Wen warns of bank risks

Pledges property crackdown to rebalance the economy away from investment and infrastructure spending.

Premier Wen Jiabao warned of “latent risk” in China’s banks and pledged to crack down on property speculation as the government faces the consequences of flooding the economy with money to drive growth.

“The domestic economy still faces some prominent problems,” Wen, 67, said in a speech in Beijing to the National People’s Congress, similar to the US State of the Union address. He also cited excess capacity in manufacturing and weak support for rural-income growth.

Wen’s comments reinforce concern that loans made in last year’s record 9.59 trillion yuan ($1.4 trillion) credit boom may go bad. Harvard University Professor Kenneth Rogoff has said growth could slide to 2 per cent from Wen’s 8 per cent target within a decade as a debt-fueled bubble collapses, and Victor Shih of Northwestern University sees risk of a crisis in 2012.

“A year ago the overwhelming priority was to get growth going and worry about the potential consequences later,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong who previously worked at the Federal Reserve and Bank of England. “We’re closer to a possible reckoning.”

Wen is trying now to rebalance the economy away from investment and infrastructure spending, toward consumption. The government pledged today to raise health and social security outlays by more than 8 per cent in 2010 and expand pensions, efforts that may help buttress consumption in the world’s third-largest economy. Transportation spending will be cut 2.7 per cent.

The government affirmed its target of reducing new loans by 22 per cent to 7.5 trillion yuan this year after property prices climbed the most in 21 months in January.

The Shanghai Composite Index closed 0.3 per cent higher. The benchmark has declined about 13 per cent from last year’s peak in August on concern that monetary tightening will slow growth and cut profits.

Wen indicated no roll-back in the fiscal stimulus that spurred a rebound, targeting a budget deficit of 1.05 trillion yuan, or 2.8 per cent of gross domestic product. That’s similar to last year’s ratio, according to the Ministry of Finance, with the projected deficit including 200 billion yuan of local-government bonds.

The premier affirmed a target of 8 per cent growth, which has been set and surpassed in each of the past five years, along with a 3 per cent inflation target and a “basically stable” currency.