Editor's note: The following is a speech made by Premier Li Keqiang at a meeting on functional transformation and institutional reform of local governments on Nov 1.

Not long ago, the Central Committee of the Communist Party of China and the State Council issued the Opinion on Functional Transformation and Institutional Reform of Local Governments. That was yet another major decision made to implement the conclusions of the 18th CPC National Congress and the second plenary session of the 18th CPC Central Committee. It was an important document that would offer guidance and norms for the reform of local governments. Today's meeting is another important meeting following the audio-video conference in May on transforming functions of State Council institutions. Its main task is to further unify thinking and mobilize efforts, make arrangements for functional transformation and institutional reform of local governments and ensure that the decisions made at the central level are well implemented on the ground.

I. We need to effectively write the major articles of government reform by integrating central and local efforts.

The reform of the central government and the local governments can be described as the two parts of an article. We need to take a holistic approach to both parts and ensure that the two go well together to form a good article of government reform. The functional transformation and institutional reform of local governments is an important part of the broader reform and opening-up endeavor of the Party and the country. It is also an important component of our efforts to deepen administrative reform. The main purpose of government reform is to clearly define the relations between government and the market, between government and society and between central and local governments. Reform can also better leverage the roles of market and society, further mobilize the initiative of both central and local governments, make sure that the government fully plays its part, accelerate the development of modern government, promote sustained and sound economic growth and social progress, and meet new expectations and requirements from the public.

1. The reform of local governments is important for sustained growth and for the transformation of the economy. Under current circumstances, if the Chinese economy is to achieve sustained and sound growth over the long run, it has to transform. Looking at the immediate and long-term needs, the Chinese economy has entered a crucial stage of transformation and upgrading.

When the new government took office, it was confronted with a complex economic situation both at home and abroad, with downward pressures on the rise of the Chinese economy. Growth of fiscal revenues slowed down to such a degree that the central fiscal revenue even experienced negative growth at one point. And it was difficult to further increase money supply as there had already been much water in the pool, so to speak. Under such conditions, we decided to focus on transforming government functions and reforming government institutions as the number one task for the new government. We intended to use it to kick off profound and sweeping reform and exercise effective macro control, playing the role of "soldier" and "cannon" when a Chinese chess game begins. Over the past six months and more, we have stayed focused and worked to innovate ways of macro control while maintaining stability. At the same time, we have addressed the issue at its root and made intensive efforts to seek steady progress in transforming government functions, streamlining administration and delegating power. As a matter of fact, the central government has abolished or delegated to lower levels the power of approval over more than 300 items in four batches. We thought that it would take some time for this move to unleash the vitality of the market, but as it has turned out, the strong signal sent by this move has already produced initial, if not immediate, effect in boosting market expectations, galvanizing the market and mobilizing capital from all sources. There has been a burst of enthusiasm for investment and entrepreneurship. The combined effects of accelerated reform and structural readjustments have exceeded people's expectations. Since the beginning of this year, the number of registered enterprises has risen by 25 percent. Among them, the number of registered private and individually owned enterprises has been up by 37 percent, resulting in a growth of around 23 percent in private investment, obviously faster than the growth of government investment. This was also an important factor behind the steady and improved performance of the Chinese economy in the third quarter. Transforming government functions and fully delegating all the power that should be delegated have unlocked market vitality, potential demand and inherent driving force for development. As such, they can give a strong boost to structural readjustment, transformation and upgrading, and advance reform through further opening-up. The primary objective of the establishment of the China (Shanghai) Pilot Free Trade Zone is to promote trade and investment facilitation and enhance efficiency in economic operation through streamlining administration and power delegation. By streamlining administration and delegating power, the government can get things done without extra costs or do more with less. This is what we should fully appreciate.

Over the past 35 years of reform and opening-up, local Party committees and governments at various levels have concentrated on the central task of economic development and made huge contributions to the economic and social development of our country. And this year, various localities have worked really hard and made new headway in economic and social development. Judging from the current situation, we are still under tremendous pressure in stabilizing growth. Fiscal revenues are only slowly growing, while the necessary spending to improve people's well-being cannot be cut and may even have to be increased in some areas. Economic growth achieved through fiscal expenditure and government investment and through more central government deficit and money supply has already come under major constraints. There is only very limited room for policy maneuver in this regard. In the long run, sustained and sound economic development will not be achieved if we continue to follow the old path. Increasing government debts, engaging in mere land transactions, and relying on excessive investment, energy consumption and emissions would also end in overcapacity. So such an approach would not go very far or lead us anywhere. Even if it does produce some short-term effects, they will come at the expense of huge long-term interests. That is why, be it for stabilizing current growth or seeking long-term development, government at all levels needs to rely on reform and innovation to release reform dividends and upgrade the economy. To achieve this, we have to accelerate transformation of government functions and make determined efforts to do away with institutional obstacles arising from excessive approvals, licences, fees and fines. We have to focus our development efforts on giving play to the roles of businesses, the market and non-government actors.

2. The reform of local governments is part and parcel of overall government reform. Local governments directly interact with businesses and the public, and the rights and interests of market players and the public are realized, safeguarded and developed mainly through the local governments. The local governments have a very important role to play in the whole system of government, accounting for over 90 percent of civil servants and around 85 percent of eventual fiscal expenditures in China. It is particularly true for primary-level governments, which belong to the "last one kilometer", as we often say. Whether the reform of government institutions meets its goal as expected and whether government functions are genuinely transformed depends, to a large extent, on local governments. During our recent field trips and seminars in different localities, we have found that many entrepreneurs are looking at the local governments to deliver what the central government has already committed in power delegation. According to them, the effects of streamlining administration and delegating power at the central level will be greatly compromised if the local governments fail to proceed with corresponding reform in a timely fashion. I assured them that the central government has made up its mind, and that so long as the central government can set a good example of effectively doing what is required, the local governments will surely act to meet the requirements of the central government. Under the current circumstances, streamlining administration and delegating power is a very important means to stabilize growth. And to stabilize growth is also for the sake of ensuring employment. With administration streamlined and power delegated, some powers of administrative approval will be cancelled or delegated, which will energize the market and make the businesses and society more creative, thus generating more jobs. If only the head turns and the body stays put, the transformation of government functions and the institutional reform may become a "fake reform" or a "feinted attempt". Since last May, positive results have been achieved in the new round of efforts to streamline administration and delegate power in various localities. Yet, due to restraints of local and sectoral interests, there have been cases where powers have been wrongly or inappropriately delegated, or where only lip service has been made with no real action. In some places, only the complex powers that involve big responsibilities have been delegated, with the "more valuable power" still retained by the government. In others, there have been exaggerations. They easily claim to have delegated approval power for more than 100 items, yet few of them involve any significant power. I want to stress that in the course of reform, the local governments must take a holistic perspective and bear in mind the overall interests. They should not be narrowly preoccupied with their own local interests, still less are they allowed to play tricks or conduct reform as a mere formality. We must ensure that streamlining administration and delegating power must be effectively delivered and serve its purpose.

3. The reform of local governments is important to ensure the effective implementation of central government decisions and mobilize the initiative of various localities. In this round of reform, we must further straighten out the relationship between the central and local governments. We need to ensure the effective implementation of central government decisions. The central government should delegate responsibilities that it is not supposed to undertake in order to focus on matters that fall within its mandate. This will make sure that the decisions of the central government are carried out effectively. At the same time, we should fully mobilize the initiative of local governments. China is a unitary state, which practices the system of unified central leadership, with specific responsibilities distributed across different levels of local government. Major policies adopted by the central government must be strictly implemented by all local governments. However, it is also important to recognize that China is a big country, with varying conditions and uneven development across different localities. We need to bear in mind this reality and leverage the role of local governments in managing economic and social development in a way consistent with their own local conditions. At this stage of economic and social development, we are seeing more demands and more differentiated needs from the people. As a result, the services to be provided by the government are also growing in scope and complexity. In line with their respective conditions on the ground, localities should be more proactive and creative in their work. As the saying goes, "Victory can only be achieved when the army share the same goal throughout the ranks". If we can think and work with one heart and one mind, we will be able to do an even better job.

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.

III. Local institutional reform should focus on "control, adjustment and change".

One old saying has it that, "A good government is a slim government". This round of local government institutional reform must ensure success in "exercising control, making adjustment and promoting change". "Control" refers to strictly controlling the total size of government staff. "Adjustment" refers to making adjustments and improvements to the personnel structure. And "change" refers to unleashing staff potential through deepening reform.

1. The size of government staffing must be put under rigorous control. In this round of reform, we must observe two principles:

one is to set a limit on the total number of local government agencies in order to control government size; the other is to make sure government payroll will only shrink and not expand. This is a commitment this government has made to the entire population. Difficult as it is, a promise is a promise and we will honor it with good faith. Why do we need to strictly control the size of government staffing? Given the current situation, government revenues at various levels are unlikely to see fast growth as in the past. With a large payroll, we will, more often than not, end up in a situation where the little produced by the few will soon be depleted by the many who consume. In just half a year since the formation of this government, some localities and departments have again asked to increase their staffing. Without control, the problem will go from bad to worse. The size of government staffing is already very big. Duplicating responsibilities and overlapping portfolios will not only lead to inefficiency, but even breed corruption. It will tarnish government image and dampen the enthusiasm of those hardworking civil servants. Eventually, it is the interest of the people that is at stake.

2. The organization and staffing structure of government agencies should be adjusted and improved. The problem at hand is not insufficient size, but poor structure and a misallocation of resources in terms of organizational setup and staffing. On the one hand, there is a shortage of hands in those key areas and links that should be strengthened, and government responsibilities that should be taken care of are even left unattended. On the other hand, in areas already identified as requiring less government attention, the agencies fail to streamline accordingly, resulting in overstaffing. While capping the overall size, we should also see the great potential in adjusting and improving the organizational and staffing structure of government agencies and public institutions. Over the past two years, we have been advancing reform of public institutions based on different categories and have removed some agencies and positions through rectification and regulation. Right now, some government agencies have fat bodies and thin legs, like an ostrich. Local governments must be determined to strengthen those institutions that should be strengthened and scale back those where it is necessary. In particular, the grassroots level and the frontline of government institutions should be fortified. When we make adjustments to the organizational and staffing structure, we have to give consideration to the need of slimming down higher-level governments while beefing-up those at the grassroots level.

3. Reform should be deepened to meet our needs for development. To control the size and adjust the structure of government agencies and staffing, the key is to deepen reform and innovate management. Experience over the years shows that without reform and innovation, it is very difficult to break the vicious cycle of streamlining-swelling-streamlining again-swelling again. In recent years, some localities have made good and effective explorations in institutional reform. Some have consolidated the market regulation functions and resources of several departments into one bigger department in order to build a unified, overarching market regulation system and thereby upgrading the quality and efficiency of its services and management. Some localities follow a real-name staffing system. All outside personnel, including those borrowed from government-affiliated institutions, are entered into records and disclosed to the public for scrutiny, effectively closing institutional and management loopholes that allow people to freeload, stay on the payroll without reporting for duty or make false claims for government funding. All local governments are encouraged to boldly explore reforms aimed at addressing these issues and good experience should be promptly summarized and shared. No central government agency may interfere in any way with the readjustment of local organizational setup and staffing.

Local government reform is a self-initiated revolution. It will involve many quarters and shake up vested interests. All localities must follow the unified arrangements of the central authorities and put this reform high on their agenda. They must put public opinion and interests first and display the courage to crack hard nuts and see the reform through without ever letting up. This reform should be combined with the campaign to study and practice the mass line of the CPC and the implementation of the "eight rules" of the CPC Central Committee so that these efforts will reinforce each other. Provincial Party committees and governments should assume overall responsibility for the reform. Leading officials must personally take charge and do more to guide, supervise and monitor the reform process in their respective jurisdictions. Government at all levels must develop plans with all seriousness, specify the timeline and task breakdown, hold themselves strictly accountable and report immediately to the central authorities whenever major issues arise. Competent authorities at the central level must strengthen guidance, coordination and supervision. Discipline in organizational setup and staffing must be strictly observed, and violations shall be dealt with without leniency.