China’s Wen pledges reform push
Beijing - China will step up economic and political reforms to spread wealth wider and make growth more resilient in the face of internal and external risks, outgoing Premier Wen Jiabao pledged on Wednesday after closing the annual meeting of parliament.
Wen said Beijing would let the yuan float more freely, keep a tight rein on property and inflation risks, deal with debts racked up by local governments and cushion downward external pressures, adding that political reforms were essential for China’s continued economic growth.
“In my final year, our government will have to do several difficult things,” 69-year-old Wen told a three-hour news conference, his last at the closing news conference of the National People’s Congress (NPC), over which he has presided for a decade.
“Reform has reached a critical stage. Without the success of political reform, economic reforms cannot be carried out. The results that we have achieved may be lost,” said Wen.
Wen has stood out among China’s leaders as the most persistent advocate of measured relaxation under party control. As he prepares to leave power, he has made a habit of calling much more forthrightly - though often vaguely - for political reform.
He retires next year along with President Hu Jintao, after a decade in power which has seen China grow to become the world’s second-biggest economy, but which is likely to see 2012 deliver the slowest rate of annual growth during their leadership.
Wen opened the annual parliamentary session over a week ago by announcing a cut to China’s economic growth target to 7.5% for 2012 from the 8% eyed in each of the previous eight years, saying it was necessary to help transform the economy.
“Due to the European debt crisis and a shrinking external market, there are downward pressures on the Chinese economy. Under such circumstances, we lowered the growth rate target mainly to allow for structural adjustment,” Wen said.
“We will step up exchange rate reforms,” he promised, adding that recent activity in Hong Kong currency derivatives markets signalled the value of the yuan “is possibly near an equilibrium level”.
The yuan has been a lightning rod for disputes between China and trading partners, including the United States, which accuse Beijing of holding down the currency to make exports cheaper.
China de-pegged the yuan from the dollar in a landmark move in July 2005 and it has since appreciated some 30% against the US currency, though some critics in the West say Beijing still keeps too tight a grip on the yuan.
Political reform needed
Wen said reforms to China’s political system are needed to address the country’s economic problems, but they had to be gradual and orderly. He said social and legal injustice were causing discontent in Chinese society.
Social harmony is an obsession of the Communist Party leadership, which justifies its one-party grip on power with the promise of stability and prosperity for the country’s 1.3 billion people, most of whom are very poor.
The country’s economic ascent has increasingly concentrated riches in the hands of an urban elite, despite the Wen government's focus on the incomes and welfare of poor farmers and rural migrants flocking to cities.
“As the economy developed, it has caused unfair distribution, the loss of credibility, corruption and other issues,” Wen said.
“To solve these problems, it’s necessary to not only enter into economic reform but also political reform, especially reform of the party and the state’s leadership system.”
China’s party-run parliament is a regimented show of unity for acclaiming policies, rather than debating them. Officials polled the media for questions ahead of time in an effort to ensure there were no surprises for the premier.
But that show of unity has been unsettled by speculation about Bo Xilai, the ambitious head of the southwestern municipality of Chongqing.
Bo’s hopes for a central leadership post took a blow after his subordinate, Wang Lijun, took refuge in the US consulate and left after more than a day inside, led away by officials who put Wang under investigation.
“The present Chongqing municipal party committee and the municipal government must reflect seriously and learn from the Wang Lijun incident,” Wen said.
The leadership of Hu and Wen has been criticised for failing to pursue reform vigorously enough to underpin long-term growth and wealth creation, falling short of efforts that have lifted 600 million people out of poverty in the three decades since Deng Xiaoping’s landmark opening up programme began in 1978.
Creating room for reform
Lower growth will help Beijing keep inflation under control, while allowing it to stick to a broadly expansionary monetary policy to ensure a flow of credit to the small and medium-sized firms the government wants to encourage.
Inflation hit a three-year high of 6.5% in July and was above the government’s 4% target in every month of 2011. Wen has maintained the target for this year.
China’s 800 million workers are mainly low paid and an estimated 10% of the population lives on less than $1 per day. They feel the pinch of rising prices acutely.
Wen said home prices, which have started to nudge lower after soaring tenfold in the last decade, remained far from falling to a reasonable level.
Government efforts to curb real estate speculation must be maintained or it will risk chaos and a property bubble which would harm the economy if it burst, he said.
“If we relaxed, all we have achieved would lost and it would cause chaos in the property market, which is bad for the long-term, healthy and stable development of the housing market,” Wen said, adding that reasonable housing prices should reflect personal income, investment and reasonable profits.
Softer property prices, prompted by the crackdown, have stopped local authorities from selling land to raise money needed to service debts of about 10.7 trillion yuan ($1.7 trillion), much of which were incurred as part of a 4 trillion yuan stimulus plan to combat the global financial crisis in 2008/09.
Economists have warned that some 20 to 30% of those loans are likely to turn sour, which could cripple the banking system.
But Wen said the debt risks were manageable.
Wen’s tough talk on property helped send Chinese shares lower as investors rapidly reversed recent speculation of near-term easing of measures in the property sector.
Benchmark share indexes in Shanghai and Hong Kong surrendered early gains to fall 2.6% and 0.3%, respectively.
Property is crucial to China’s economy. Real estate investment generates about 13% of economic output and the country’s vast factory sector is battling with a downturn in external demand from debt-ridden Europe and under-spending US consumers - China’s two biggest export markets.
Data released at the weekend showed that China’s trade balance plunged $31.5bn into the red in February, the largest deficit in at least a decade.
The trade data followed reports on Friday that inflation eased in February while bank lending, retail sales and industrial output growth all cooled more than expected, pointing to slowing of the world’s second-biggest economy but not a hard landing.