China to follow easy monetary stance, active fiscal policy

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China will steer a steady policy course this year but will change track if needed to counter the lingering impact of the international credit crunch, Premier Wen Jiabao said on Friday.

Wen announced increases in social and rural spending that outstrip the planned rise in defence outlays, underscoring concern over the income inequalities that blight a country poised to pass Japan this year as the world's second-largest economy.

In his annual address to the National People's Congress, the largely ceremonial parliament, Wen said China would maintain an appropriately easy monetary stance and an active fiscal policy.

China avoided the worst of the global slump by pumping up credit, slashing interest rates and launching a 4 trillion yuan (USD 585 billion) infrastructure programme in late 2008.

The economy grew 8.7% last year as a result, by far the fastest pace of any major country, but Wen played down the achievement.

"We must not interpret the economic turnaround as a fundamental improvement in the economic situation," Wen said in his "State of the Union" speech to nearly 3,000 delegates in the cavernous Great Hall of the People.

"There is insufficient internal impetus driving economic growth," he added.

Wen said China was targeting 8% growth in gross domestic product - the goal it traditionally sets every year - and an inflation rate of about 3%.

Wen announced increases of 8.8% on social spending and 12.8% on rural outlays - more than the rise of 7.5% in the military budget - to narrow the yawning wealth gaps that economists blame for dampening domestic consumption.

"Improving people's well-being is the fundamental goal of economic development. We can ensure that there is sustained impetus for economic development, a solid foundation for social progress, and lasting stability for the country only by working hard to ensure and improve people's well-being," Wen said.

Still, the projected growth in welfare and agriculture spending is much slower than in 2009 when the financial crisis was raging.

Reflecting the conservatism of China's financial planners, the budget deficit will again be kept below 3% of national income, Wen said.

Last year the deficit was just 2.2% of GDP despite massive government spending on infrastructure and job creation.

Wen also signalled continued caution towards the yuan , reiterating standard language that Beijing would seek to keep the currency basically steady at a reasonable and balanced level.

To the dismay of Washington and Brussels, China has frozen the yuan's exchange rate at around 6.83 per dollar since mid-2008 to preserve the international competitiveness of its exporters.