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PRESS RELEASE

Prospects for Growth Remain Good; Policy Could Focus on Liquidity and Rebalancing

May 30, 2007




BEIJING, May 30, 2007 - Although GDP growth again surprised on the upside, the pattern of growth and the implications for policy have remained largely unchanged, notes the World Bank's China Quarterly Update released today. In the first quarter of 2007, growth continued to be industry-led, powered by external trade and investment. With export growth to the EU and the developing world surging, the trade surplus continued to rise, and foreign reserves soared further. Inflation picked up on the back of international food prices, while China's stock markets are booming.

 

The Quarterly Update finds that prospects for growth this year are good, both globally and in China. The international environment remains largely favorable, although there is a risk of a further rise in global food prices. With China's export prospects improved, and a policy stance that is less tight than expected, the World Bank revised its forecast for GDP growth in 2007 upwards to 10.4 percent and its projection for the current account surplus to almost 11 percent of GDP. 

 

With no obvious need to tighten overall demand, policy would best focus on liquidity and rebalancing the economy. From the macroeconomic perspective, the real economy does not appear overheated, as overall demand and supply are growing broadly in line with each other, notes the World Bank's China Quarterly Update. “The key macro issue in the real economy remains the widening trade surplus,” says Louis Kuijs, Senior Economist for China and the main author of the report. “Macro policies to tighten overall demand are therefore not obvious, although draining excess liquidity from the banking system will remain necessary.” The stock market boom has drawn widespread attention. “Concerns about asset market valuations strengthen the case for tighter monetary policy and higher interest rates to tie up liquidity in bank deposits,” says Bert Hofman, Lead Economist for China. “In turn, the need for tighter monetary policy has strengthened the case for more rapid RMB appreciation, although a lower trade surplus will have to come largely from policies to rebalance the economy.”  The report points out that there is a risk that food price increases spill over into more general price increases.

 

The rapid rise in the stock market index has drawn the attention of policymakers. While the report says that the authorities can be agnostic about the stock market index level, a sharp negative correction would have policy implications. The new-found confidence in the Chinese capital market could be damaged, and although the impact on the real economy and the banking sector is likely to be modest, large losses of financial wealth for specific groups could lead to pressure to bail them out. The authorities have already taken several types of measures to stem price increases by containing inflows into the stock market and stimulating outflows. The Quarterly Update discusses possible additional measures that could further moderate price rises, as well as other measures and structural reforms that can mitigate volatility in financial markets and make markets (and the economy) more robust to shocks.

 

China's key economic challenge is to rebalance the economy. This requires a shift in production from industry towards services, more reliance on domestic demand, and more equally shared and environmentally sustainable growth. The Quarterly notes that the State Council's document on stimulating the service sector sets the stage for future policy action in this area, while many new policy initiatives could potentially support rebalancing, including policies for more equitable growth, administrative policies to reduce energy intensity, and price and tax mechanisms to address environmental and energy issues. China could debate what forms of taxes are best used to improve energy efficiency.

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



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