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World Bank: Enough stimulus for now

CHINA does not need to add more financial stimulus this year as the country's expansionary fiscal and monetary policies have kept the economy growing "respectably", the World Bank said today.

The Washington-based bank also upgraded its forecast for China's economic growth to 7.2 percent for this year from its 6.5 percent forecast in March and said the pace of growth may accelerate to 7.5 percent in 2010.

"Government-influenced investment will strongly support growth in 2009 and China can have the confidence to emphasize forward-looking policies and structural reforms," said the World Bank in its China Quarterly Update released today.

"We think it is not necessary or appropriate to add more traditional stimulus this year. One reason is that the fiscal deficit is likely to be significantly higher than budgeted and additional stimulus now reduces the room for stimulus in 2010."

China unveiled its 4-trillion-yuan (US$586 billion) stimulus package in November last year and the large-scale government spending started to gain traction when the country's industrial production and investment showed improvement in recent months.

China managed a better-than-expected growth of 6.1 percent in the first quarter on an annual basis. The country is aiming for an expansion of 8 percent for the whole year, despite it still feeling the brunt of the global crisis. China's export sector has kept contracting and posted the worst performance in at least 14 years in May with a drop of 26.4 percent.

"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, the bank's lead economist in China.

"However, there are limits to how much and how long China's growth can diverge from global growth based on government-influenced spending."

The report said China's market-based investment is likely to continue to lag for a while because of a squeeze on margins in many manufacturing sectors. Prospects for real estate activity appear reasonably good, but consumption is unlikely to pick up.

"China's growth is not likely to rebound to very high single digit rates before the world economy recovers convincingly," the report said.

China has been on track of a recovery, economists generally agreed but some were divided on whether the country would have a V-shaped, W-shaped, or U-shaped recovery.
Premier Wen Jiabao said on Monday that China's economy is at a critical period as it begins to recover steadily. He said the government should continue its proactive fiscal policy and moderately relaxed monetary policy.

The World Bank indicated China needs more growth from domestic demand, consumption in particular, under the current environment of more subdued global demand and thus less export growth.

"The transition to more consumption-led, service sector-oriented, and labor-intensive growth requires policy adjustments: help channel resources to sectors that will grow in the new setting, instead of giving to sectors that have traditionally been favored and done well; support thriving domestic markets and successful, permanent urbanization. Such reforms can be pursued more successfully if flanked by a well-functioning public finance system and social safety net," the report said.


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