PREMIER'S NPC REPORT PLEDGES MORE REFORM, TACKLES

C O N F I D E N T I A L BEIJING 000809

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/05/2033
TAGS: PGOV SOCI ECON KCUL PHUM CH
SUBJECT: PREMIER'S NPC REPORT PLEDGES MORE REFORM, TACKLES
TOUGH SOCIAL, ECONOMIC PROBLEMS

REF: A. BEIJING 792


B. BEIJING 767

Classified By: Political Section Internal Unit Chief
Dan Kritenbrink.Reasons 1.4 (b/d)

Summary
--------------


1. (C) The State Council's annual "Government Work Report,"
read by Premier Wen Jiabao at the opening session of the
National People's Congress (NPC) on March 5, reviewed China's
major hot-button economic, administrative and social issues
and provided general policy priorities to tackle them. The
rough equivalent of the State of the Union address, it
closely followed the ideological and policy priorities laid
out at the 17th Communist Party Congress last fall. Wen
issued a strong call for continued market reforms tempered by
social justice and balanced development and promised to
devote more resources to a variety of serious infrastructure,
environmental and social problems. Wen broke no ground on
political reform, pledging administrative reform but
revealing no details on the "super-ministry" plan, while
reiterating the need to crack down on corruption. The Report
also indicated that inflation is a top leadership concern.
In the section reviewing foreign policy developments, the
Report used language that suggests some progress in China's
embrace of a "responsible stakeholder" role and took the
unusual step of specifically naming the United States,
placing it first in the list of successful bilateral
relationships. The Taiwan portion was consistent with
China's generally low-key rhetoric in the run-up to the
Taiwan presidential election this month. Xi Jinping's
appointment as co-chair of this session, a position
previously held by current Vice President Zeng Qinghong, may
signal that Xi will be "elected" to take Zeng's place later
in the proceedings. End Summary.

Curtain Rises on Annual Political Theater
--------------


2. (C) China's most extravagent display of political
theatrics, the National People's Congress (NPC),opened on
March 5 in Beijing amid great fanfare and tight security in
the Great Hall of the People. NPC Chairman Wu Bangguo called
the meeting to order and yielded the floor to Premier Wen
Jiabao, who read his two-hour and forty minute Government
Work Report to the nearly 3,000 newly-elected deputies,
diplomatic and press corps, and a national TV audience.
Since this was the first plenary session of a new (11th) NPC,
which is elected to a five-year term, the Report reviewed the
Government's accomplishments and shortcomings over the past
five years while laying out the policy priorities for the
coming year. Delegates applauded throughout, mostly on cue
from Wen, but reserved their most enthusiastic, sustained and
seemingly spontaneous, applause for Wen's remarks opposing
Taiwan's independence.


3. (C) The session was attended by China's entire senior
leadership, which included not only the current 25 members of
the Politburo, but also four former Politburo members who
retired from their positions at the 17th Party Congress last
October but still retain Government portfolios. (Note:
These four, Zeng Qinghong, Wu Yi, Zeng Peiyan and Cao
Gangchuan, are all expected to give up their Government
positions at this year's NPC session.) The seating of Xi
Jinping directly to the right of NPC Chairman Wu Bangguo in
the first row of seats on the dais together with other
"executive chairman" of the Presidium in charge of this NPC
session may indicate that Xi is slated to become Vice
President, which would further solidify his position as heir
apparent to Hu Jintao in 2012. Records from five years ago
indicate that Zeng Qinghong was appointed (and seated) in
this same position, prior to his elevation to the Vice
Presidency in 2003. (Note: Zeng Qinghong sat with other
Politburo Standing Committee (PBSC) members, who were seated
in protocol order, with Zeng sitting in his traditional fifth
spot. Current and former Politburo members not on the PBSC
were seated according to the number of strokes in their
surnames.)

Following Hu Jintao's Blueprint
--------------


4. (C) Wen's Report hewed closely to the ideological and
policy prescriptions adopted by the 17th Party Congress
convened last October which endorsed the economic and social
"vision" associated with Communist Party General Secretary Hu
Jintao. The Report's overview of Government achievements in

the past five years, the "lessons learned" section, the
ideological slogans and the policy outline for the next year
reflected Hu's development model: continued robust market

reforms, balanced and sustainable development that takes
account of environmental impact and resource conservation,
and reallocation of resources to close the rural-urban income
gap and provide adequate health care, education, housing and
social welfare guarantees. Wen attributed the successes of
the past five years to "the correct leadership" of the
Central Committee "with Hu Jintao as General Secretary."


5. (C) Wen's report was laced with the ideological slogans
associated with Hu that underpin these economic and social
policy priorities. Thus, he described the "Party's
ideological line" as a call to "liberate our thinking" and
"follow a realistic and pragmatic approach." He called for
holding fast to Hu's primary ideological construct, the
"Scientific Development Concept," which he called "a major
strategic concept for developing socialism with Chinese
characteristics" and "an important guiding principle" for
China's economic and social development. He said that while
development remains the top priority, the Party must continue
to "put people first" and "promote social fairness and
justice." Noting the need especially to improve the lives of
"low-income people," he said that the purpose of Government
is to "ensure that all of the people share in the fruits of
reform and development." Finally, in a clear shot at
continuing carping from orthodox Communist officials who seek
to roll back market reform, Wen, to resounding applause,
declared that there was no turning back from the reform and
opening policies of the past 30 years. This policy
direction, he said, is a "crucial policy choice" that is
"shaping the destiny of contemporary China."

Political Reform and Rule of Law
--------------


6. (SBU) Wen broke no new ground on political reform, instead
sticking mostly to typically vague platitudes, though he did
make some specific proposals, including soliciting public
opinion on some draft legislation. Reviewing the past five
years, Wen made familiar claims that China had made progress
in developing "democracy" the legal system ad "law-based
government," while also safeguaring "people's rights and
interests" and ensuring "social fairness and justice."
Turning to goals for 2008, Wen drew from language in Hu
Jintao's 17th Party Congress political report by pledging to
carry out elections, decision-making, administration and
oversight "in accordance with the law," while claiming China
would allow the public to participate in, express views on
and oversee Government affairs. Specifically, Wen said China
would "in principle" release draft legislation to solicit
public views on issues concerning "the interests of the
people." (Note: Although Wen made general references to
minor reforms concerning China's law enforcement agencies,
his comments appeared to fall short of those Hu Jintao made
in the Party Congress political report, which had stated the
need to "ensure that courts and procuratorates exercise their
trial and prosecution powers independently and impartially in
accordance with the law.")


7. (C) Though he cited the need for administrative reform,
Premier Wen avoided revealing any specifics regarding the
Government's plans for restructuring entities under the State
Council and creating "super ministries." Wen did, however,
tout such administrative tinkering as an important type of
"political reform" with significant implications for the
economy. The primary objective of such reforms, Wen said, is
to raise Governmental efficiency by clarifying the division
of responsibilities among Government entities, particularly
those involved in management of the economy and the provision
of public services, while also improving oversight functions
and enhancing transparency. Wen referred specifically to the
controversial "Super Ministries" proposal but shied away from
specifics, merely saying the Government's plan will be
submitted to the NPC for deliberation and approval. (Note:
The Government is scheduled to present its State Council
restructuring plan at an NPC plenary session on March 11.)


8. (SBU) In accordance with the Government's emphasis on
anti-corruption the past few years, Premier Wen sounded tough
on cracking down on malfeasance, using rhetoric that was
perhaps slightly harsher and more detailed than last year.
Wen said in the past five years, the Government had combated
corruption and improved Government conduct by cracking down
on bribery in business and by uncovering illegality and
dereliction of duty among officials. In the year ahead, Wen
pledged to "attach even greater importance to combating
corruption and encouraging integrity." Wen said China would

take a "dual approach" to countering corruption that combined
both prevention and punishment, with the greatest emphasis on
prevention. Describing the causes of corruption, Wen
delineated the problems of "excessive concentration of power
and lack of checks on power," which he pledged to address
through various ill-defined administrative measures. Issuing
a warning to Government officials, Wen resolved to "strictly
curb bribery in business, resolutely bring corrupt people to
justice and prosecute them to the full extent of the law."

Economic Plan for 2008: Inflation a Major Challenge
-------------- --------------


9. (C) In addressing the state of the economy, Wen warned of
mounting inflationary pressure in China and said inflation,
as evidenced by the 4.8 percent increase in the Consumer
Price Index (CPI) in 2007, is the "biggest concern of the
people." Wen admitted it will be difficult for the
Government to control prices. Media reports and statements
by Government officials prior to the NPC session indicated
that controlling inflation would be the major economic
challenge for the Central Government, and Wen stated in the
Work Report that preventing fast economic growth from
becoming overheated growth and keeping price increases from
turning into significant inflation would be the primary tasks
for macroeconomic regulation in 2008.


10. (C) The Premier said the GDP should grow by approximately
8 percent in 2008, and the CPI should not rise above 4.8
percent. (Comment: Central Government estimates of GDP
growth during the NPC always are lower than the actual
expectation, and most analysts believe China's GDP will
experience double-digit growth again in 2008 (the GDP grew by
11.4 percent last year). A CPI increase of 4.8 percent would
be the same as 2007 but may be unrealistic, as on the eve of
the Work Report, Goldman Sachs upgraded its annual inflation
forecast to 6.8 percent in 2008. End Comment.) Wen stated
that China is increasingly wary of possible external shocks,
specifically singling out the potential negative impact on
China of the U.S. sub-prime mortgage crisis, the falling
dollar and growing risks in global financial markets.

Macroeconomic Controls
--------------


11. (C) In addition to controlling inflation, Wen said
efforts to improve macroeconomic regulation in 2008 would
focus on:

-- Fiscal Policy: As in previous years, Wen stressed the
importance of reforming the budget system, reducing the
budget deficit and making better use of surplus government
revenue, which totaled RMB 723.9 billion (USD 100.5 billion)
in 2007, by increasing rebates on consumption and value-added
taxes, and boosting spending on agriculture, environmental
protection, education and building a social safety net. Wen
emphasized the need to improve the transfer payments process
and reform sub-provincial fiscal systems but did not propose
any specific plans for such reforms.

-- Monetary Policy: Wen said China will maintain a tight
monetary policy in response to excess liquidity, inflationary
pressure and potential growth in fixed asset investments.
Wen reiterated that China will limit credit growth to
energy-intensive or polluting enterprises and industries with
excess production capacity while extending credit support for
agriculture, rural areas, small and medium-sized enterprises,
energy conservation, environmental protection and balancing
regional development.

-- Foreign Exchange: Wen repeated language from last year's
Work Report, which stated that China would improve the RMB
exchange rate regime to make the exchange rate more flexible.
He also reiterated the need to develop new channels and
means for using foreign reserves and called for improvements
to China's international balance of payments. In addition,
Wen said China will improve its system for foreign exchange
settlements.

-- Disaster Relief: One month after a snowstorm hit southern
and central China, Wen said the Central Government would
quickly repair infrastructure and restore agricultural
production. He said the government had learned from the
incident and would improve its disaster response system.

Further Economic Reform and Opening
--------------


12. (C) Wen reiterated China's commitment to further reform

and opening, pledging to take the following measures:

-- SOE Reform: Wen stated that the Central Government would
focus more on market-oriented State Owned Enterprise (SOE)
reform proposals, including corporate governance, the
separation of secondary SOE businesses from their core
businesses and a call to standardize the transformation of
SOEs into stock companies.

-- Foreign Trade and Investment: Further opening of the
services sector in China was mentioned. Noticeably absent
this year was support for specific multilateral trade
negotiations such as the WTO Doha Round. Instead, Wen
highlighted broad support for promoting free trade zones and
honoring treaties already signed.

-- Financial System Reform: New to this year's report, Wen
called for the establishment of a deposit insurance system.
(Comment: There is broad consensus among Chinese financial
regulators that a deposit insurance system is needed, but
bureaucratic wrangling and technical issues have held up
progress. The FDIC has been engaged with the Chinese in an
advisory role on this issue. End Comment.) However, Wen's
financial sector reform proposals were similar to last
year's, including the call for development of bond and
futures markets. He reiterated other themes from last year's
report, including deepening reform of state-owned banks,
improving the rural banking system, developing capital
markets, expanding insurance coverage and strengthening
financial oversight.

Energy and Product Safety
--------------


13. (C) Wen emphasized the importance of conserving energy,
reducing emissions, protecting the environment, and ensuring
product quality and safety, focusing much of his attention in
this area on energy consumption and food safety:

-- Energy Consumption: Wen detailed successes in reducing
energy consumption per unit of GDP and emissions, while
saying that this year is crucial for meeting obligatory
targets in the 11th Five-Year Plan (FYP) for energy
conservation and emissions. Nevertheless, he did not provide
information on China's progress towards meeting its FYP
energy efficiency targets. Wen outlined a plan to close down
"backward" production facilities (including electricity,
steel, cement, coal and papermaking) but did not offer
specific information on those industries' production and
generation capacities. (Comment: The lack of specifics on
meeting 11th FYP energy efficiency targets suggests that the
Central Government still is facing significant challenges
meeting the targets. End Comment.)

-- Product Quality and Safety: There were several rounds of
applause when efforts to improve product quality and safety
were addressed. Wen specifically mentioned the need for
domestic confidence in food and consumer product safety and a
good reputation for Chinese exports. His plan laid out
specific recommendations for updating national standards,
improving legal guarantees and oversight and control.
(Comment: Inclusion in this year's Work Report certainly was
a response to several recent highly publicized Chinese food
and product safety export issues. End Comment.)

Rural Areas, Balanced Development and Social Issues
-------------- --------------


14. (C) Not surprisingly, Wen again this year focused on
rural development, balancing the structure of the economy and
social issues:

-- Rural Areas: Following the release of the 2008 Number One
Document in January, which named rural development as the
State Council's top priority for the fifth year in a row, Wen
announced in the Work Report that funding for rural
development would increase by 30 percent.

-- Changing the Pattern of Development: Wen stressed the
importance of shifting China's growth pattern from a reliance
on investment and exports to a more balanced structure that
encourages consumption. He criticized development that
depends on blindly promoting investment projects,
particularly in energy intensive industries. He said that
China should promote research and development and he
announced that Central Government funding for science and
technology would increase 13.4 percent in 2008.

-- Promoting Regional Development: The Premier reiterated

the importance of balancing development among regions, and he
said the Central Government would continue to support the
Great Western Development Program, Northeast China
Revitalization Program and Central China Rising Policy.

-- Education: As in 2007, the Premier again emphasized the
importance of developing education, particularly focusing on
rural compulsory education and education for children from
poor families and children of migrant workers.

-- Health Care: Wen said the Central Government would
improve access to medical care in both urban and rural areas,
and he officially announced that the Central Government and
local governments would double their contribution to the
Rural Cooperative Medical System.

-- Population and Family Planning: Wen said China would
continue to carry out the one-child policy in order to
maintain a low birthrate and improve maternal and child
health. (Comment: There had been speculation leading up to
the NPC session that the Central Government would ease
restrictions on having more than one child. End Comment.)

-- Employment: Wen said the Central Government will enforce
the Employment Promotion Law and Labor Contract Law and would
continue to expand employment.

-- Urban and Rural Incomes: Wen stressed the importance of
increasing both urban and rural incomes in order to maintain
social harmony and stability.

-- Social Safety Net: The Premier echoed his statements of
previous years, urging the Central Government to improve the
social safety net, specifically by expanding social security
coverage and improving the social assistance system.

-- Housing: Although less of a focus than in 2007, housing
prices also were a priority in the Work Report, in particular
ensuring the provision of housing for low income families.
(Note: Henan Party Secretary Xu Guangchun told the
Ambassador on March 5 that he was very interested in the
Premier's remarks on housing, as rising housing prices are a
significant concern in Zhengzhou, the provincial capital (see
septel). End Note.)

Foreign Policy: U.S. Role Highlighted
--------------


15. (C) Following past precedent in Government Work Reports,
foreign policy and cross-strait relations received less
attention than economic, political and social issues.
Nonetheless, this year's report provided insight into China's
priorities and focus for the coming year, including language
that suggests some progress in China's embrace of its
"responsible stakeholder" role. As was the case last year,
the Report is devoid of the ideological shibboleths of the
past, such as attacks on international "power politics" and
"hegemonic" behavior, clear references to the United States.
Wen laid out China's diplomatic priorities as being first
focused on major "developed" countries, then on "neighboring
countries" and finally on developing countries. He took the
unusual step of mentioning key developed countries by name,
listing the United States first among its list of successful
bilateral relations. Wen said that over the past five years,
relations with the United States developed "steadily," with
Russia "reached new heights," with Europe "went from strength
to strength" and with Japan "improved." Wen also highlighted
China's "major multilateral diplomatic activities" and
China's "active and responsible" role in resolving issues in
international and regional "hotspots." While not hitting the
"harmonious world" theme as hard as in the 2007 work report,
Wen said that in 2008 China would again actively work to find
"appropriate solutions" to major hotspots and global issues.
With respect to defense policy, the Report's language offered
a possible indication of a broadening focus away from
preparing only for a Taiwan contingency. In addition to
standard language about protecting sovereignty, security and
territorial integrity, Wen called on the military to enhance
its ability to "respond to security threats and accomplish a
diverse array of military tasks"


16. (C) Wen also addressed the Olympics, noting that the
entire Chinese nation is looking forward to the Games, which
will be of great importance in promoting China's economic and
social development as well as friendship with other
countries. He pledged to prepare and organize well for the
Games and cooperate with the international community to
ensure the Games are "unique and well-run."

Hong Kong, Macao and Taiwan
--------------


17. (C) There was a slight shift in language that put greater
emphasis on Hong Kong and Macao's own efforts at
development, as opposed to last year's report that called on
the NPC to work together with the people of Hong Kong and
Macao to promote prosperity and stability. The Taiwan
portion was consistent with China's generally low-key
rhetoric in the runup to the Taiwan presidential election
this month, providing little in the way of sound bites that
might influence the election outcome. (Note: The Report's
language was considerably less sharp than that of NPC
spokesman Jiang Enzhu on March 4. (Ref A). Echoing language
in last October's 17th Party Congress political report, Wen
stressed the peaceful resolution of differences and improving
conditions for Taiwan investors in the mainland. Wen
reiterated Beijing's desire for the direct mail, transport
and trade links and, on the basis of the one-China principle,
a resumption of cross-Strait negotiations to address major
issues of concern. He made an oblique reference to the UN
referendum by noting that any issue relating to China's
sovereignty must be decided by all Chinese people, including
those in Taiwan, and that efforts to deny the "one China"
reality or undermine peace across the Strait were "doomed to
fail." As with past years and the 17th Party Congress
Political Report last fall, the audience gave frequent,
spontaneous and emotional applause during the presentation on
Taiwan and was particularly boisterous in supporting the
assertion that China will never tolerate Taiwan independence.
RANDT