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World Bank offers `benign' outlook for Chinese economy

China's economy will grow by 9.2 percent this year but continue to face challenges from its over-reliance on investment and insufficient growth in domestic consumption, the World Bank said yesterday.

The bank offered a "benign" outlook for the world's fastest growing major economy in its China Quarterly Update, attributing continued rapid growth to robust investment, increasing domestic demand and strong exports.

However, domestic consumption is not expected to expand fast enough in this year to achieve the government's goal of relying less on investment, largely because rural incomes will not grow as rapidly as last year, the report said.

The one-off nature of recent measures benefiting China's 800 million rural dwellers, including a removal of agricultural taxes, boosted income last year but will have little effect this year, the bank said.

To achieve balanced growth, the government will need to invest more on social services, such as health care, education and a social safety net, to encourage farmers and others to spend more, the bank said.

"We believe [the government] should ... shift spending from more investment-oriented to consumption-oriented," Bert Hofman, the World Bank's chief economist for China, told a briefing in Beijing.

The World Bank said China's trade surplus -- which tripled last year to US$101.9 billion -- was expected to fall marginally as domestic demand began to play a larger role and bring in more imports.

"We believe China's trade surplus will gradually drop, but it will take time before it drops dramatically," said Louis Kuijs, the World Bank's senior economist on China.

The bank said China will continue to face risks this year from a disorderly adjustment in global imbalances and trade tensions.

But the biggest risk will be the tendency, especially by local governments, to invest heavily to generate growth, the quarterly report said.

Chinese policy makers have been trying for the past few years to engineer a gentle slowdown of the economy, aiming to cool down overheated sectors without throwing millions out of their jobs.

Local governments, however, were following a different path, setting high growth targets this year, Hofman said.

"If all these provinces are so ambitious in terms of growth ... then those provinces will also have to allocate a lot of fiscal resources to building infrastructure to make that growth work," Hofman said.

"That means this shift in fiscal spending from growth in infrastructure spending to more social spending, which will actually spark consumption, will not happen."

The World Bank's forecast of 9.2 percent for this year was up from a prediction of 8.7 percent in its previous quarterly update.

It said the revised figure was due to the government's announcement in December that the size of economy had been underestimated by 16.8 percent in 2004 and was not due to any change in the economic situation.
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