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* Wen reiterates easy monetary stance, steady yuan policy

* Social spending to rise faster than military spending

* Domestic drivers of growth still not strong enough – Wen

* Budget deficit to stay below 3 pct of GDP

By Simon Rabinovitch and Zhou Xin

BEIJING, March 5 (Reuters) – China will seek to heal social
rifts and spur home-driven growth with more public welfare and
rural spending even as the government tightens its belt after a
burst of feverish spending, Premier Wen Jiabao said on Friday.

Wen told the country’s parliament that China’s economy
faced a clouded international outlook in 2010 and would stick
to a steady policy course this year, shifting tack if needed to
counter the lingering impact of the global credit crunch.

China would maintain an appropriately easy monetary stance
and an active fiscal policy, he added, showing no sign of a
break from current settings.

Wen also signalled continued caution towards the yuan
CNY=CFXS, reiterating standard language that Beijing would
seek to keep the currency basically steady at a reasonable and
balanced level.

To the dismay of Washington and Brussels, China has frozen
the yuan’s exchange rate at around 6.83 per dollar since
mid-2008 to preserve the international competitiveness of its
exporters. In his annual “State of the Union”-style report
to the National People’s Congress, Wen unveiled increases in
spending for China’s poorer citizens and 700-million strong
farming population that outstripped the planned rise in
military outlays.

China wants to slow spending and bank lending after pumping
out cash to counter the global downturn, but Wen said
improvements in social welfare, healthcare and rural services
were needed to secure the nation’s economic health and the
ruling Communist Party’s hold over an increasingly fractured
society.

“We can ensure that there is sustained impetus for economic
development, a solid foundation for social progress, and
lasting stability for the country only by working hard to
ensure and improve people’s well-being,” Wen told the nearly
3,000 delegates of the Communist Party-controlled legislature.

China escaped the worst of the global slump by ramping up
credit, slashing interest rates and launching a 4 trillion yuan
($585 billion) infrastructure programme in late 2008.

The economy grew 8.7 percent last year as a result, by far
the fastest pace of any major country, but Wen played down the
achievement.

More domestically-driven growth, fuelled by consumers more
confident about their health, incomes and welfare protection,
was needed to keep the world’s third-biggest economy growing at
a solid pace, he said.

“We must not interpret the economic turnaround as a
fundamental improvement in the economic situation,” Wen said in
the cavernous Great Hall of the People.

“There are insufficient internal drivers of economic
growth,” he added, reading aloud the 36-page report in a
practiced, steady voice, occasionally pausing for effect and
applause.

Wen said China was targeting 8 percent growth in gross
domestic product — the goal it traditionally sets every year
– and an inflation rate of about 3 percent.

Wen announced increases of 8.8 percent on social spending
and 12.8 percent on rural outlays — more than the rise of 7.5
percent in the military budget — to narrow the yawning wealth
gap that economists blame for dampening domestic consumption.

China’s parliament is a Party-run spectacle that affirms
policy, rather than making or challenging it.

But the gathering offers an opportunity for the Party
leadership to sell their policies, which face growing doubts
from wealthier taxpayers and from local officials who see
little wrong with the country’s traditional recipe of
industrial growth.

“We will continue to give preference to agriculture,
farmers and rural areas, and to improving people’s well-being
and developing social programmes,” said Wen, whose second and
final five-year term running the Chinese government ends in
2013.

Still, the projected growth in welfare and agriculture
spending is much slower than in 2009 when the financial crisis
was raging.

Reflecting the conservatism of China’s financial planners,
the budget deficit will again be kept below 3 percent of
national income, Wen said.

Last year the deficit was just 2.2 percent of GDP despite
massive government spending on infrastructure and job
creation.
(Additional reporting by Eadie Chen and Ben Blanchard; Writing
by Alan Wheatley and Chris Buckley; Editing by Ken Wills and
Tomasz Janowski)