Wen Warns on China’s Tensions After Decade of Growth

Chinese Premier Wen Jiabao said the nation lacks a sustainable growth model and faces mounting “social problems,” as he ends a decade in power that saw the economy grow fourfold to be the world’s second largest.

“We are keenly aware that we still face many difficulties and problems,” Wen told almost 3,000 delegates in his final report to the National People’s Congress in Beijing today. He set an economic growth target of 7.5 percent for this year, unchanged from 2012, and an inflation goal of 3.5 percent.

Wen steps down at the congress, which runs through March 17, after overseeing China’s rise to an $8 trillion economy that surpassed Japan and Germany and sustained its expansion through the global financial crisis. Those achievements have come at the cost of surging inequality, environmental degradation and growing financial risks, challenges that he leaves for incoming Premier Li Keqiang.

“There are also many problems Wen left behind, and the new leaders are to face and tackle,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. They include “the risk of a property bubble, significantly increased local government debt, income equality and worsening pollution,” said Zhang, who previously worked for the International Monetary Fund.

An annual expansion target of 8 percent was in place from 2005 to 2011. Last year’s inflation goal was 4 percent. Wen reiterated that interest rates and the yuan’s exchange rate will become more market-based.

Unbalanced Growth

China needs to navigate a global recovery that’s “full of uncertainty,” Wen said. In the domestic economy, “unbalanced, uncoordinated and unsustainable development remains a prominent problem,” he said, repeating a phrase that he’s used previously. “Social problems have increased markedly.”

A separate report from the National Development and Reform Commission today shows a commitment this year to open more than 5,200 kilometers (3,232 miles) of new railway lines and build 80,000 kilometers of highways, indicating how infrastructure spending may keep powering the economy even as Wen called for “accelerating the change of the growth model” and expanding domestic demand.

“In the current stage, the role investment plays in promoting economic growth cannot be underestimated,” Wen said.

The benchmark Shanghai Composite Index fell 3.6 percent yesterday, the most since August 2011, on measures to cool the property market, underscoring the challenge for the new Communist Party leadership of balancing growth and price concerns. The gauge rebounded 2.3 percent today.

Reform Pace

“Li Keqiang will be thinking about how to keep the pace of reform fast enough to prevent China from a hard landing,” said Yao Wei, China economist at Societe Generale SA in Hong Kong, ranked by Bloomberg as the most accurate forecaster for quarterly gross domestic product. “The Chinese economy is losing competitiveness because of high wage growth, the corporates have high leverage and there’s excess capacity.”

January saw Beijing engulfed by pollution and the statistics chief reporting a drop in the workforce that may constrain expansion. China’s Gini coefficient, a measure of income differences, was 0.474 last year, according to the government, higher than the 0.4 level that analysts say signals a potential for social unrest.

Wen didn’t discuss changes to the one-child policy, saying China “should adhere to the basic state policy on family planning.” He also said that “we should resolve to solve the problems of serious air, water and soil pollution.”

Money Supply

Wen also set a goal for M2 money-supply growth of about 13 percent, following last year’s increase of 13.8 percent.

China is aiming for an 8 percent increase in foreign trade in 2013, the NDRC said, compared with last year’s 10 percent goal. Exports advanced 7.9 percent in 2012 and imports rose 4.3 percent.

The retail-sales growth target is 14.5 percent and fixed-asset investment is projected to rise 18 percent, according to the NDRC report. Retail sales rose 14.3 percent last year and investment increased 20.3 percent.

“The biggest risk this year is still growth, not inflation,” said Joy Yang, chief Greater China economist at Mirae Asset Financial Group in Hong Kong.

The nation plans to run a budget deficit of 1.2 trillion yuan ($193 billion), amounting to about 2 percent of gross domestic product and 50 percent wider than last year’s deficit. The Ministry of Finance said it will issue bonds to cover local governments’ portion of the budget deficit, which will amount to 350 billion yuan.

Crisis Response

Wen’s response to the global financial crisis included lending that left local governments with 10.7 trillion yuan of debt at the end of 2010. “We will continue to strengthen management of local government debt” and “keep such debt at an appropriate level,” Wen said today.

“There are concerns that some local governments are accumulating too much debt for short-term high growth,” Li Daokui, a former member of the central bank’s monetary policy committee, told reporters at the congress today. “They are consuming May’s grain in April.”

The economy expanded 7.8 percent last year, the weakest pace since 1999. The median estimate of 43 analysts surveyed in February by Bloomberg News is for a pickup to 8.1 percent growth in 2013. Expansion was 7.9 percent in the fourth quarter, the first acceleration in two years.

“This year, China is still under considerable inflationary pressure,” Wen said, citing upward pressure on prices of land and labor and monetary easing in major developed countries. In addition, “we need to leave some room for adjusting the prices of energy and resources,” Wen said.

Inflation Forecast

The consumer price index increased 2.6 percent last year, less than half 2011’s rate, and economists project a 3.1 percent rise this year, based on a Bloomberg survey.

Wen reiterated China will pursue a “prudent” monetary policy and “proactive” fiscal policy. China has held off from easing monetary policy since cutting interest rates in June and July and lowering banks’ reserve requirements three times through May.

Elsewhere in the Asia-Pacific region today, the Reserve Bank of Australia kept its benchmark interest rate unchanged at a half-century low and reiterated it has room to cut further if needed to boost demand. Governor Glenn Stevens and his board left the overnight cash-rate target at 3 percent.

“With inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate,” Stevens said in a statement. “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary.”

Euro-area services output shrank less than initially estimated in February, adding to signs the currency bloc’s economy may be beginning to emerge from a recession, a report from Markit Economics showed.

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