China Aims to Enhance Internal Demand

China’s latest five year economic plan seeks to boost consumer confidence.

During the annual National People’s Congress in Beijing this weekend, China’s ruling Communist Party outlined its twelfth five year economic plan which seeks to enhance internal demand and mend social imbalances. Premier Wen Jiabao told the some 3,000 delegates from across the country that China must fight corruption and temper inflation to ensure domestic tranquility.

China’s inflation rate reached almost 5 percent last year and continued to accelerate despite recent interest rate hikes. Rising food and fuel prices are a concern because poor families spend up to half their incomes on basic commodities.

In recent decades, the Chinese economy has relied heavily on exports for growth. America, China’s largest importer, has been critical of this dependence and fears that lasting global trade imbalances will prolong its recession.

On Saturday, Premier Wen announced to stimulate domestic demand with subsidies to farmers and the urban poor. “Expanding domestic demand is a long-term strategic principle and basic standpoint of China’s economic development as well as a fundamental means and an internal requirement for promoting balanced economic development,” he said.

The “People’s Premier” has long championed balanced growth, telling CNN’s Fareed Zakaria in a rare interview with Western media last year that China’s economy “still lacks balance, coordination and sustainability.” While the country’s eastern seaboard is booming, the hinterland remains largely impoverished.

Wen reiterated this long-held belief of his this weekend, adding that the government has to “make sure [that] people are content with their lives and jobs.” Many well educated adolescents are struggling to find employment in the cities. Welfare provisions formally exist but in reality, people cannot rely on the state for pensions.

The congress was expected to increase social security spending and raise the minimum wage to boost consumer confidence.

In order to diversify China’s economy and finance increased welfare spending, the state will likely have to cut subsidies and subsidized loans to companies, real estate developers and other vested interests that have allies in the party. With major changes in political leadership expected next year, it may prove difficult for the ruling generation to implement such reforms.