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China must note expansionary policy

CHINA has been driving an economic rebound in East Asia but Chinese authorities should note the increasing costs of keeping an expansionary policy, the World Bank said today.

The Washington-based bank upgraded its forecast for China's economic growth this year to 8.4 percent from 7.2 percent predicted in June.

"China is on track to meet the target of 8 percent growth this year," the bank said in its China Quarterly Update.

In East Asia Pacific Update, a separate report also released by the World Bank today, it said "the economic rebound in the region has been surprisingly swift, but take China out of the equation and the regional picture is less rosy."

China's economy has managed to reverse a slowdown. The gross domestic product in the world's third largest economy expanded 8.9 percent year on year in the third quarter, up from the increases of 7.9 percent in the second quarter and 6.1 percent in the first three months.

The exports, the hardest-hit sector by the global financial crisis, also declined at a slower pace in recent months after external demand stabilized. In September, China's overseas shipments fell 15.2 percent from a year ago to US$115.9 billion, the smallest drop so far this year.

"Falling exports amidst the global recession have been a major drag on growth," the bank said. "But China's export growth is likely to resume, helped by strong fundamental competitiveness and the recent depreciation of the nominal effective exchange rate, and net exports are likely to stop being a drag on growth."

But Chinese authorities need to take note of the increasing costs of keeping an expansionary policy.

"The costs and risks of sustaining the current expansionary policy stance will increase over time," said Louis Kuijs, a senior economist at the bank.

"In our view, 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."

China's banks, which have been at the front line of economic revival efforts, lent 8.67 trillion yuan (US$1.27 trillion) in the first nine months of this year, 75 percent more than in all of 2008.


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