World Bank slashes China's growth estimate to 6.5 per cent

The intensifying global slowdown has been taking a mounting toll on Chinese exports, affecting its market-based investment and sentiment, notably in the manufacturing sector.

This has led the World Bank to ascale down its growth estimates for the world's third-largest economy to just 6.5 per cent for 2009.

In the regular assessment update put up by the World Bank, it says that China's banks have been largely unscathed by the international financial turmoil and that the economy still has plenty of space to implement forceful stimulus measures.

However, as the global crisis has intensified, China's exports have been hit badly, (See: China's exports decline again in February; investments soar) leading to a decline in investments, particularly its manufacturing sector. (See: Chinese manufacturing sector close to recession)

The world Bank's 6.5-per cent growth estimate is significantly lower than the country's potential growth. The resulting spare capacity is therefore likely to lead to weaker new investments, lower job growth, and migration.

The bank also warned of downward pressure on prices (See: China's CPI enters negative zone signalling deflation), redirection of exports to the domestic market, and import substitution in the coming years.

However, the update says that China is still likely to continue to outgrow most other countries. Domestically, amidst the solid macroeconomic fundamentals, stimulus policies are expected to help reduce theimpact of the downturn by providing support for investments.

Banks are keen to help finance growth, after having deleveraged in recent years. Private consumption has been fairly resilient so far and should be able to continue to grow significantly, while government-influenced investment is accelerating already.

''China is a relative bright spot in an otherwise gloomy global economy,'' said the World Bank's country director for China, David Dollar. ''Shifting China's output from exports to domestic needs helps to provide immediate stimulus while laying the foundation for more sustainable growth in the future.''

He said that subdued prospects for the global economy and thus for exports, increased the importance of boosting domestic demand and domestic consumption, which is also key for rebalancing.

Recent initiatives to stimulate consumption and improve people's livelihoods by expanding the government's role and spending on health, education, and social protection measures are welcome and there is room to do more.

The update notes that China's economic fundamentals are strong enough to look beyond 2009. So far, the policy response to the downturn has emphasised stimulating investment to help achieve the short-term economic targets. Given the fiscal space, there is a strong case for expansionary policies. But there may be a case for less emphasis on short-term growth and more on longer-term issues.

''Somewhat lower growth is not likely to jeopardise China's economy or social stability,'' said Louis Kuijs, the report's main author and senior economist, ''especially not if the adverse consequences of the downturn for employment and people's livelihoods can be limited through the social safety net, preferably combined with education and training.''

Less emphasis on targeting short-term GDP growth would allow for more emphasis on the rebalancing and reform agenda and the quality of growth, Kuijs said.

The update also highlights the importance of financial sector reform. With inflation prospects subdued, there is scope for accommodative monetary policy.

Deflation is a risk in principle, it said but added that Chinese policymakers have some tools to fight it. It also said further structural reforms in the financial system would help China manage the downturn and make the transition to a rebalanced growth model.