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PRESS RELEASE

More policy action is needed to contain credit and investment growth, mitigate external imbalances, and rebalance growth says World Bank Report

May 10, 2006




Beijing, May 10, 2006 – Economic growth and credit expansion in the first quarter of 2006 have surprised on the upside, notes the World Bank’s China Quarterly Update. Much of the growth surprise stemmed from stronger exports, whereas domestic demand grew in line with expectations. Investment continued to power ahead, though, partly due to an up tick in credit growth, with more new lending going into real estate development.


The Quarterly Update observes that prolonged strong foreign exchange inflows continue to complicate monetary policy.With the trade surplus, FDI, and non-FDI inflows all up, foreign exchange reserves surged by US$56 bln to US$875 bln. The People’s Bank of China’s (PBC’s) policy of keeping bank liquidity high, and thus inter-bank interest rates low, has so far succeeded in dealing with the exchange rate challenges. But the easy monetary stance sits oddly with concerns about too rapid credit and investment growth, including to real estate. This development could lead to overcapacity and rising non-performing loans down the road.

 

Sustained rapid growth is expected to continue, according to the Quarterly Update. Global conditions and growth prospects remain favorable, and rates of increase in international commodity prices are coming down, although upward risks on commodity prices remain. In light of the strong first quarter, we revise up our GDP growth forecast for 2006 to 9.5 percent. This still implies a slowdown in the rest of the year and into 2007, assuming that a moderate policy tightening can keep investment growth in check. Inflation should on balance remain subdued. The current account surplus may rise again this year, although it should decline as a share of GDP.

 

More policy action is needed to keep credit and investment growth in check, mitigate external imbalances, and to entrench the rebalancing of growth patterns.Further monetary tightening, after the increase in benchmark bank lending rates of April 27, should include mopping up liquidity in the inter-bank market, possibly supported by measure to limit credit to risky sectors such as real estate,” said Bert Hofman, Lead Economist for China. “To limit renewed liquidity buildup from foreign exchange inflows triggered by higher domestic interest rates, the Government could choose to accelerate the planned gradual appreciation of the currency and take further measures to limit those inflows, or increase outflows.” Accelerated appreciation would also help reducing current account surpluses and rebalancing growth towards consumption. Any adverse effect on vulnerable sectors of such a move could be mitigated by fiscal policy, whereas the risk of deflation could be addressed by speeding up administrative price reforms, including for energy and utilities.

 

In the medium term, rebalancing growth requires structural measures.Increasing domestic consumption and reducing the saving-investment surplus can be achieved by shifting government spending from investment to health, education, and the social safety net; speeding up financial sector reform; and improving corporate governance and dividend policies,” said Louis Kuijs, Senior Economist on China, and main author of the Quarterly.

 

“Investment can be shifted into nontradables (services) by removing several subsidies for manufacturing stemming from the pricing of inputs (land, energy, water, utilities, and the environment) and through the tax system.”  

Media Contacts
In Beijing
Li Li
Tel : (86-10) 58617850
Lli2@worldbank.org


PRESS RELEASE NO:
2006/404/EAP

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