World Bank Raises China Growth Forecast To 9.8%

World Bank Raises China Growth Forecast To 9.8%
(The Canadian Press – Associated Press)

China's economy is weathering the global slowdown better than expected, the World Bank said Thursday as it raised its growth forecast for the Asian giant to 9.8% from 9.4%.

The World Bank cited the country's strong domestic demand and sustained competitiveness in exports as key strengths.

“Amid weaker and uncertain global prospects, China's growth will be supported by strong international competitiveness and a robust domestic economy,” David Dollar, the bank's country director for China, told reporters in Beijing.

Just two months earlier, the World Bank had lowered its growth estimate for China to 9.4% from 9.6% on weakening demand for its exports.

The back-and-forth revisions reflect the uncertainties prevailing at a time when the U.S. economic outlook remains murky due to the fallout from the mortgage lending crisis. They also result from a revision in China's own gross domestic product growth estimate for 2007, which was raised by a 0.5 percentage points following the bank's most recent half-yearly report in early April.

Despite the upbeat overall message, the quarterly report did note that China's growth is moderating as investment in factories, construction and other fixed assets slows.

Although the nominal rate of growth in such investments remains above 25% on an annual basis, much of that increase reflects surging prices. Adjusted for inflation, real growth in such spending slowed to 16 % in January-May, with the greatest deceleration in industry – a sector most exposed to global trends, the report said.

“Global growth is on course to slow further and commodity price-driven inflation has become a complicating factor everywhere. These developments imply considerably more international uncertainty and risk,” Dollar said. “The upward revision to our growth forecast largely reflects revised GDP data showing stronger service sector growth,” he said.

The World Bank's current forecast is for growth to slow to 9.2% in 2009.

The Chinese government has set a growth target for this year of 8% following last year's sizzling 11.9% expansion.

The Washington-based bank said it did not expect the calamitous earthquake that struck central China last month, killing about 70,000 people, to have a significant impact on the wider, national economy. However, it noted that reconstruction might actually boost growth in the months ahead.

The bank lauded China's progress in combating inflation, which fell to 7.7% in May from 8.5% in April. It forecast that the inflation benchmark, the consumer price index, will rise 6% for all of 2008.

The report noted that the gradual strengthening of the Chinese currency, which has gained 20% against the U.S. dollar in the past three years, can help reduce inflationary pressures by boosting China's purchasing power at a time of surging prices for crude oil and other crucial commodities.

At the same time, inflows of speculative funds from overseas, which have been flooding into China in anticipation of the future strengthening of the Chinese yuan, might be discouraged if Beijing changes its policies “to effectively change exchange rate expectations,” it said. It did not elaborate on how that might be done.

The report also noted the difficulties Beijing will have in maintaining price caps on fuel, food and other necessities – controls are intended to insulate domestic consumers and businesses from surging international prices and to control inflation. “With China's economy more interlinked with the global economy than in the past, such price gaps will be more difficult to maintain over time,” it said.

China is facing increasing pressure over the ramifications of its fuel price controls, and the subsidies it pays to refiners to compensate them for the widening gap between soaring costs for crude oil imports and the prices they can charge consumers. Such subsidies are costing China about 330 billion yuan ($47.9 billion) a year, or about 1.2% of the country's GDP.

“Keeping prices low distorts demand behaviour,” the report said. It reiterated its call for Beijing to instead direct its subsidies to individual consumers rather than state-run oil companies. “It's in China's interest to let prices rise to the world level and be passed through for investments and households to be more energy efficient,” Dollar said.