In a revision of its forecast of economic growth for this year
the World Bank said Wednesday that China's stronger-than-expected
progress in the first quarter had prompted them to raise the figure
from 9.2 to 9.5 percent.
This implies a slowdown for the remaining part of the year and
into 2007 assuming that a moderate policy tightening can keep
investment growth in check. The current account surplus may rise
again this year although it should fall as a share of gross
domestic product (GDP), the bank said in its China Quarterly Update
published on Wednesday.
Louis Kuijs, a senior economist with the bank's China mission
and main author of the report told reporters that sustained, rapid
growth is expected to continue in China. He added that global
conditions and growth prospects remained favorable. Rates of growth
in international commodity prices were coming down although upward
risks on commodity prices remained.
China's GDP grew by 10.2 percent during the first quarter of
this year over the same 2005 period and together with the country's
credit expansion in the quarter many had been surprised by the
upturn, according to the report.
The bank said much of the surprise at the level of growth
stemmed from stronger exports while domestic demand had grown in
line with expectations. Investment continued to power ahead, partly
due to an upturn in credit growth, with more new lending going into
real estate developments.
The bank said that prolonged and strong foreign exchange inflows
continued to complicate monetary policy. With the trade surplus,
foreign direct investment (FDI) and non-FDI inflow were?both
up, foreign exchange reserves surged by US$56 billion? to
US$875 billion.?
China's policy of "keeping bank liquidity high, and thus
inter-bank interest rates low has so far succeeded in dealing with
the exchange rate challenges," according to the report.
However, it warned that the easy monetary stance sat oddly with
concerns about too rapid credit and investment growth, including
real estate, and this development could lead to overcapacity and
rising non-performing loans later.
More policy action was required to keep credit and investment
growth in check, mitigate external imbalances and to entrench the
rebalancing of growth patterns, the bank said.
Bert Hofman, chief economist for the bank's China mission, said
that further monetary tightening, after the increase in benchmark
bank lending rates of April 27, should include "mopping up
liquidity in the inter-bank market", possibly supported by measures
to limit credit to risky sectors such as real estate.
"To limit renewed liquidity buildup from foreign exchange
inflows triggered by higher domestic interest rates, the (Chinese)
government could choose to accelerate the planned gradual
appreciation of the currency and take further measures to limit
those inflows or increase outflows," he acknowledged.
Accelerated appreciation would also help reduce current account
surpluses and rebalancing growth towards consumption and any
adverse effect on vulnerable sectors of such a move could be
mitigated by fiscal policy, said the economist.
Bert said the risk of deflation could be addressed by speeding
up administrative price reforms including those for energy and
utilities.
Kuijs called on China to take structural measures in the medium
term to rebalance its economic growth.
"Increasing domestic consumption and reducing the
saving-investment surplus can be achieved by shifting government
spending from investment to health, education and the social safety
net, speeding up financial sector reform and improving corporate
governance and dividend policies," he said.
"Investment can be shifted into non tradables (services) by
removing several subsidies for manufacturing stemming from the
pricing of inputs (land, energy, water, utilities, and the
environment) and through the tax system," he added.?
(Xinhua News Agency May 11, 2006)