China, wary over economy, to steer steady course

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By Simon Rabinovitch and Zhou Xin

BEIJING (Reuters) - China will seek to heal social rifts and spur home-driven growth with more public welfare and rural spending even as the government tightens its belt after a burst of feverish spending, Premier Wen Jiabao said on Friday.

Wen told the country's parliament that China's economy faced a clouded international outlook in 2010 and would stick to a steady policy course this year, shifting tack if needed to counter the lingering impact of the global credit crunch.

China would maintain an appropriately easy monetary stance and an active fiscal policy, he added, showing no sign of a break from current settings.

Wen also signaled continued caution toward the yuan, reiterating standard language that Beijing would seek to keep the currency basically steady at a reasonable and balanced level.

To the dismay of Washington and Brussels, China has frozen the yuan's exchange rate at around 6.83 per dollar since mid-2008 to preserve the international competitiveness of its exporters. In his annual "State of the Union"-style report to the National People's Congress, Wen unveiled increases in spending for China's poorer citizens and 700-million strong farming population that outstripped the planned rise in military outlays.

China wants to slow spending and bank lending after pumping out cash to counter the global downturn, but Wen said improvements in social welfare, healthcare and rural services were needed to secure the nation's economic health and the ruling Communist Party's hold over an increasingly fractured society.

"We can ensure that there is sustained impetus for economic development, a solid foundation for social progress, and lasting stability for the country only by working hard to ensure and improve people's well-being," Wen told the nearly 3,000 delegates of the Communist Party-controlled legislature.

China escaped the worst of the global slump by ramping up credit, slashing interest rates and launching a 4 trillion yuan ($585 billion) infrastructure programme in late 2008.

The economy grew 8.7 percent last year as a result, by far the fastest pace of any major country, but Wen played down the achievement.

More domestically-driven growth, fueled by consumers more confident about their health, incomes and welfare protection, was needed to keep the world's third-biggest economy growing at a solid pace, he said.

"We must not interpret the economic turnaround as a fundamental improvement in the economic situation," Wen said in the cavernous Great Hall of the People.

"There are insufficient internal drivers of economic growth," he added, reading aloud the 36-page report in a practiced, steady voice, occasionally pausing for effect and applause.

Wen said China was targeting 8 percent growth in gross domestic product -- the goal it traditionally sets every year -- and an inflation rate of about 3 percent.

Wen announced increases of 8.8 percent on social spending and 12.8 percent on rural outlays -- more than the rise of 7.5 percent in the military budget -- to narrow the yawning wealth gap that economists blame for dampening domestic consumption.

China's parliament is a Party-run spectacle that affirms policy, rather than making or challenging it.

But the gathering offers an opportunity for the Party leadership to sell their policies, which face growing doubts from wealthier taxpayers and from local officials who see little wrong with the country's traditional recipe of industrial growth.

"We will continue to give preference to agriculture, farmers and rural areas, and to improving people's well-being and developing social programmes," said Wen, whose second and final five-year term running the Chinese government ends in 2013.

Still, the projected growth in welfare and agriculture spending is much slower than in 2009 when the financial crisis was raging.

Reflecting the conservatism of China's financial planners, the budget deficit will again be kept below 3 percent of national income, Wen said.

Last year the deficit was just 2.2 percent of GDP despite massive government spending on infrastructure and job creation.

(Additional reporting by Eadie Chen and Ben Blanchard; Writing by Alan Wheatley and Chris Buckley; Editing by Ken Wills and Tomasz Janowski)

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