By Richard Spencer in Beijing
China's prime minister gave a surprisingly gloomy assessment of the state of the country's booming economy and fast-changing society in his annual speech to parliament yesterday.
In the face of near-euphoria among governments and businesses in the western world about the pace of its growth, Wen Jiabao said long-term economic health was at risk while society faced "deep-seated conflicts".
For years, Communist leaders have worried about the growing wealth gap between the expanding cities of the east coast and the rural interior. But yesterday Mr Wen, delivering the annual "work report" to the rubber-stamp National People's Congress, added the need to be concerned about "social equity".
This was a strong nod to concern that inequalities are not just caused by different rates of economic growth but by such issues as corruption and illegal expropriation of land by officials. "Some deeply-seated conflicts that have accumulated over a long time have yet to be fundamentally resolved, and new problems have arisen that cannot be ignored," he said.
Mr Wen is already seeking to address some of these issues with a policy of building a "new socialist countryside" - a plan to spend £25 billion on improving incomes in rural areas and providing better education and health care.
But Mr Wen also addressed fundamental economic issues caused by the speed of economic growth, which most outsiders regard with wonder rather than concern.
China's entry into the World Trade Organisation in 2001 was a nervous time for international businesses and China's banks, which feared whether the country's export-led economic miracle would survive the strict, pro-competition rules it would have to face.
In fact, the reverse was the case, with growth from 2002-04 that surpassed predictions. But Mr Wen alluded to fears that the growth was unsustainable. Much of the investment has gone on factories and power stations, which is starting to lead to over-supply.
That is one reason for the threat of trade wars - as in last summer's "Bra Wars" with Europe - as companies cut prices to stay competitive. Many now risk bankruptcy as a result.
"Production gluts are increasingly severe, prices of related goods are falling and inventories are rising," he said. "Profits are shrinking, losses are growing and latent financial risks are increasing." If companies start defaulting on debts it could trigger a crisis in the banking system, which has given out huge loans to fuel the investment.
Mr Wen is under pressure on several fronts. He needs to bring excessive growth under control, but keep it high enough to employ China's vast pool of surplus labour to avoid social unrest.
For President Hu Jintao, the answer to corruption has been to intensify a campaign to revive the teaching of Marxist theory to party cadres. There has also been a shift away from economic reforms such as the privatisation of state-owned industries.
But while diplomats and China's growing activist movement have welcomed the shift towards spending on the countryside, many say that without changes in the party's autocratic management system it will have little effect.
"I used to be an optimist about (Hu and Wen's) reformist tendencies," said one western diplomat. "But I think it's become clear that what we have here is a return to old ways of thinking."
Mr Wen yesterday set a target of eight per cent for growth this year. This is lower than most economists predict, suggesting that he fears that the higher growth is now, the harder it can fall.
The answer for many economists and Mr Wen himself is to boost the domestic economy - leading to an unusual call for the once strictly puritan Communist population to go out and spend.
But he accepted that this depended on improving health care and pensions, the lack of which drives the determination to earn and save.
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