China will channel its surging economic growth to narrow the chasm dividing its cities and countryside, Premier Wen Jiabao told parliament on Sunday in a speech tempering optimism with stark warnings.

In setting out government goals for the coming year, Wen promised "continuity and stability" in general economic policy, including the currency exchange rate and monetary policy. But he said more wealth and investment must go to farmers and other struggling groups to ensure China's stability and growth.

Wen praised China's performance in 2005 in a speech to nearly 3,000 delegates of the National People's Congress who packed Beijing's Great Hall of the People for their brief annual session.

He read a 35-page speech word for word, his delivery occasionally interrupted by applause. A long clapping before the end came when he spoke of China's commitment to reclaim Taiwan.

Wen warned of dangers and difficult choices ahead. "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.

The country must "pay more attention to social equity and social stability so that all the people can enjoy the fruits of reform and development."

Wen drew a picture of a rapidly growing economy threatened by excessive investment, production gluts and mismanagement. He said distorted industrial expansion was undercutting China's long-term economic health.

"Production gluts are increasingly severe, prices of related goods are falling and inventories are rising. Business profits are shrinking, losses are growing and latent financial risks are increasing," he said.

Wen's government is working on the assumption that gross domestic product will grow about 8 percent this year and that consumer prices will rise 3 percent. But the government typically sets cautious growth targets; it set an 8 percent target for 2005 but actual growth was 9.9 percent.

SLUICE GATES

Wen promised strict controls on the "sluice gates" of land and credit to deter excessive investment. But China could only find a lasting cure for its economic and social imbalances by raising the incomes, efficiency and confidence of farmers.

A large section of his report addressed the government's plans to build a "new socialist countryside" for the country's 750 million farmers. Wen said the government plans to spend 339.7 billion yuan ($42.3 billion) this year on upgrading agriculture, and billions more on rural social services.

The programme was a "major historic task" to divert government investment, education and health care, and bank loans to the countryside, where rising protests against corruption and inequity have alarmed central officials.

"We must apply the guiding policies of industry replenishing agriculture and the cities supporting the countryside," he said.

Wen said these redistributive policies would bring industry and cities not pain but more growth by stimulating domestic demand. He described the measures as part of the government's "strategy of expanding domestic consumption."

"We will stabilize residents' outlay expectations to expand current consumption," Wen said.

Income rises would provide cash for the poor to spend on consumer goods, and improved social security and more affordable hospitals and schools would ease fears about the future, he said.

The parliamentary delegates praised the premier's promises. But in group sessions afterward, even some officials chided the government for allowing farmers' livelihoods to fall so far behind.

"A lot of money has been invested, but people's lives have improved little," Guo Shuqing, the chairman of China Construction Bank Corp., told members of the China People's Political Consultative Conference, an advisory body that meets at the same time as parliament.

Wen avoided breakthrough statements on foreign policy and defense. And he also refrained from threatening force against Taiwan.

But he left a veiled barb apparently directed at Taiwan leader Chen Shui-bian, who recently antagonised Beijing by scrapping an official council on reunification.

"It is the people's will for cross-Strait relations to develop in a direction of peace, stability and mutual benefit," he said. "Anyone who vainly seeks to destroy this great trend will certainly fail."

With tensions simmering, China is also set to spend 14.7 percent more on defense in 2006 than it did last year, a spokesman for the parliament said.

Finance Minister Jin Renqing, in a report to parliament, said China expects to trim its budget deficit by about 1.7 percent in 2006, further winding back fiscal stimulus that began in 1998.