China is on course for another five years of robust growth, but inflation threatens social stability and must be tamed, Premier Wen Jiabao said on Saturday.

In China's version of a State of the Union address to the annual parliamentary session, Wen said the top priority this year was to curb price rises that are hurting ordinary people in the world's second-largest economy.

Laying out a plan for the next five years, he said the drivers of China's meteoric economic rise remained firm.

There is huge potential demand in the market, the supply of funds is ample, the overall scientific and educational level of the people is rising, Wen said in a report to the National People's Congress.

He vowed to boost spending on education, healthcare and public housing, initiatives intended to narrow the chasm between the rich and poor in China that has stirred resentment.

A huge police presence in the capital and a rare public warning against protests underscored the government's sensitivity to even the faintest whiff that the unrest roiling the Middle East could spread to China.

Building a fairer society has been a core goal of Wen's premiership, but the income gap has in fact widened during his eight years in power and he is trying to lay the groundwork for improvement before a leadership reshuffle in late 2012.

As Deng Xiaoping said, the first step is to make a part of the people rich and the next step is to make everyone rich, said Shen Jianguang, economist with Mizuho Securities, referring to the Chinese leader who launched market reforms in the late 1970s.

They have already done a great job on the first step. Some people have gotten very rich. But the second step is lagging behind.

The premier's annual address is given in the cavernous Great Hall of the People, crowded with thousands of delegates vetted by the Communist Party to acclaim and approve its policies.

But Wen's televised speech is also aimed at hundreds of millions of ordinary citizens who Party leaders fear could become sources of anger unless grievances about price rises, unaffordable housing and expensive healthcare are eased.

He made clear that addressing those concerns would preoccupy China's economic policy, shaping decisions on everything from farmers' incomes to the yuan exchange rate.

Recently, prices have risen fairly quickly and inflation expectations have increased, Wen said. This problem concerns the people's well-being, bears on overall interests and affects social stability. We must, therefore, make it our top priority in macroeconomic control to keep overall price levels stable.

For 2011, the government aimed to contain average inflation to 4 percent, Wen said. Inflation has been running near a two-year high of more than 5 percent in recent months. Lofty home price rises have also defied government cooling efforts.

CONFIDENCE

Wen used his speech to lay out a series of economic targets, including the customary objective of 8 percent growth this year, which, as in previous years, is sure to be surpassed.

There were no surprises, as all the numbers had previously been announced. More telling was the tone of Wen's comments, brimming with the confidence of a government that has presided over two decades of nearly uninterrupted double-digit expansion.

The government's ability to exercise overall control and respond to major challenges has increased significantly, Wen said.

China will stay in the fast lane, with tens of millions of people moving to cities from farms, more openings to global trade and investment, and factories and computers spreading into the hinterland, he said.

The gross domestic product was on track to exceed 55 trillion yuan in 2015. That would make the Chinese economy nearly half the size of the U.S. economy. In 2010, it was a little more than a third as big.

NEW SOURCES OF GROWTH

Wen said China was looking to generate new sources of domestic demand that would wean economic growth off its reliance on cheap exports and infrastructure projects.

He also told parliament that China would cut energy intensity by 16 percent and carbon intensity by 17 percent by the end of 2015.

We are keenly aware that we will have a serious problem in that our development is not yet well balanced, coordinated or sustainable, said.

He did not mention the popular uprisings that have shattered authoritarian governments across the Middle East, and observers see scant risk of China's one-party state soon succumbing to mass unrest.

But his speech showed that leaders in Beijing want to head off such risks, particularly anger stemming from price rises and wage gaps.

The world economy will continue to recover slowly, but the foundation for recovery is not solid. Economic growth in developed economies is weak, Wen added, noting that some countries still faced sovereign debt crises.

Wen has said government policies would focus on a rural population of 720 million people, including 153 million migrants who usually live and work outside their home towns, many working at building sites and factories that make cheap exports.

(Additional reporting by Ben Blanchard and Sui-Lee Wee; Writing by Chris Buckley and Simon Rabinovitch; Editing by Dean Yates and Daniel Magnowski)

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