Earlier this week, China’s Premier Wen Jiabao delivered the Government Work Report at the opening session of the National People’s Congress (NPC), outlining the economic policies that China will follow in 2010. Wen Jiabao indicated that the government plans a smooth exit from the expansive policies that ruled the day in 2009.

For starters, the government is expecting a fiscal deficit of around 2.8 percent of gross domestic product (GDP). Although the Premier projected a drop in fiscal expenditures, investors should keep in mind that the Chinese government is traditionally conservative when its sets targets for fiscal revenues and expenditures–both numbers could end up being higher.

More important, Wen Jiabao noted the country will target a little over USD1 trillion in bank loans, while M2 money supply growth will be kept around 17 percent. Because of China’s relatively narrow tax base, loan growth has traditionally been a more powerful mechanism for authorities than fiscal policy. For this reason, the government is unlikely to raise interest rates before the second half of the year; expect authorities to focus on loan supply in its efforts to cool the economy.

Economic observers who hoped for the renminbi (RMB) to appreciate significantly this year will be disappointed. According to Premier Wen, China “will continue to improve the FX pricing mechanism, and keep the renminbi basically stable at an appropriate and balanced level.”

The Chinese government projects that the economy will grow 8 percent this year–the same annual projection since 2005. The Chinese leadership believes that 8 percent growth is both sustainable and sufficient to maintain solid employment numbers and socioeconomic stability. Nevertheless, the Chinese economy could even touch 9 percent this year, provided that the developed economies do not relapse.

Inflation also figured prominently in the speech. Premier Wen indicated that the government plans to implement reforms that will elevate wages and “narrow wage income inequality.” Consequently, the government’s 3 percent inflation target shouldn’t worry investors, especially in an economy that’s expected to grow 8 percent.

Finally, the Premier noted that “the government will resolutely curb the precipitous rise in house prices in some cities and satisfy people’s basic need for housing.” By focusing on housing prices rather than construction, the Chinese leadership clearly aims to satisfy the pent-up demand, while finding ways to moderate speculation and be more vigilant of illegal activities that artificially increase property values. I discussed the growth opportunities in China’s real estate market and my top recommendations in the most recent installment of The Silk Road Investor, Real Talk on China’s Real Estate Sector.

China’s economy should be able to grow by 8 to 9 percent this year, especially if developed economies have a decent year. That being said, investors will need to keep in mind that if developed economies register solid growth numbers, China’s economy could enjoy double-digit growth. This will be an unwelcome development for the Chinese leadership, which would likely implement drastic measures to cool down the economy. In this scenario, the construction sector and other industries would take a hit. But investors shouldn’t be overly concerned with this risk–developed economies will more than likely experience anemic growth.

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