The announcement came after the National Audit Office finished auditing the subsidies in 10 counties and districts surrounding the project in Hubei province and Chongqing municipality.

A total of 9.6 billion yuan (US$1.2 billion) were earmarked by the central government in 2004 and 2005 to relocate local residents and factories surrounding the Three Gorges Dam. By the time the audit was carried out, 8.82 billion yuan (US$1.1 billion) had been spent.

The audit found 289 million yuan of the subsidies were used for purposes other than what the government intended. Around 272 million yuan (US$34 million) paid for unrelated construction work, real estate purchases, government operational expenses, and balancing local budgets.

The audit also discovered five cases where the funds were misappropriated. These cases have been transferred to the police and the party disciplinary office for further investigation.

Local administrations were also found to have fabricated data to illegally obtain 17 million yuan (US$2.13 million) on top of the original value of the relocation subsidies. They exaggerated the amount of money required to compensate employees of the factories that were forced to close by the project, or claimed they had to compensate workers at factories that were not affected by the construction work.

Local governments overestimated the cost of related projects, including training programs and new equipment for relocated residents, and then delayed distributing the funds.

The National Audit Office has suggested a number of methods for dealing with the problems in its report.

Government of Hubei province and Chongqing municipality are urged to strengthen the supervision of all the departments and work units involved with the relocation work.

The report also called for all departments to work harder on improving the livelihood of all the residents who have been relocated and developing the Three Gorges Project area.

Hubei provincial and Chongqing municipal governments have started working on recouping the missing funds under the guidance of the State Council Three Gorges Project Construction Committee. Around 242 million yuan were redirected to the proper projects by the end of last year, accounting for 83.7 percent of the total funds.

The Three Gorges Project on the Yangtze River is the world's largest hydro-power project. The construction of the project has involved the relocation of an estimated 1.4 million people. More than 1.2 million people have been resettled. According to the Three Gorges Project Construction Committee, the rest will be resettled before 2008, when the project is completed.