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 all up, foreign exchange reserves surged by 56 billion US dollars to 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.
