Beijing, March 6:

China’s prime minister, Wen Jiabao, yesterday promised an extra 42 billion yuan in spending for poor rural areas, in a key policy speech aimed at addressing the strains that have emerged in the world’s fastest growing yet most unbalanced large-scale economy.

Amid growing unrest in the provinces, Wen said the redistribution of resources to create a ‘new socialist countryside’ was a historic task. While there was no mention of political reform, the government’s sense of domestic and international insecurity was highlighted by a sharp increase in the defence budget and the arrest or expulsion from Beijing of dozens of human rights campaigners and rural protesters.

Speaking to more than 3,000 deputies inside the Great Hall of the People, Wen said the economy would continue its spectacular rise — with a forecast of eight per cent growth this year — but he painted a grim picture of the underlying problems threatening to make this breakneck pace of development unsustainable.

“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, “Production gluts are increasingly severe, pric-es of related goods are falli-ng and inventories are rising. Business profits are shri-nking, losses are growing and latent financial risks are increasing.” He emphasised that over-investment and over-capacity were undercutting the efficiency of China’s economy and creating a mountain of bad loans in the banking sector.

But his central theme was the need to address inequality in a country where the mix of capitalist economics and authoritarian politics has widened the gulf in living standards. Rural incomes are less than a third of those in the cities. While hundreds of millionaires are being created, mo-stly in urban areas, tens of milli-ons of people subsist in the cou-ntryside on less than $1-a-day.

This is a consequence of the free-market policies introduced 27 years ago by Deng Xiaoping, who shifted the ruling party away from the communist notion of equality with the statement that some people should be allowed to get rich before others. Wen, however, said that the people left behind — most of whom are peasants — now needed help to catch up. China, he said, could only find a lasting cure for its economic and social imbalances by raising the income, efficiency and confidence of its farmers.

The central government will lift spending on rural areas by 15 per cent this year to 339.7 billion yuan. In addition, more investment should be provided by banks and richer provinces, Wen said. The funds will go on agricultural subsidies, education grants and a rural healthcare scheme. China has a rural population of 750 million, and, considering the scale of the problem, the sums are relatively small, suggesting any redistribution of wealth will be gradual if it comes at all. Wen and the president, Hu Jintao, have taken a political risk by shifting priorities towards the countryside.

The heads of rich coastal provinces, such as Guangdong, Shandong and Shanghai, may balk at being asked to contribute more to rural areas, where returns on investment are unlikely to match the money to be made along the economically dynamic eastern seaboard. But Wen, whose political support base is in the poorer areas of the west and north-east, has made much of the need for greater social stability. “If the spending power of farmers is lifted, he said, “domestic demand would also grow.”