to administrative review and approval by local governments. Provincial governments should go through the items that still require review and approval, and resolutely abolish or delegate the power of approval to lower levels when necessary. The State Council has set the goal of canceling or delegating over a third of the items requiring administrative review and approval within the five-year term of this government. The provincial governments should also set clear goals according to local realities. Delegation of power should be evaluated not only quantitatively but also qualitatively. In principle, provincial governments from now on should not set new items requiring administrative review and approval. As for municipal and county governments, they do not have such right in the first place, but there are cases where they have imposed requirements through official documents in the form of registration, archiving, verification, annual review, certification, supervision, examination, accreditation or certificates of this kind or that. These may not be called "administrative review and approval", but they all represent thresholds for companies, being hardly different from review and approval and involving the collection of fees in most cases. The government is now encouraging university students in big cities to return to their hometown after graduation to start their own business, which would be good for local employment. But without an enabling environment, how can they run a business on a sustainable basis? Therefore, we should have the strictest enforcement of a "threshold" for items requiring administrative approval. Items established via "official documents" to impose administrative management or to collect charges and fines must be abolished if they do not conform with laws and regulations. The State Council has decided to reform the business registration system. The reform, as we have learned, is welcomed by the people, especially the youth and university graduates. They all hope it could be carried out as soon as possible. Local governments should waste no time in putting in place the supporting measures so as to encourage more people to start their own businesses.

3. Local governments need to enhance their functions in both regulation and services. Sufficient power delegation does not mean zero regulation. Power delegation and enhanced regulation are like the two wheels of a wagon. Only when both wheels turn can the reform of the government progress smoothly. In this sense, local governments must exercise market regulation to the full extent vis-a-vis all the producers and distributors. With reduction in pre-project approval, the government needs to step up mid- and post-project regulation. In this round of local government reform, the power of market regulation will be delegated to the lower levels, especially to the municipal and county governments. A regulation web of full coverage will be set up to leave no misconduct unattended to. In this way, we will be able to break away from the doomed cycle whereby power delegation leads to market disorder which, in turn, leads to tighter control, thus ending the transformation efforts.

To grow the economy, local governments should, first and foremost, create a unified, open and level-playing field for all types of market players. This is also an important way to strengthen regulation and services. Going forward, local governments, in principle, will make no direct investment in enterprises, as such investment or government direct intervention in the production and management of enterprises tends to give rise to monopoly over investment and industry and market blockade. For years, local protectionism has been a main obstacle to the development of a national, unified and open market. Local governments should not aim to own businesses operating in their localities. Rather, they should aim to play good hosts. This was the approach adopted by some local governments in southern China at the early days of reform and opening-up. What has happened since shows that the governments following this approach have seen their economy grow. For local governments, what is of fundamental importance is to grow the local economy, create more jobs, and collect taxes in accordance with law. In growing the economy, local governments should serve not as a "driver" personally riding the vehicle but as someone taking care of the "street lights" and "traffic lights" and as a "police officer". The "street lights" are intended to light the way forward for all enterprises with no discrimination. "Traffic lights" refers to rules that tell the enterprises when to go ahead and when to stop and apply to all enterprises. "Good policing" refers to more effective regulation and severe punishment for violations of laws and regulations, such as producing and selling counterfeit and substandard products, bossing and monopolizing the marketplace, cheating and swindling, infringing on intellectual property rights and, in particular, jeopardizing food safety at the expense of people's life and health. Effective regulation ensures fairness for law-abiding and honest enterprises, while ineffective regulation will allow "bad money to drive out good" and result in rampant cheating, swindling and the like. If we focus more of our efforts on enforcing the "rules of the road", we will be able to foster a better market environment and put economic transformation and upgrading on a more solid foundation.

We also need to reform and innovate ways of supervision and establish a set of scientific rules and methods of supervision. In the past, we had too many annual and monthly market inspections and even staged "inspection campaigns" from time to time. I am not saying that such inspections are to be banned altogether, but they should not be done without clearly defined rules to follow as to whom to inspect, whom to punish and how severe the penalty should be in case of irregularities. Here, we can borrow the practice of other countries, such as conducting proportionate random inspections on entities under supervision. Random inspections are not inspections at will; on the contrary, there are rules to follow. For example, if there are 100 enterprises under supervision, then every year, a preset percentage of them will be selected through a lottery draw to receive thorough inspection. We can also entrust a third party to conduct the inspections. Those who violate the law, once found, are subject to punishments enough to make their violations unprofitable and even lead to their bankruptcy. At the same time, we need to establish a complete catalogue of enterprises with irregular operations and a system of blacklisting, and ensure their rigidity through technical methods. Problem enterprises and illicit operators, once listed, cannot have their names removed no matter what connections they have or what strings they pull. One single irregularity in a certain business will mean life-long exclusion. Such a system, with its universal deterrence, serves as a sword hanging over the heads of all business operators, who may be deterred from taking chances. The honest ones are never worried that the devil might call at night but the swindlers are always in fear of unbearable cost once their luck runs out. This system can also help standardize the conduct of government regulators, and lower the cost and improve the efficiency of regulation. Local governments may make explorations in this area.

To ensure basic public services essential to people's livelihood is another administrative function local governments need to enhance. In this aspect, the primary responsibilities of the government are to meet people's basic needs, address weak links and ensure that poor people have something to fall back on to promote social equity. Some local authorities have misinterpreted what basic services are about. They have been busily embroidering more flowers on the brocade rather than sending charcoal to the needy on a snowy winter day, so to speak. Some compulsory education schools have been turned into so-called "noble schools" — schools for the rich. Some nursing homes are far too luxurious. It may look good if the government tries to provide for everything free of charge, but in reality, this is unrealistic and unaffordable. And it would also make it hard for the private sector players to get in, because they can hardly compete even when they run businesses at a thin profit margin. We need to think hard and mobilize market forces into developing the services sector. Meanwhile the government must earnestly fulfill its responsibility of ensuring basic services. Recently, the State Council stressed the importance of strengthening the social aid system to meet people's essential needs. If we are to advance market-oriented reform more vigorously, we must improve this system to prevent such things from happening that are beyond the limits of people's moral and psychological tolerance. This is also what is intended by the socialist market economy.

We need to place greater importance on the building of community-level governments. As people often say, "Authorities at higher levels are like thousands of threads and governments at the community level are the single needle that weaves". Governments in counties (cities), townships, and urban districts and resident offices directly interact with and serve the people. We need to care more about community-level officials and provide sufficient support for their life and work. In particular, there must be no wage arrears. In the transfer payments from the central to local governments, priority should be given to wage payment for community-level officials.