China Premier Proposes
Economic Adjustments

BEIJING -- Chinese Premier Wen Jiabao called for changes to make China's economy more efficient, equitable and environmentally friendly as it faces the contradictory challenges of quickening domestic inflation and a global slowdown.

Delivering China's version of the U.S. presidential State of the Union address, Mr. Wen told legislators the government must "concentrate on changing the way the economy develops and adjust the economic structure to improve the quality and efficiency of economic growth." The speech, on the first day of the annual meeting of the National People's Congress, hit Mr. Wen's signature themes of curbing waste and pollution, increasing spending on social services, and ensuring that growth boosts jobs and incomes.

Mr. Wen acknowledged danger from rising tensions with China's trading partners and the turmoil in international financial markets, and he said rising prices are the biggest concern for ordinary people. He promised to take "prompt and flexible measures" to deal with economic problems, offering numerous measures to sustain growth and curb inflation in the short term.

But Mr. Wen kept the focus on a broader set of long-term solutions. A major part of that agenda is streamlining the central-government bureaucracy into fewer, stronger agencies. The legislature will discuss and approve those plans in coming days. Also, a roster of new officials who will work with Mr. Wen in his second term on China's State Council, or cabinet, will be announced.

Economic planners have notched some efficiency gains already: China required 3.3% less energy and 9.5% less water to produce each dollar of economic output in 2007. With economic growth rising 11.4% last year, China's consumption of resources is still growing. The improvements could help make the country less dependent on imports of oil and raw materials, whose soaring prices have contributed to China's inflation problems. Emissions of sulfur dioxide, a major air pollutant, meanwhile, fell outright by 4.7% last year as use of pollution-control equipment expanded to half of China's coal-burning plants.

For this year, Mr. Wen is boosting spending on scientific research and development to help shift China away from industries that are heavy polluters and consumers of raw materials. He plans further changes at state enterprises, including the stodgy railroads.

Mr. Wen reaffirmed the government's commitment to tight credit policy, offering little hope that interest rates would be eased soon after six increases last year. But he said the government's intention is to "encourage growth in some sectors and discourage it in others." He called for more lending to agriculture but less to heavy industry, for instance.

The government is increasing spending on services such as health care, partly to solve a broader economic problem. In theory, a stronger social safety net should make households more willing to spend.

China's growth has traditionally been driven mainly by investment from government agencies and state companies, but if planners build more than is needed, investment booms carry the risk of busts. To provide a potentially more stable growth driver, Mr. Wen has encouraged consumer spending. An encouraging jump in retail sales toward the end of last year meant that, for the first time since 2000, consumption contributed more to growth in 2007 than did investment, according to planners.

Mr. Wen announced a major social program: abolishing tuition and school fees for primary education in urban areas, starting this fall. Central-government spending on education will rise 45% to make up the lost revenue for schools, as with an earlier program that did away with rural-school fees blamed for denying many access to education.

Mr. Wen has been criticized in some quarters for not spending even more aggressively to expand the social safety net and reduce poverty, given that revenue grew more than 30% last year. But officials are wary of overwhelming benefit programs with money, fearing it could be lost to corruption and waste. There also have been calls for more public-works construction to offset the impact of a U.S. economic slowdown, but such programs got only a minor increase.

Government outlays will exceed revenue by 180 billion yuan ($25.33 billion) this year, which, on current forecasts, would be a deficit equal to a modest 0.6% of annual gross domestic product. Still, that would be a turnaround from 2007, when a surge in revenue led to a small surplus.

"Even with a sharp U.S. slowdown, China's growth is still expected to be 9% to 10% this year. It's not clear that fiscal policy right now needs to be more countercyclical," or directed at offsetting a slowdown, said Wang Tao, an economist with Bank of America in Beijing. "The main thing in the budget is expenditure switching: reduce investment and increase spending on social services and welfare. That's the right direction."

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source: www.wsj.com