World Bank sees stronger China GDP growth in 2010

By Alan Wheatley, edited by Ken Wills

The World Bank on Wednesday raised its forecasts for Chinese growth this year and projected a slightly faster pace of expansion in 2010, but it said Beijing did not need to embark on major policy tightening at this stage.

Gross domestic product will increase 8.4% this year and 8.7% in 2010 on the back of massive fiscal and monetary stimulus, the bank said in a regular update on China's economy.

Back in March, the Washington-based lender was forecasting growth in 2009 at just 6.5 percent, which it revised to 7.2% percent in June.

The bank's forecasts point to a sharp reduction in China's current account surplus, one of the imbalances that will be uppermost in the minds of finance ministers from the Group of 20 when they meet in Scotland at the end of the week to discuss how to put the global economy on a more even keel.

The bank said it expected the surplus to shrink from 9.8% of GDP in 2008 to 5.6% this year, despite a sharp drop in import prices, as stronger domestic demand buoys import volumes.

The current account surplus will fall further to 4.1% of GDP in 2010 even though net exports will recover and contribute 0.4% points to GDP growth after subtracting 3.4% points from headline growth in 2009.

"Growth is likely to remain robust in 2010, but the composition will change," said Ardo Hansson, the bank's lead economist in Beijing.

Stronger real estate investment will also boost growth, but the impact of government stimulus spending is set to decline sharply, while spare capacity in China and abroad will put a lid on capital spending by manufacturers, the bank said.

Excess capacity is one reason the bank expects inflation to remain tame, with consumer prices rising 2% on average in 2010 after falling 0.8% this year.

Louis Kuijs, the World Bank's senior economist in Beijing, said the costs of sustaining the current expansionary policy stance would grow. China is implementing a 4 trillion yuan (USD 585 billion) pump-priming package and has prodded the country's mainly state-owned banks into a record lending spree.

"Macroeconomic conditions in the real economy do not yet call for a major tightening. 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," he said.

The bank reiterated its long-standing advice to China to put more emphasis on consumption and services, and less on investment and industry, in order to rebalance the economy and spur faster domestic growth.

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