World Bank raises Asia forecast on back of China

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By Alan Wheatley and Jason Subler

The World Bank on Wednesday raised its forecasts for East Asian growth, largely due to a rebound in China driven by aggressive fiscal and monetary stimulus, but warned that a true recovery in the region was not yet at hand.

In a twice-yearly review, the Washington-based development bank revised its projection of 2009 gross domestic product growth in East Asia to 6.7% from 5.3% and pencilled in an acceleration to 7.8% next year.

But stripping out China, the bank reckons the developing economies of East Asia would grow by only 1.1% this year, picking up to 4.5% next year.

That means growth in the region outside of China, despite government spending and steady performances by the likes of Indonesia and Vietnam, will be slower on average this year than in South Asia, the Middle East and North Africa.

"China's rapid growth is not only pulling the region along; it is also having an impact on the global economy," said Vikram Nehru, the bank's regional chief economist.

China, now the world's largest auto market, was contributing more to global demand than either the United States, the euro zone or Japan, Nehru said by videolink from Washington.

The bank accordingly jacked up its growth forecast for China this year to 8.4% from 7.2% and said a further pick-up was likely in 2010 to 8.7%.

Nevertheless, the bank said it was too soon for China and other East Asian governments to start unwinding the ultra-loose pro-growth policies they put in place to cushion the global downturn.

"The rebound has yet to become a recovery. That is why the authorities in the region are mindful of the risks of a premature withdrawal of stimulus, given the large output gaps and concerns that developed countries are converging to a slower-growth equilibrium," the bank said.

Gradual Exit

When governments do start to tug on the reins, they should generally begin with monetary policy, the bank believes.

"Macroeconomic conditions in the real economy do not yet call for a major tightening," said Louis Kuijs, the World Bank's senior economist in Beijing.

China is implementing a 4 trillion yuan ($585 billion) pump-priming package and has prodded the country's mainly state-owned banks into what Kuijs described as a spectacular lending spree, equivalent to 30% of annual GDP.

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