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

Wen praised China’s performance in 2005, when the economy grew by 9.9 percent, in a speech to almost 3,000 delegates of the National People’s Congress, who packed Beijing’s Great Hall of the People for their annual session.

Red flags fluttered in the breeze over the Great Hall near Tiananmen Square while the deputies, mostly Communist Party members, filed through the doors under heavy security.

But Wen warned of dangers and difficult choices ahead. "We also need to see clearly that there are many hardships and problems in economic and social life," he said in the speech, excerpts of which were seen by Reuters early on Sunday.

"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."

Wen drew a picture of a rapidly growing economy threatened by excessive investment, production gluts and mismanagement. He says China’s rapid industrial expansion was too often undercutting 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. The government typically sets cautious growth targets; it also set a target of 8 percent for 2005 but actual growth was 9.9 percent.

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

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 (.3 billion) on upgrading agriculture as well as billions more on rural social services.

The program is 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.

Wen’s speech avoided breakthrough statements on foreign policy and defense. And he also refrained from threatening force against Taiwan, the self-governed island that China says must accept eventual reunification.

But he left a veiled barb apparently directed at Taiwan President Chen Shuibian, who recently antagonized 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 national 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.