Wen says China lacks sustainable growth model

Chinese Premier Wen Jiabao said the nation lacks a sustainable growth model and faces mounting “social problems,” as he ends a decade in power that saw the economy grow fourfold to be the world’s second largest. “We are keenly aware that we still face many difficulties and problems,” Wen told almost 3,000 delegates in his final report to the National People’s Congress on Wednesday.

He set an economic growth target of 7.5 percent for this year, unchanged from 2012, and an inflation goal of 3.5 percent. Wen steps down at the congress, which runs through March 17, after overseeing China’s rise to an $8 trillion economy that surpassed Japan and Germany and sustained its expansion through the global financial crisis. Those achievements have come at the cost of surging inequality, environmental degradation and growing financial risks, challenges that he leaves for incoming Premier Li Keqiang. “There are also many problems Wen left behind, and the new leaders are to face and tackle,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. They include “the risk of a property bubble, significantly increased local government debt, income equality and worsening pollution,” said Zhang, who previously worked for the International Monetary Fund.

An annual expansion target of 8 percent was in place from 2005 to 2011. Last year’s inflation goal was 4 percent. Wen reiterated that interest rates and the yuan’s exchange rate will become more market-based.

China needs to navigate a global recovery that’s “full of uncertainty,” Wen said. In the domestic economy, “unbalanced, uncoordinated and unsustainable development remains a prominent problem,” he said, repeating a phrase that he’s used previously. “Social problems have increased markedly.” The benchmark Shanghai Composite Index (SHCOMP) fell 3.6 percent yesterday, the most since August 2011, on measures to cool the property market, underscoring the challenge for the new Communist Party leadership of balancing growth and price concerns. The gauge rebounded 2.3 percent today.

“Li Keqiang will be thinking about how to keep the pace of reform fast enough to prevent China from a hard landing,” said Yao Wei, China economist at Societe Generale SA in Hong Kong, ranked by Bloomberg as the most accurate forecaster for quarterly gross domestic product. “The Chinese economy is losing competitiveness because of high wage growth, the corporates have high leverage and there’s excess capacity.” January saw Beijing engulfed by pollution and the statistics chief reporting a drop in the workforce that may constrain expansion. China’s Gini coefficient, a measure of income differences, was 0.474 last year, according to the government, higher than the 0.4 level that analysts say signals a potential for social unrest.

Wen didn’t discuss changes to the one-child policy, saying China “should adhere to the basic state policy on family planning.” He also said that “we should resolve to solve the problems of serious air, water and soil pollution.” Wen also set a goal for M2 money-supply growth of about 13 percent, following last year’s increase of 13.8 percent.