BEIJING -- China's government Friday pledged to keep prices stable this year as it tries to rein in lending and manage consequences of a massive stimulus program, but said it will continue to support the economy.
As widely expected, Chinese Premier Wen Jiabao reaffirmed China's growth target will remain at 8%. China has been seeking annual economic growth of 8% since 2005; it set a 7% target for 2004.
The government, which last year was determined to revive the economy amid the global financial crisis, this year is shifting toward tackling challenges such as surging housing prices and potential bad debt. Gross domestic product expanded 8.7% last year, helped by a credit boom and government investments.
"Latent risks in the banking and public finance sectors are increasing," said Mr. Wen in prepared remarks, adding the government will curb "the precipitous rise of housing prices in some cities."
China, the world's third-largest economy, has already begun to restrain credit growth as the economy has rebounded. Despite such changes in policy, Mr. Wen reiterated in his annual report at the opening of the National People's Congress that the government will continue its "active" fiscal policy and "moderately loose" monetary policy. It will also maintain the "basic stability" of the yuan exchange rate, he said.
Mr. Wen cautioned that "there is insufficient internal impetus driving economic growth," and reiterated the government needs to "consolidate the momentum of the economic turnaround," while restructuring the economy. Beijing wants to rely more on consumption and services to drive growth, and encourage Chinese companies to make more advanced goods.
"Individual countries face difficult choices in phasing out their stimulus policies; larger fluctuations may occur in the prices of major commodities and exchange rates among the major currencies; trade protectionism is clearly reasserting itself," he said.
But the policy wording still gives Beijing room to scale back stimulus; the central bank has twice ordered banks to keep a bigger portion of deposits on reserve this year to curb loan growth, without changing the monetary policy stance. Mr. Wen added: "We need to manage inflation expectations well and keep the overall level of prices stable."
Royal Bank of Canada economist Brian Jackson wrote in a note that Mr. Wen's comments "seem designed to give himself the rhetorical room to adjust policy as and when he sees fit. His speech seems consistent both with keeping policy unchanged for now but also with making some gradual adjustments in the months ahead."
China will aim for around 7.5 trillion yuan (around $1.1 trillion) worth of new local-currency loans this year, lower than the record 9.59 trillion yuan worth of new loans banks extended last year. It will also seek to slow growth in broad money supply, or M2, to around 17% this year from nearly 28% in 2009.
The consumer price index, the country's key inflation gauge, is targeted to rise around 3% this year, Mr. Wen said, after falling 0.7% last year
The government has grown concerned about potential risks to public finances from local governments, which aren't allowed to raise debt. Many, however, set up special investment vehicles that borrowed from banks, helping to drive the economy's recovery. But such forms of financing don't show up in the government's balance sheets and concerns have grown that such debt could turn bad, hurting banks and straining the central government's finances.
"We will strengthen the fiscal management system at and below the provincial level, set up a mechanism to ensure basic funding for county governments and carry forward reforms that place county finances directly under the management of provincial governments," said Mr. Wen.
The Ministry of Finance will issue 200 billion yuan worth of bonds on behalf of local governments, continuing a similar program as last year.
China's economic planning agency, the National Development and Reform Commission, said Friday it is aiming to expand fixed-asset investment this year by 20% while curbing excess and obsolete capacity in certain sectors, continuing Beijing's recent policy goals.
The growth target would represent a marked slowdown from nationwide FAI growth of 30.1% last year, which was boosted by the government's stimulus program.
Still, Mr. Wen said the government plans to run a fiscal deficit of 1.05 trillion yuan this year, or 2.8% of GDP. The budget suggests continued fiscal stimulus this year given earlier data showed the 2009 deficit at 2.2% of GDP, though the finance ministry said last year's deficit was higher, at 950 billion yuan, because of an accounting move.
"The fiscal deficit in 2010 still needs to be of an appropriate size. At the same time, in order to promote the sustainable development of public finances, actively prevent fiscal risk, and leave some leeway to gradually reduce the deficit in future years, we must keep the deficit under 3% of GDP," said the Ministry of Finance.
The central government plans to invest more to support the development of new technologies this year than last year, in line with its goal of restructuring the economy. But it is budgeting a slight slowdown in public spending on health care, social security and education this year, and keeping the share of social spending in its total spending broadly unchanged from last year.
Economists say China could encourage its people to spend more money by improving education, health care and social security.
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