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China bets on consumer-led growth to cure social ills

China's Premier Wen Jiabao delivers a speech during the opening ceremony of National People's Congress (NPC) at the Great Hall of the People
China's Premier Wen Jiabao delivers a speech during the opening ceremony of National People's Congress (NPC) at the Great Hall of the People

By Kevin Yao and Aileen Wang

BEIJING (Reuters) - China's new rulers will focus on consumer-led growth to narrow the gap between rich and poor while taking steps to curb pollution and graft, the government said on Tuesday, tackling the main triggers for social unrest in the giant nation

Outgoing Premier Wen Jiabao, speaking at the opening of the annual session of parliament, also announced record government spending in 2013 that will sustain growth and maintain the ruling Communist Party's grip on power through an enhanced budget for internal security.

The plan is the blueprint for the incoming administration led by Xi Jinping, who will formally take over as president at the end of the session, with Li Keqiang taking over as premier.

"Production falls short of the ever-growing material and cultural needs of the people," Wen said to delegates assembled in the Great Hall of the People for the once-a-year meeting of China's National People's Congress (NPC).

China admitted earlier this year there was an urgent need for reforms to narrow an income gap that is now one of world's widest and at levels that analysts say sparks social unrest, despite three decades of blistering economic growth that have lifted hundreds of millions of people from rural poverty.

Beijing also announced an 8.7 percent rise in the 2013 domestic security budget to 769.1 billion yuan ($128 billion), exceeding military expenditure for the third year in succession.

Wen said consumption was the key to unlocking the full potential of domestic demand in the economy of 1.3 billion people, reducing excess, inefficiency and inequality. This, he said, would deliver growth of 7.5 percent in 2013 - a level China barely beat in 2012 when growth eased to its slowest pace in 13 years, expanding by 7.8 percent.

"We should unswervingly take expanding domestic demand as our long-term strategy for economic development," Wen said.

"To expand individual consumption, we should enhance people's ability to consume, keep their consumption expectations stable, boost their desire to consume, improve their consumption environment and make economic growth more consumption-driven."

HUKOU REFORM

China officially classified 51 percent of its citizens as urban dwellers in 2011, but that includes around 200 million rural migrant workers who generally do poorly paid jobs in cities, lack residency rights and have very little to spend.

Wen said accelerated reform of the rigid hukou household registration system was needed to drive an urbanization effort that he said would underpin economic development.

Rebalancing growth away from the investment-heavy, export-oriented model that has lifted hundreds of millions of people from poverty and turned China into the world's biggest trading economy, has been a policy priority for much of Wen's term.

There are growing concerns that more fixed-asset investment - already worth about 50 percent of GDP and at a level that worries the International Monetary Fund - would simply add to the inefficiency of China's state sector.

Industrial inefficiency also exacerbates pollution, which has its origins in China's factory-fuelled expansion.

Wen acknowledged the massive environmental cost of growth.

"The state of the ecological environment affects the level of people's well-being and also posterity and the future of our nation," Wen said.

"We should adhere to the basic state policy of conserving resources and protecting the environment and endeavor to promote green, circular and low-carbon development," he said.

There has been widespread public anger and rare media criticism over pollution in China after smog enveloped swathes of the north of the country recently, grounding flights, forcing people indoors and forcing measures such as factory closures.

Wen linked the successful delivery of policies on consumers, food safety, pollution, healthcare, education, corruption and financial reform to the Communist Party's right to rule.

"We need to improve the socialist market economy," Wen said.

"Reform and opening up are the fundamental force that drives China's development and progress. We can continue to advance our cause only by adhering to reform and opening up," he added.

INCOME GAP

Despite its ranking as the second-largest economy globally after three decades of stellar growth, China remains an aspiring middle-income country riven with inequality and dependent on state-backed investment.

About 13 percent of China's population still live on less than $1.25 per day, the United Nations Development Programme says. Average urban disposable income is just 21,810 yuan ($3,500) a year.

On the other hand, according to the latest reckoning by Forbes, China has 122 dollar billionaires. A rival list in the Hurun Report says China has 317 billionaires - a fifth of the total number in the world.

Consultants at McKinsey meanwhile estimate China will have 167 million "mainstream" consumer households by 2020 - those with annual disposable income of between $16,000 and $34,000 - more than 10 times the 14 million, or 6 percent, who currently fit that definition.

There will also be 120 million households with $6,000-$15,999 of spending power, McKinsey reckons.

But while Wen was heavy on promises to change China's economic model, there was a ring of familiar rhetoric to much of his speech and the spending priorities laid out in separate documents issued by the Ministry of Finance and the powerful National Development and Reform Commission (NDRC), the country's top economic planning agency.

Analysts said that fit with their modest expectations of any significant change in the final stages of a once-a-decade handover of power at the top of the Communist Party that began last year and broadly concludes with the end of the NPC.

INCREASED SPENDING

In a broad series of increased commitments, the Ministry of Finance said China would boost fiscal spending in 2013, raising the fiscal deficit target to 2 percent of gross domestic product, its highest since 2010 and up from 1.6 percent in 2012.

In absolute terms, China's budgeted fiscal spending of 13.82 trillion yuan ($2.2 trillion) for 2013 is a record level.

In a separate document, the Ministry of Finance said it was raising the quota for bonds issued by local governments to 350 billion yuan in 2013, compared with 250 billion yuan in 2012.

It also pledged to further strengthen regulation of local government debt and curb irregular financing activities.

China's local governments have been dogged by debt worries since racking up 10.7 trillion yuan of loans by the end of 2010. They borrowed heavily to finance their contributions to infrastructure spending laid out in a 2008 stimulus programme launched by Beijing in the face of the global financial crisis.

(Additional reporting by Michael Martina and John Ruwitch; Writing by Nick Edwards; Editing by Raju Gopalakrishnan)

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