By Chris Buckley and Nick Edwards
BEIJING (Reuters) - China must embrace slower growth and bolder political reform to keep its economy from faltering and to spread wealth more evenly, Premier Wen Jiabao said on Wednesday, vowing to use his last year in power to attack mounting discontent that he warned could end in chaos.
Wen pledged to make growth more resilient to external pressures, deflate domestic property and inflation risks and deal with 10.7 trillion yuan ($1.7 trillion) in debt racked up by local governments, while also promoting political change.
"Reform has reached a critical stage. Without the success of political reform, economic reforms cannot be carried out. The results that we have achieved may be lost," the 69-year old Wen told reporters at the end of China's annual meeting of parliament, the National People's Congress (NPC), over which he has presided for a decade.
Wen has stood out among China's leaders as the most vocal advocate of measured relaxation under party control. As he prepares to leave power, he has made a habit of calling more forcefully -- though vaguely -- for political reform.
He retires next year along with President Hu Jintao after a decade in power which has seen China grow to become the world's second-biggest economy, but which is likely to see 2012 deliver the slowest rate of annual growth during their leadership.
Wen, who was once an aide to purged reformist party chief Zhao Ziyang, also gave an unusually blunt prognosis about the risks to growth and stability posed by China's political system, even warning that failure to act could rekindle the chaos of Mao Zedong's Cultural Revolution.
"A historical tragedy like the Cultural Revolution could occur again," he said. "Each party member and cadre should feel a sense of urgency."
During Mao Zedong's era of fervent Communism, Wen's father and grandfather, both teachers, were among the victims of party campaigns to demote citizens deemed to have bad "class" backgrounds or suspect pasts.
Wen opened the annual parliamentary session over a week ago by announcing a cut to China's economic growth target to 7.5 percent for 2012 from the 8 percent eyed in each of the previous eight years, saying it necessary to help transform the economy.
"Due to the European debt crisis and a shrinking external market, there are downward pressures on the Chinese economy. Under such circumstances, we lowered the growth rate target mainly to allow for structural adjustment," Wen said.
"We will step-up exchange rate reforms," he promised, adding that recent activity in Hong Kong currency derivatives markets signaled the value of the yuan "is possibly near an equilibrium level".
China de-pegged the yuan from the dollar in a landmark move in July 2005 and it has since appreciated some 30 percent against the U.S. currency, though some critics in the West say Beijing still keeps too tight a grip on the yuan to make exports cheaper.
NEW REFORMS MAY HAVE TO WAIT
Over a three-hour press conference, Wen flagged that he does not want to be a lame duck in his last 12 months as premier, spelling out a package of goals to addressing yawning income disparities and public dismay over soaring housing prices.
Social harmony is an obsession of the Communist Party leadership, which justifies its one-party grip on power with the promise of stability and prosperity for the country's 1.3 billion people, most of whom are very poor.
China's economic ascent has increasingly concentrated riches in the hands of an urban elite, despite Wen's pledge to improve the livelihoods of poor farmers and rural migrants to cities.
"Economic development has also produced unfair distribution, a lack of trust, graft and other problems," Wen said.
"I'm deeply aware that solving these problems needs the advance of political system reform, as well as economic system reform, and especially reform of the leadership system of the party and state."
However, many analysts said it seemed unlikely that any major reforms would be delivered ahead of a leadership handover, which is scheduled to begin towards the end of this year when Hu and Wen retire from their posts in the Communist Party.
"I do not expect deep reforms in a transition year," said Zhang Zhiwei, chief China economist with Nomura in Hong Kong.
"Structural reforms take multiple years to finish so it makes sense for the new leaders to push them," he told Reuters.
There is already a long to-do list of reforms in the 12th five year plan, laid out by Wen last year and approved by the NPC, which sets China's overall policy direction for 2011-2015.
The leadership of Hu and Wen has been criticized for failing to pursue reform vigorously enough to underpin long-term growth and wealth creation, falling short of efforts that have lifted 600 million people out of poverty in the three decades since Deng Xiaoping's landmark opening up program began in 1978.
CREATING ROOM FOR REFORM
Lower growth will help Beijing keep inflation under control, while allowing it to stick to a broadly expansionary monetary policy to ensure a flow of credit to the small and medium-sized firms the government wants to encourage.
Inflation hit a three-year high of 6.5 percent in July and was above the government's 4 percent target in every month of 2011. Wen has maintained the target for this year.
Wen said home prices, which have started to decline after soaring 10-fold in the last decade, remained "far from returning to reasonable levels".
Government efforts to curb real estate speculation must be maintained or risk chaos and a property bubble which would harm the economy if it burst, he said.
Softer property prices have stopped local authorities from selling land to raise money needed to service debts. Economists believe that some 20 to 30 percent of those loans may to turn sour, which could cripple the banking system.
But Wen said the debt risks were manageable.
Wen's tough talk on property helped send Chinese shares lower, with Shanghai's benchmark stock index ending down 2.6 percent and Hong Kong slipping 0.2 percent as investors rapidly reversed recent speculation that Beijing was preparing to ease measures in the property sector.
Property is crucial to China's economy. Real estate investment generates about 13 percent of economic output and the country's vast factory sector is battling with a downturn in external demand from debt-ridden Europe and under-spending U.S. consumers, China's two biggest export markets.
China revealed at the weekend that its trade balance plunged $31.5 billion into the red in February -- the largest deficit in at least a decade.
The trade data followed other reports on Friday showing softer rates of growth in inflation, bank lending, retail sales and industrial output, pointing to a gradual slowing of the economy but not a hard landing.
($1 = 6.3270 Chinese yuan)
(Writing by Nick Edwards; Additional reporting by Clement Tan in Kong Kong; Editing by Kim Coghill and Don Durfee)