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November 5, 2009

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Home » Business » Economy

World Bank lauds China's fiscal efforts

CHINA has been driving an economic rebound in East Asia but the nation's authorities should take note of the increasing costs of keeping expansionary policies, the World Bank said yesterday.

The 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 the East Asia Pacific Update, a separate report also released yesterday by the World Bank, 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.

Exports, the hardest-hit sector by the global crisis, also declined at a slower pace in recent months after external demand stabilized.

In September, China's overseas shipments fell an annualized 15.2 percent, the smallest drop this year.

"Falling exports amidst the global recession have been a major drag on growth," the World 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."

One spot requiring attention from the Chinese government is the increasing costs of keeping an easy fiscal and monetary policy, according to the bank.

"The costs and risks of sustaining the current expansionary policy stance will increase over time," said Louis Kuijs, a senior economist at the World 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, issued 8.67 trillion yuan (US$1.27 trillion) in new loans in the first nine months of this year, 75 percent more than in all of 2008.

Huge investment growth has fueled production in industries including steel, cement, flat glass and emerging markets such as wind power equipment and polysilicon.

"Given our economic projections, an unchanged or only slightly higher fiscal deficit would fit best in 2010 but flexibility is important and this includes allowing the automatic stabilizers to work," said Kuijs.

Rebalancing and getting more growth out of the domestic economy call for more emphasis on consumption and services, and less on investment and industry, according to the bank report.

The bank said further steps should be taken to rebalance and boost domestic demand, including increasing the presence of government funds in health, education and social areas, improving financial access to small and medium enterprises, and reducing environmental damage.


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