Bank: China growth to hit 10.4%

Bank: China growth to hit 10.4%

Tuesday, August 15, 2006 Posted: 0526 GMT (1326 HKT)


China's economy has expanded at a red-hot pace in 2006.SPECIAL REPORT

(CNN) -- The World Bank has raised its forecast for China's economic growth this
year to 10.4 percent, up sharply from its earlier estimate of 9.5 percent.

The bank said Tuesday that China's economy grew by almost 11 percent in the
first half of 2006, with the 11.3 percent implied expansion in the second
quarter the highest in more than a decade.

While the bank expects economic expansion to slow to 9.3 percent in 2007, that
will still keep China at the forefront of global growth rates.

China's economy now ranks No. 4 in the world behind the United States, Japan and
Germany, while it has surged to No. 3 spot among global trading nations, after
Germany and the U.S. Its foreign exchange reserves at the end of June reached
$941 billion, according to figures in the bank's update.

China's red-hot growth in recent years and consequent demand for energy has been
one of the drivers of the sharp rise in global oil prices. Its massive trade
surplus with the United States has also been a point of friction in its
relations with Washington.

Services outpaced
In its Quarterly Update for China, the bank said Chinese industry continued to
outpace services on the supply side, and investment remained the main driver of
demand.

"With export growth continuing to outpace import growth, the current account
surplus rose to record highs," it said.

The bank noted that the Chinese authorities had taken steps to cool down the
economy.

"Measures include monetary tightening by absorbing liquidity in the interbank
market; administrative measures to limit investment in real estate;
reinforcement of controls and regulations on investment projects; and loosening
controls on capital outflows," it said.

The bank said the outlook for China's economy remained favorable. Production
capacity continued to expand in line with demand, inflation was low, and with
the current account in surplus, the main policy concern was not "general
overheating."

Policy risk
Rather, the bank said, Chinese policymakers were worried that high investment
could cause overcapacity in specific sectors, and could result in some bank
loans turning bad.

"The authorities can take some comfort from the fact that most investment is
financed from profits rather than credit, and that the highest investment growth
is taking place in largely commercialized sectors," it said

"But the continued investment boom warrants concerns about efficiency, making
more moderate growth desirable. On the external side, key risks are a sharper
than expected slowdown in the U.S. economy and a disorderly resolution of global
imbalances.

Louis Kuijs, the World Bank's senior economist on China and main author of the
Quarterly Update, said the macroeconomic outlook would allow China to put more
policy focus on rebalancing the economy.

He said policies that would promote rebalancing include:


Measures to stimulate domestic consumption and increase the efficiency of
investment;


Measures to increase the relative attractiveness of producing services (non
tradables) over manufacturing (tradables);


Institutional reforms to give local decision makers stronger incentives and
better tools to pursue rebalancing.
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