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A push for change in China as new leaders take the helm

Hotel guides pose for a photograph in front of the giant portrait of the late chairman Mao Zedong during a pre-session of the Chinese People
Hotel guides pose for a photograph in front of the giant portrait of the late chairman Mao Zedong during a pre-session of the Chinese People

By Ben Blanchard

YUANGUDUI, China (Reuters) - For Chen Qiuyang, the new Chinese leadership that formally takes over this month can radically improve her life by doing just one thing: providing running water in her village in a remote corner of the northwestern province of Gansu.

"We have to carry water from the well on our shoulders several times day. It's exhausting," Chen, who looked older than her 28 years, said in Yuangudui village, resting on a stool outside her home after completing another trip to the well.

Communist Party chief Xi Jinping takes over as China's new president during the annual meeting of parliament beginning on Tuesday and bridging the widening income gap in the vast nation is one of his foremost challenges.

Xi has effectively been running China since assuming leadership of the party and military - where real power lies - in November, and has already projected a more relaxed, softer image than his stern predecessor Hu Jintao.

But there will be pressure on him to tackle problems accumulated during Hu's era like inequality and pervasive corruption, which have given rise to often violent outbursts in the world's second-biggest economy, sending shivers through the party.

Outgoing Premier Wen Jiabao will likely address these issues in his last "state of the nation" report at the National People's Congress to nearly 3,000 delegates, whose ranks include CEOs, generals, political leaders and Tibetan monks - as well as some of China's richest businessmen.

China now has 317 billionaires, a fifth of the total number in the world, and is on track to overtake the United States as the largest luxury car market by 2016.

Yet the United Nations says 13 percent of China's 1.3 billion population, or about 170 million people, still live on less than $1.25 a day.

While parliament is a regimented show of unity that affirms rather than criticizes policies, income redistribution is likely to be a hot topic, along with other issues like ministry restructuring, corruption and the environment.

In January, the State Council, or cabinet, issued a new fiscal framework designed to make rich individuals and state corporations contribute more to government coffers and strengthen a social security net for those at the bottom.

But tackling China's wealth gap will need more than just taxes. Analysts say state-owned enterprises will have to be privatized and the household registration, or hukou, system that prevents migrants from enjoying the benefits of urban citizens, will have to be dismantled.

"Fiscal reforms and changes to let private firms advance and the state retreat will decide whether this round of reforms can succeed," said Xia Bin, an economist at the cabinet think-tank Development Research Centre and a former central bank adviser.

"There is definitely no way out," he wrote in the latest edition of China Finance, a magazine published by the central bank.

HOT TOPIC

Many groups have said they will make sure that message is heard at the parliament, even though the session typically acts more as a talking shop for decisions already made by the party rather than approving new laws. On its closing day it will formally vote in Xi as the new president and Li Keqiang as new premier.

A group of private businessmen will meet on the sidelines to push for privatization of state firms, which they view as a "vital second round of reforms", according to a person knowledgeable about their plans.

A separate forum for private steel producers will air grievances about preferential loan access for state firms, even though the state firms were less profitable than their more flexible cousins in last year's volatile steel market.

The champions of the private sector argue that private firms generate nearly 60 percent of China's economic growth and 75 percent of jobs.

Favoring state firms that thrive on political connections rather than market discipline skews the economy, undermining future competitiveness, they say.

Some export-oriented companies have ceased manufacturing and are simply speculating in property or the grey finance market.

"Private firms are having a hard time," said Xu Qing, general manager of Zhongbohong Urban Development Co, a unit of privately owned property and investment firm Boao Hungkai Enterprise Group in Guangzhou.

"I believe top leaders have seen the problems and I'm cautiously optimistic about reforms."

Without reforms, China is at risk of falling into the "middle income trap" after three decades of breakneck growth, the World Bank warned last year.

Growth in the world's second-biggest economy slowed in 2012 to a 13-year low, albeit at a 7.8 percent rate that is the envy of other major economies.

The annual economic growth target is likely to be set at 7.5 percent for this year, the same as in 2012.

Many analysts believe China's growth will be nearer 5 percent than 10 percent by the end of this decade without reform, making it even harder to tackle the gap between the rich and the poor.

LONG WAY

China's Gini co-efficient, a measure of social inequality, stands at 0.474 according to official estimates, well above the 0.4 level that analysts view as the point at which social tensions may come to a head.

A 0 score on the Gini scale denotes perfect equality and 1.0 complete inequality.

For now, such statistics are a long way from Yuangudui, where government support boils down to repaving rutted roads, building latrines and subsidizing planting of potatoes, a cash crop.

But the villagers are fully conscious of the inequality plaguing China, even if some of them had never heard of Xi Jinping before he showed up last month on a visit.

Most young people have left for the provincial capital of Lanzhou, where they can make 1,000 yuan ($160) a month as construction workers, far more than the income from farming.

"The rich get richer while we in the village are getting poorer," said Guo Lianying, 32, holding out his hands to symbolize the growing gap.

"This is a problem the general secretary has to solve," he added, using Xi's formal title as Communist Party boss.

(Writing and additional reporting by Kevin Yao and Lucy Hornby; Editing by Raju Gopalakrishnan)

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