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PRESS RELEASE

Benign outlook but structural problems remain, Says World Bank Report

February 9, 2006




Beijing, February 9, 2006 - China's GDP growth hardly slowed in 2005, with domestic demand firmly taking the lead over net trade in the second half, noted the World Bank's China Quarterly Update released today. While China's 2005 trade surplus recently grabbed the headlines, the contribution of net trade to growth had already turned negative by the end of last year, with solid consumption growth and strong investment growth, while exports decelerated. Notwithstanding the large build-up of foreign reserves in 2005, lower non-FDI capital inflows in the second half suggest that the new exchange rate regime should over time add to domestic stability.

 

The Quarterly Update presents a benign outlook for China's economy in 2006. China will benefit from solid export demand, while profit and credit developments suggest robust investment in 2006. Consumption may not accelerate much in 2006, though, held back by subdued rural income prospects. Overall, we project GDP growth of 9.2 percent in 2006, based on the new GDP data, which is equivalent to an unchanged forecast of about 8.7 percent based on the old data. International risks include a disorderly adjustment in global imbalances and trade tensions, even though China's trade surpluses are likely to fall. The main domestic risk is that ample liquidity will re-fuel credit and investment.

 

For macroeconomic policy, this setting implies that the "prudent" stance announced last year is appropriate for this year as well. "Monetary policy could in the short run focus on absorbing some of the excess liquidity to reduce the risk of excessive credit growth," said Bert Hofman, Lead Economist for China. "This task may be complicated somewhat by the rapid financial innovation, whose impact should be closely watched. The overall fiscal stance needs little change for now, but a shift towards social spending is needed to redress China's macroeconomic and structural imbalances." Over time, with a rebalanced economy that relies more on services and consumption, tax revenues may come under pressures. That would need to be countered by reform in tax structure and administration and medium-term expenditure restraint.

 

The Quarterly Update, in a special focus section,notes that the GDP revisions moderate, but do not substantially change, the perspective on China's main structural challenges. "China still shows a strong reliance on industry and investment and a lower than normal share of services in GDP,"said Louis Kuijs, Senior Economist on China, and main author of the Quarterly. "Interestingly, 2/3rd of the GDP revision came from higher price increases, which, amongst other things, implies that China's real exchange rate has appreciated 10 percent more than previously thought."

 

The Quarterly Update discusses the Party's Proposal for the 11th five year plan. The Proposal signals a change to more balanced growth, with more attention to the environment and income distribution. However, while local leaders' announcements fall in line with these national goals, local growth targets remain high. To achieve these high growth rates, local spending is likely to continue to be directed at investment rather than at the social services needed for a harmonious society and a more balanced economy. The targeted reduction in energy intensity of the economy by 20 percent over the next five years is very ambitious, and the announced industrial policy to realize the target, instead of pricing policies, raises some concerns.

Media Contacts
In Beijing
Li Li
Tel : 86-10-58617850
lli2@worldbank.org



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