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China’s Wen Targets Inflation to Limit Risk of Social Unrest

China’s Wen Targets Inflation to Limit Risk of Social Unrest

Fighting inflation is China’s top economic priority this year as the government aims to limit the risk of social unrest, Premier Wen Jiabao said in his state-of-the-nation speech.

“We cannot allow price rises to affect the normal lives of low-income people,” Wen said in a report to the annual meeting of the National People’s Congress in Beijing today. “This problem concerns the people’s well-being, bears on overall interests and affects social stability.”

Wen, 68, confirmed targets of 4 percent for full-year inflation and 8 percent for economic growth, as the Communist Party seeks to maintain support for its 61-year rule. In the past two weekends, the government has deployed hundreds of police in Beijing and Shanghai after Internet calls for so-called Jasmine protests, inspired by revolts in the Middle East and North Africa.

“Inflation is a potential trigger point for social discontent,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group in Hong Kong who formerly worked for the Hong Kong Monetary Authority and the World Bank. The government needs to boost lending and deposit rates by 0.75 percentage point by year-end, as well as raising wages and giving subsidies to the poor, he said.

Land Seizures, Food

Wen identified illegal land seizures, food safety, house-price increases and corruption as top public concerns and said institutional changes are needed to end the excessive concentration of power. The government will “decisively” counter inflation and make it the “top priority in macroeconomic control,” he said.

The budget deficit may be 900 billion yuan ($137 billion), or 2 percent of gross domestic product, 150 billion yuan less than targeted for 2010, Wen said. He confirmed that the nation is maintaining a “proactive” fiscal policy and a “prudent” monetary stance.

The Shanghai Composite Index rose to a four-month high yesterday as investors anticipated moves to boost consumption. The government aims to cut dependence on exports and investment and raise consumer spending, a shift that could help to ease global economic imbalances blamed for the financial crisis.

“Expanding domestic demand is a long-term strategic principle,” Wen said in the report. Subsidies for urban low-income earners and farmers and continued incentives for rural purchases of home appliances may boost spending, he said.

Private Investment

Wen also pledged to encourage private investment, including in infrastructure, public utilities and financial services.

The premier had already disclosed an annual growth target of 7 percent for the five-year plan running through 2015, down from the previous 7.5 percent. Based on 2010 prices, gross domestic product should exceed 55 trillion yuan ($8.37 trillion) by the end of the period, Wen said. The U.S. has a more than $14 trillion economy.

China’s growth goals are routinely surpassed, with the economy expanding an average 11 percent over the past five years, adding jobs and boosting incomes.

Wen read his report to more than 4,000 delegates gathered at the Great Hall of the People, alongside Tiananmen Square, a meeting first held in 1954 to approve government policies. Members of the congress include Zong Qinghou, the billionaire chairman of Hangzhou Wahaha Group and China’s richest man.

Inflation Risks

The world’s second-biggest economy faces heightened inflation and asset-bubble risks and banks may be saddled with more bad loans after a record expansion in credit drove China’s economic recovery.

Consumer prices rose an annual 4.9 percent in January and food prices jumped, even after the central bank increased interest rates and banks’ reserve requirements. Wen pledged a “comprehensive audit” of local-government debt, after a surge in borrowing linked to the stimulus program from late 2008.

To control inflation, the government will manage liquidity, ensure agricultural production and use price controls when needed, Wen said. Officials will curb real-estate speculation and “adjust and improve” property tax policies, he added.

“The main challenge for controlling inflation is the property-price bubble stemming from overly loose monetary conditions relative to asset prices,” economists led by Peng Wensheng at China International Capital Corp. Ltd. said in a March 2 report.

Public Security

On Feb. 27, Wen pledged to punish abuse of power by officials and narrow the wealth gap. His comments coincided with public security operations in Beijing and Shanghai to prevent protests after an open letter called for “jasmine” rallies, named after the January uprising in Tunisia that overthrew President Zine El Abidine Ben Ali.

China’s leaders are seeking to maintain stability as the world’s most populous nation shifts from a predominantly rural to mostly urban society. During the five years through 2015, the level of urbanization will rise to 51.5 percent from 47.5 percent, Wen’s report said.

“Private companies will have huge business opportunities during the process,” Wang Jianlin, the billionaire chairman of property developer Dalian Wanda Group, said at the congress.

The divide between rich and poor is at levels not seen outside of Africa, Credit Suisse Group AG said in an August report. The average full-year income in the countryside last year was 5,919 yuan ($900), according to the statistics bureau.

Spending Power

The nation’s Gini coefficient, an income-distribution gauge used by economists, has climbed to near 0.5 from less than 0.3 a quarter century ago, according to Li Shi, professor of economics, School of Economics and Business at Beijing Normal University. The measure ranges from 0 to 1, and the 0.4 mark is used as a predictor by analysts for social unrest.

Government moves to boost incomes and spending power may include raising the threshold for income tax from 2,000 yuan per month, a plan already approved by the State Council.

A stronger Chinese currency would also bolster consumption, the U.S. government says. Wen’s report said the government will improve “the exchange-rate mechanism,” while Yi Gang, the head of the State Administration of Foreign Exchange, told reporters at today’s meeting that the yuan’s rate “has never been closer to equilibrium.”

Chinese companies can accept annual yuan appreciation of 3 percent to 5 percent, Bank of China Ltd. President Li Lihui said at the meeting. The yuan closed at 6.5686 per dollar on March 4. Li also said lending growth will cool this year because of government constraints.