* Premier Li sees tough battle as growth sinks to 25-yr low
* Draft documents set GDP growth target 6.5-7 pct in 2016
* Budget deficit 3 pct of GDP only modest fiscal boost
* Defence spending to slow, energy consumption capped (Adds information on trade)
By Xiaoyi Shao and Jake Spring
BEIJING, March 5 (Reuters) - China faces a tough battle to keep its economy growing by at least 6.5 percent over the next five years while creating more jobs and restructuring inefficient industries, Premier Li Keqiang said as he opened China's annual parliament on Saturday.
Growth of 6.5 percent would mark a ripping pace for most countries but would be the slowest in China in a quarter century as world's No. 2 economy grapples with gyrating financial markets, softening global trade and efforts to reduce environmental degradation.
"Our country's development faces more and greater difficulties ... so we must be prepared for a tough battle," Li said.
In 2016, Beijing will aim for an economic growth rate between 6.5-7 percent, as Reuters previously reported, with a consumer inflation target of around 3 percent and money supply expansion of around 13 percent, according to a series of draft reports ahead of the opening of the 12-day parliament.
Many investors had been hoping China would post an aggressive target for fiscal spending to prop growth.
But the draft goal of running a fiscal deficit equivalent to 3 percent of GDP, while up from the previous year's target of 2.3 percent, still disappointed some who had hoped for a number closer to 4.
"The budget deficit of 3 percent is not enough and should be increased," economist and former central bank advisor Yu Yongding told Reuters on the sidelines of the meeting.
Zhou Hao, economist at Commerzbank in Singapore, said the low figure may reflect concerns that a higher number would signal tolerance for another spree of debt-fueled growth such as that Beijing embarked on in 2009.
Moody's recently downgraded the outlook for Chinese sovereign debt, a move Chinese regulators said was unjustified.
"The pressure from rating agencies could be something China has to consider, indicating that China is cautious on rolling out large infrastructure investment that could result in long-term debt issues," Zhou said in a email.
KILL THE ZOMBIES
The reports provide a blueprint of China's aspirations for the next five years across a range of sectors and measures.
They show Beijing trying to strike a balance between holding up growth and restructuring underperforming industries, where so-called "zombie firms" are responsible for much of the country's corporate debt overhang left over from the 2009 stimulus.