China tightens belt but keeps eye on social rifts

China's President Hu Jintao (2nd L) and Premier Wen Jiabao (2nd R) attend the preparatory meeting for the National People's Congress (NPC) at the Great Hall of the People in Beijing March 4, 2010.

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.

"We must not interpret the economic turnaround as a fundamental improvement in the economic situation," Wen said in his annual "State of the Union"-style report to the National People's Congress.

Financial markets showed little reaction to the widely anticipated message. Despite the lack of change in any of the key wording, analysts noted that Wen's increased emphasis on controlling inflation showed the government was trying to mop up excess cash in the economy after last year's extraordinary credit boom.

He also signaled continued caution toward the yuan, reiterating standard language that Beijing would seek to keep the currency steady as it has done since the financial crisis struck in mid-2008, to the chagrin of its trade partners.

Speaking to the nearly 3,000 legislative delegates gathered in the cavernous Great Hall of the People, Wen unveiled increases in spending for China's poorer citizens and 700-million strong farming population that outstripped the planned rise in military outlays.

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

SLOWER SPENDING, LENDING

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.

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

"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, a relatively low number given the build-up of price pressures.

"Beijing wants to send a clear message to the local governments that the policy focus for this year has already been shifting away from supporting growth at all costs to balancing the need to maintain steady growth while managing inflation," Qu Hongbin, chief China economist at HSBC, said in a note.

GROWING DOUBTS

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 Communist Party-run spectacle that affirms policy, rather than making or challenging it.

But the gathering offers an opportunity for the 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 programs," said Wen, whose second and final five-year term running the Chinese government ends in 2013.

Wen has staked much of his legacy on spreading wealth to those left behind by China's booming economy, especially rural citizens, but income disparities have grown wider on his watch, a worry for leaders bent on maintaining social peace.

Reflecting the conservatism of China's financial planners, the budget deficit will again be kept below 3 percent of national income, Wen said. The U.S. deficit, by contrast, will hit 10.6 percent of gross domestic product this year, according to White House projections.

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

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 help its exporters stay competitive.

Many economists think China will resume yuan appreciation in the coming months as inflation climbs. It would have been unrealistic to expect Wen to flag any such move, said Tom Orlik, a Stone & McCarthy analyst in Beijing.

"If you send the signal to the markets that you are going to appreciate the yuan, then you are going to attract hot money inflows, so signaling does not make any sense," he said.

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