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Wen plugs concerns over stimulus exit

March 7, 2010

By Olivia Chung
Asia TImes (Hong Kong)
March 6, 2010

HONG KONG -- Chinese Premier Wen Jiabao used the
annual gathering of the National People's
Congress (NPC) on Friday to ease concerns that
the central government is poised for an early
unwinding of its economic stimulus support, and
pledged that sustainable economic growth will be maintained.

He also outlined measures aimed at boosting
domestic spending and reducing the income gap
between urban and rural ares, from increasing
support for agriculture to relaxing controls over
movement by workers from the countryside to cities.

China "will still face a complicated situation"
to maintain a stable and comparatively fast 8%
growth target this year as it fights the effects
of the global economic slowdown, although the
environment had improved since last year, Wen
told the opening of the third plenary session of the 11th NPC.

The country aims "at ensuring the quality of
economic growth, focusing on the transformation
of the economic development pattern and
adjustment of economic structures," Wen said,
adding that the value of China's currency, the
yuan, would be kept "basically stable" at an
"appropriate and balanced" level. The mechanism
for setting the exchange rate would continue to
be improved, he said, without giving details. Wen
may expand on the issue at the press conference
that concludes the NPC meeting on Sunday.

China's economy expanded 8.7% last year, higher
than an 8% target, helped by an unprecedented 4
trillion yuan (US$585 billion) in government
stimulus spending to counter the effects of the
global slowdown. As the leading economies emerge
from recession and exports pick up, the yuan's
exchange rate is back as a point of tension, with
the US and other countries claiming the currency
is undervalued, giving China's exporters unfair
advantage and increasing balance of payments surpluses in its favor.

Some US politicians claim its present value is a
factor in the US official unemployment rate
rising to as high as 10% - and around 17% when
those no longer seeking jobs are included.

On another area of concern to Washington,
National People’s Congress spokesman Li Zhaoxing,
a former foreign minister, told reporters
yesterday that defense spending would grow 7.5%
this year, the slowest pace in a decade. The
increase to 532.1 billion yuan is down from a
14.9% rise in 2009. China's defense budget
increased by at least 10% a year for the past 10
years, Bloomberg reported, adding that the US
aims to spend $636.3 billion this year.

China's actual defense spending could be as much
as two and a half times the official budget,
Bloomberg reported, citing Phillip C Saunders, a
research fellow at the National Defense
University's Institute for National Strategic
Studies in Washington. The published figure
doesn't include purchases of foreign weapon systems and pensions, he said.

China will continue its moderately easy monetary
policy in 2010, Wen said. "We need to maintain
continuity and stability in our policies while
constantly making them better-targeted and more
flexible as circumstances and conditions change."

The government will "consolidate the momentum of
the economic turnaround", but will also need to
accelerate economic restructuring and make
substantive progress in transforming the pattern
of economic development, he said. China is using
tax incentives and other measures to boost
domestic consumption to lessen its dependence on exports for growth.

Shen Minggao, China economist at Citigroup, said
official documents in the course of the NPC
meeting would continue to ignore specific wording
about an exit from stimulating the economy as
policymakers believe that to do otherwise could hurt market confidence.

"Before inflation becomes a clear and immediate
threat, the exit policy will likely be
constrained to the areas of the property market,
overcapacity, and credit control," Shen said.

Wen said China also needs keep the overall level
of prices stable, and the consumer price index
(CPI), a key inflation indicator, will be held at about a 3% rate of increase.

CPI inflation eased to 1.5% year-on-year in
January, after surging to 1.9% in December last
year, according to the National Bureau of
Statistics (NBS). The producer price index (PPI),
a gauge of inflation at the wholesale level, rose
4.3% in January from a year earlier, up from 1.7%
in December 2009, when the figure ended 12 months of decline.

Numerous policy statements this year have made it
clear that the government is managing liquidity,
not turning off the taps, Pauline Loong, senior
vice president in charge of China policy and risk
research at CIMB-GK Securities (HK), said. An NPC
announcement reaffirming the government's
commitment to ensuring economic growth restores
much-needed perspective, she said.

"We see the government stepping up the shift to
domestic consumption, particularly rural
consumption and introducing credit and stimulus
support for the private sector, especially for
small and medium-sized businesses," she said.

Economists are concerned that some stimulus money
is not going to riskier private markets, such as
small and medium-sized enterprises (SMEs), which
create the most jobs, but is flowing to the
property market and state-owned enterprises,
leading to assets bubbles and a widening income gap.

Private businesses, especially the SMEs, have
been left out of the credit bonanza as new
lending doubled last year to a record 9.6
trillion yuan, according to Loong. Credit went
mostly to large state-owned enterprises and to funding speculative activities.

Wen on Friday pledged that the central government
will allocate 10.6 billion yuan to support the
development of small and medium-sized
enterprises. Private businesses created more than
11 million jobs last year, or more than 90% of
new employment, according to the All-China Federation of Industry and Commerce.

Unlike last year, when macro-economic issues
topped the NPC agenda in the wake of the global
recession, domestic concerns, such as income
disparities and soaring housing prices, are the
focus of this weekend's sessions. State-run
Xinhua News Agency reported that the top three
issues of most concern to the general public are
income disparities, housing and efforts to stamp out rampant corruption.

The 36-page working report delivered by Wen gave
less than one page to the property sector, which
might disappoint public concerns about the rising
cost of housing. Average contracted home prices
rose 24% last year to 4,695 yuan per square
meter, with Shanghai prices rising 27.6%, and
Beijing's 16.4%, according January report by the National Bureau of Statistics.

Wen vowed to enhance income distribution as a key
way to boost domestic demand and narrow the income gap.

"We will not only make the 'pie' of social wealth
bigger by developing the economy, but also
distribute it well on the basis of a rational
income distribution system," he said. The
government would set strict standards for the
income of executives, especially senior staff, at
state-owned enterprises and financial
institutions. He vowed to crack down on illegal
income, regulate off-the-books income, gradually
form a transparent, fair and rational pattern of
income distribution, and reverse the widening income gap.

There are growing complaints in China that income
growth lags the increase in state fiscal revenue.
Low incomes have also been seen as impeding
government efforts to shift growth from an
over-reliance on exports to an economy driven mainly by private consumption.

Urban per capita full-year net income increased
9.8% to 17,175 yuan last year, almost three times
average rural income of 5,153 yuan, which rose
8.5% in 2009, according to the National Bureau of
Statistics. The urban-rural income gap is now at
its widest since the country launched its reform
and opening-up policy in 1978, according to China Daily.

The central government is to increase spending to
support agriculture, rural areas and farmers by
21.8% to 725.3 billion yuan, and up to a further
133.5 billion yuan will be spent subsidizing
agricultural production, Wen told the NPC.

Fast economic growth has come with severe
environmental costs, such as air and water
pollution and forest degradation. Increased
outputs of carbon dioxide and other gases linked
by many in the scientific community to climate
change have also increased with widespread
construction of mostly coal-fired power stations.

China will work hard to develop low-carbon
technologies as well as new and renewable energy
resources to actively respond to climate change,
Wen said. The country also plans to increase it
forest carbon sinks and expand forests by at
least 5.92 million hectares in 2010.

Wen also told the NPC that China will reform its
national household registration system and relax
restrictions on permanent residence registration,
or hukou, in towns, small and medium-sized cities.

The hukou system was introduced in 1958 when the
government put a lid on free migration flow,
particularly from rural areas to cities. Under
the present system, migrant workers have to
maintain their registered permanent residence in
the countryside, making it hard for them to
obtain welfare such as healthcare and education,
among other rights, at their urban work places.

On Monday, 13 mainland newspapers covering 11
provinces in China made a rare joint appeal in a
co-signed editorial urging an end to the hukou system.

The joint editorial said there is great potential
in the consumption demand of 900 million people
in rural areas, which could help propel domestic
demand to fight against export deflation and boost economic development.

Olivia Chung is an Asia Times Online correspondent based in Hong Kong.
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