World Bank Cuts China's 2009 GDP Forecast to 6.5%

The World Bank lowered its forecast for China's 2009 economic growth on Wednesday but warned Beijing that it would be thwarting its own medium-term goals if it tried to offset the slowdown by further boosting investment.

Greg Baker / AP

In a quarterly economic update, the bank cut its projection of gross domestic product growth this year to 6.5 percent from the 7.5 percent outcome it had forecast in November. It said there were both upward and downward risks to its outlook.

The global crisis would be a drag both this year and next, mainly via weaker exports and non-government investment, but the bank said China's economic fundamentals were still strong enough to give policymakers the luxury of looking well beyond 2009.

The bank welcomed the inclusion of steps to boost consumption in the government's 4 trillion yuan ($585 billion) stimulus package since over-reliance on capital-intensive investment could damage the pace of job creation and the quality of growth.

Indeed, it said there was room for a further shift towards consumption and for less emphasis on capital spending in order to address the need to make growth more sustainable economically, socially and environmentally.

"Looking ahead, less focus on targeting short-term GDP growth would allow more focus on the rebalancing and reform agenda.

"Meanwhile, somewhat lower overall growth is not likely to jeopardize China's economy or social stability, especially if the adverse consequences can be limited via the social safety net, preferably combined with education," the report said.

The forecasts of most commercial bank economists for 2009 growth are clustered in a range of 5 percent to 8 percent.

Could Be Worse

The recommendations fly in the face of the ruling Communist Party's determination to do whatever is necessary to meet its self-imposed target of 8 percent growth this year.

Just last Friday, Premier Wen Jiabao said the government was ready to roll out extra stimulus measures if needed.

But the World Bank said there may be limits to how much money can be spent efficiently on traditional investment projects.

What's more, the government cannot hope to take up all the slack left by the collapse in exports and knock-on drop in private investment, the bank said.

As it is, the bank already expects 4.9 percentage points of this year's projected 6.5 percent growth to stem from government-influenced investment and public-sector consumption.

More From CNBC.com

• China Should Be Cautious Lending to IMF: Economist
• China Stimulus Property Snub a Signal on Prices
• In the Spotlight, China PM Sends Strong Signal
• China Relaxes Rules for Firms to Invest Overseas
• More Asia Pacific News

"China's economy cannot escape the impact of the global weakness. Government-influenced activity makes up a modest share of the total: it cannot and should not offset fully the downward pressures on market-based activity," the report said.

The bank tempered this message of resignation with the assurance that China would continue to grow substantially faster than most other countries this year and next.

Indeed, the stimulus is already supporting activity and sentiment, even if it is too early to expect a sustained rebound, the World Bank said.
     
Rising Yuan

The report also made the following points:

• GDP grew an estimated 2.5 percent between the third and fourth quarters of 2008 at a seasonally adjusted annual rate.
• The drag on production from inventory overhang should be modest since surveys suggest the pace of destocking is declining.
• China will lose 16-17 million non-farm jobs in 2009.
• Raising the threshold at which income tax is payable would be bad policy because it would favor a well-off minority of about 20 million taxpayers. Cutting social security charges paid by 200 million Chinese would be a better option.
• To cushion the risk of deflation, now is a good time for Beijing to remove remaining price controls on industrial inputs such as energy, water, utilities and natural resources.
• The yuan is likely to keep strengthening in the next decade in inflation-adjusted, trade-weighted terms given China's prospective balance-of-payments and productivity trends.
• Pushing the currency lower in the short term would not help revive exports, because global demand is weak, and would slow China's transition to consumption-led growth.
  

Copyright 2009 Reuters. Click for restrictions.