The International Monetary Fund has called on China to accelerate its reform of state-owned enterprises. IMF directors have told mainland officials that this would help to ensure a stable economy and improve efficiency and reform. Details of the recommendation have emerged in the monetary watchdog's annual report, which was released in Hong Kong yesterday. The IMF board concluded talks with the mainland in June, but details of the discussions have emerged just before the 15th Party Congress. It is the first congress overseen by President and party general secretary Jiang Zemin, who is believed to back the co-existence of state, non-state and private ownership. If successful, it would set the stage for far-reaching reforms that could see the privatisation of large sectors of the ailing state sector. The IMF's recommendation is a lot stronger than last year's call for a reduction in subsidised credit and other financial support to state-owned enterprises. Directors have also stressed the need for a medium-term framework for fiscal policy to help in prioritising public expenditure. The IMF states: 'They [directors] emphasised the need to improve the transparency of the budget. Also, a marked improvement in budgetary revenue would be required to ensure a strong overall fiscal position.' This would involve a broadening of income taxes and value-added tax, strengthening tax administration and phasing out tax concessions for foreign-funded enterprises. The economy remained robust, with real gross domestic product of 9.75 per cent last year and 9.5 per cent during the 1997 first quarter. A weakening in domestic demand was offset by a strong pick-up in new exports while inflation fell to 4.5 per cent at the end of 1996 and averaged 2.6 per cent in the first quarter of this year. The overall figures masked widespread disparities across sectors and regions, because of differences in the performances of state-owned enterprises and the private sector. '[Directors] agreed that the key challenge was to take advantage of this favourable situation to undertake bold and comprehensive structural reforms, particularly to address deep-seated weaknesses in the state enterprises and the financial system in order to accelerate China's transition to a more fully market-based economy.' They praised mainland authorities for 'skilful and sustained' economic policies that ensured a soft landing while maintaining its integration into the world economy. The board said Hong Kong's emergence as a 'mature, services-based economy' indicated a potential for additional high growth over the medium term. The report states: 'Its future lay in developing its services-based export industries and maintaining its status as an international financial centre. 'Safeguarding Hong Kong's institutions and values, particularly the rule of law, impartiality of the judiciary, neutrality of the civil service and freedom of information, was important for its medium-term prospects.'