China's Wen puts social stability at heart of economy

Fighting inflation is a priority for the government in China where rapid price rises and pressure to sharply raise the value of the yuan are a threat to social stability, Premier Wen Jiabao said on Sunday.

Wen's comments at an online forum ahead of China's annual parliament session from March 5, reflect the sensitivity among top Communist Party leaders to public grumbling about rising real estate and food prices.

That wariness has been amplified by official jitters about a fallout from the unseating of authoritarian rulers in the Middle East.

Rapid price rises have affected the public and even social stability, Wen said.

The Party and government have always made a priority of keeping prices at a generally stable level, he said during the online chat, adding that China has ample grain and abundant foreign exchange reserves that would help to keep price rises in check.

Wen said maintaining social stability was also central to the country's foreign exchange policy, requiring a step-by-step increase in yuan flexibility so that Chinese businesses could adapt to the changes.

If the yuan saw a one-off large appreciation, that would cause many closures of our processing enterprises and make many export orders shift to other countries and many of our workers will lose jobs.

Wen sought to deflect criticism from foreign governments, particularly the United States, that have been urging a more rapid rise in the currency.

Let them think about that: if businesses go bankrupt, workers become unemployed and rural migrant workers go home, then what do we have to expand domestic consumption, where will increased consumption come from?

STAMPING OUT CORRUPTION

Wen, whose term ends in early 2013, highlighted the political risks if the public starts to associate inflation with official corruption.

He said the government was determined to stamp out corruption, citing the recent dismissal of the Liu Zhijun, the former railways minister who is suspected of corruption.

I have in fact said before that if price rises become linked to the problems of graft and corruption, that will be enough to spark public discontent, and even create serious social problems, Wen said.

Wen also said the official GDP target was 7 percent per year for the 2011-2015 developmental plan. That rate is significantly below the average annual 11.2 percent growth during the last five-year period, but growth targets tend to undershoot actual performance.

Chinese inflation was lower than forecast in January at 4.9 percent, compared with a year ago, but price pressures remain strong enough to demand deeper tightening. Food prices rose 10.3 percent.

To help rein in inflation, China raised interest rates on February 8, the third rate increase since China began a monetary tightening cycle in earnest in October.

Beijing has also imposed a slew of measures to target property prices that have stayed stubbornly high. The country's leaders, aware of public anger over unaffordable housing, have said they would not tolerate property inflation and speculation.

Even so, housing prices have continued to climb. New home prices climbed in January from a year earlier in 68 of the 70 major cities tracked by the National Bureau of Statistics, with 10 of them registering double-digit growth.

There must be unwavering determination to contain investment and speculative demand in housing. We're adopting economic and legal measures, as well as when necessary administrative ones, Wen said.

I'm confident that through our efforts, we'll see results in reining in speculative and investment purchases of housing.

There is no indication price pressures in China will spark major social unrest, but the ruling Communist Party is wary of any signs that public complaints could coalesce into deeper discontent.

The Premier did not say how the government might use its foreign exchange reserves to combat inflation.

The head of China's State Administration of Foreign Exchange (SAFE), Yi Gang, said on Saturday that the government could not invest much of the forex reserves in the global commodities market because doing so would only push up the prices of the raw materials the economy depends on.

(Editing by Sugita Katyal)