World Bank Raises Forecast for China's Economy

Published: November 4, 2009
BETTINA WASSENER

HONG KONG — The World Bank on Wednesday became the latest major institution to raise its forecast for growth in China — a reflection of that country’s rapid rebound this year — though it cautioned that more policy adjustments would be necessary in the medium term to ensure the country’s recovery would be sustained.

China’s giant economy is now expected to grow 8.4 percent this year, according to the World Bank’s latest projection, rather than by the 7.2 percent it had forecast in June. It forecasts 8.7 percent growth for next year.

The new 2009 estimate is just shy of the 8.5 percent being projected by the International Monetary Fund, which likewise raised its forecast for China and the rest of Asia last week, and also echoes recent upward revisions by economists at several private-sector banks.

China’s remarkable rebound stems mostly from a massive spending package, of 4 trillion yuan, or $585 billion, which the government announced a year ago. Lower interest rates and vastly increased lending by the country’s state-owned banks also have helped offset the fallout from the collapse in demand in Europe and the United States, which has hit export industries in China — and elsewhere in Asia — hard.

Chinese export growth is likely to resume, helped by strong fundamental competitiveness and the recent depreciation of the nominal effective exchange rate, the World Bank said in its quarterly review of China on Wednesday.

“Net exports are likely to stop being a drag on growth,” it said.

But the challenge, according to the institution, would be to continue weaning China off its reliance on exports and stimulate domestic demand.

Although the bank said that China had already seen broad-based domestic demand growth, it stressed that more was needed.

“Following on earlier initiatives, some steps have been taken in recent months to rebalance and boost domestic demand, including increasing the presence of the government in health, education, and social safety” and other measures like improving small and medium-sized companies’ access to financing, the World Bank said.

“But more policy measures will be needed to rebalance growth in China, given the strong underlying momentum of the traditional pattern. Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome.”

Meanwhile, the speed of the rebound, coupled with vast liquidity as state-owned banks cranked up lending to help boost growth, has prompted a debate about whether some of the stimulus measures should now be reined in. A rapid rise in stock and property prices also has fueled this debate, as some analysts worry that a bubble may be in the making.

“In our view, macroeconomic conditions in the real economy do not yet call for a major tightening,” Louis Kuijs, the main author of the World Bank’s update, said in a statement.

“However, risks of asset price bubbles and misallocation of resources in the face of abundant liquidity are real, and the overall monetary stance will have to be tightened eventually.”

Meanwhile, China’s powerful rebound is benefiting others in the region, the World Bank said in a separate report on East Asia and the Pacific, a region that groups China with emerging economies in Southeast Asia like Indonesia, Thailand and Cambodia, but does not include India and Japan.

“Countries exporting consumer durables, electronic components and raw materials to China have felt the positive flow-on effects,” it said, adding that it now expected the region to grow 6.7 percent this year.

But the World Bank also cautioned that “despite Indonesia and Vietnam performing well, developing East Asia excluding China is projected to grow at around 1 percent in 2009” — a slower pace than in South Asia and the Middle East and North Africa, and only slightly stronger than sub-Saharan Africa.