Nearly 50 government departments have been ordered to explain how 5.51 billion yuan (US$689 million) of government funds were misused last year.

The State Council, China's cabinet, which yesterday demanded an explanation for the misuse of funds, will report to the legislature by the end of the year.

Premier Wen Jiabao called for the probe in a drive to correct budget problems.

The council urged departments to "conscientiously analyze their problems and immediately correct wrongdoing to give the Chinese people a serious, responsible and satisfactory reply."

A release from the State Council's meeting, in Beijing, said budgeting and budget implementation were "an important duty entrusted by the Constitution to the State Council" and all departments must rigidly enforce the central budget approved by the Standing Committee of the National People's Congress, China's legislature.

A source at the meeting said the State Council stood by the annual audit report, delivered by the National Audit Office in June, on misused central funds last year and the rectification orders of the legislature.

State councillors agreed the closure of loopholes in the budget management system was a high priority and told central government departments to improve transparency in their budgets and  make revenue forecasts more realistic.

The release said the State Council was deliberating measures to bring revenue from the transfer of land use rights into the central budget, as well as a package of fiscal and taxation policies targeting economic development zones.

The central government will reform investment mechanisms to ensure the tasks and responsibilities of local governments are separated from those of businesses.

The State Council also agreed to impose tighter controls on expenditure and to improve the auditing of central budget funds.

It reiterated that departments and officials who breach regulations or misappropriate funds will be held responsible for their actions.

The State Council urged all departments to fully support auditors and take the initiative on self-discipline.

The meeting also discussed, and approved in principle, an outline for China's cultural development between 2006 and 2010 and a draft regulation on the management of Yellow River water resources.

(For more biz stories, please visit Industry Updates)