World Bank raises China's GDP growth to 7.2 per cent in 2009

The World Bank has raised China's GDP forecast by 0.7 percentage point to 7.2 per cent in 2009 from its earlier forecast of 6.5 per cent, as the country's expansionary fiscal and monetary policies have kept the economy growing respectably. (See: Chinese revival may start this year: World Bank)

 The World Bank's latest China quarterly update, released today, says that China's fiscal stimulus is centered on the infrastructure-oriented ''RMB 4 trillion'' stimulus plan while the monetary stimulus has led to a surge in new bank lending.

Chinese government-influenced investment have soared, while market-based investments lagged, although positive signs have emerged in the real estate sector, the report said.
 
China's consumption has held up well. Very weak exports have continued to be the main drag on growth, while import volumes have recovered in the second quarter of 2009 as raw material imports rebounded, the report said

The report said that the global growth prospects still remained subdued even as signs of stabilisation have emerged. Financial markets world over have become less strained and there are prospects for stabilisation of activity.

However, a rapid global recovery seems unlikely and uncertainty remains. The risk of global deflation seems low, although spare capacity will continue to put downward pressure on prices of manufactured goods.

Monetary policymakers in major countries should in principle be able to prevent inflation from rising in the medium term, although risks remain, including political ones, the report added.

''Growth in China should remain respectable this year and next, although it is too early to say a robust sustained recovery is on the way,'' said Ardo Hansson, World Bank's Lead Economist for China. ''Government influenced investment will strongly support growth in 2009. However, there are limits to how much and how long China's growth can diverge from global growth based on government influenced spending.''

The update finds that market based investments are likely to continue to lag for a while because of a squeeze on margins amidst spare capacity in many manufacturing sectors. Prospects for real estate activity appear reasonably good, but consumption is unlikely to pick up speed.

Overall, the World Bank thinks that China's growth is unlikely to rebound to very high single digit rates before the world economy recovers convincingly, projecting the Asian giant's GDP growth at 7.2 per cent in 2009.

''China can have the confidence to focus on forward looking policies and structural reforms,'' said Louis Kuijs, senior economist and main author of the World bank Update. ''On current projections it is not necessary and probably not appropriate to add more traditional stimulus in 2009. One reason is that the fiscal deficit is on course to be significantly higher than budgeted this year and additional stimulus now would reduce the room for stimulus in 2010.''
 
The report noted that China needed more growth from internal consumption, as global demand was more subdued and would curb export growth. Also, relative prices especially of natural resources needed to be changed, it noted.

 The update concluded that transition to more consumption-led, services-  and labour-intensive growth required policy adjustments by the Chinese government like to help channel resources to growth sectors in the new setting, instead of to sectors that have traditionally been favoured and done well; and to support thriving domestic markets and successful, permanent urbanisation.

The report also noted that such bold reforms could be pursued successfully if they were flanked by a well-functioning public finance system and social safety net.

China's retail sales of consumer goods increased 15.2 per cent to touch 1,002.8 billion yuan, YoY in May. (See: China's consumer goods retail sales rise 15.2 per cent in May)

 China's consumer price index (CPI), the main gauge of inflation, fell 1.4 per cent in May. (See: China's May CPI falls 1.4 per cent, PPI declines 7.2 per cent)

China's May data showed improvement from its April figures and China has raised export tax rebates in June for the seventh time since August 2008 which may help it to achieve its target of 8 per cent economic growth in 2009. (See: China confident of achieving 8 per cent economic growth)