rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » World Bank cuts China growth forecast

World Bank cuts China growth forecast

March 21, 2009 18:36 IST

The World Bank on Wednesday lowered its economic growth forecast for China this year to 6.5 per cent, down from 7.5 per cent at the end of last November, after huge falls in exports and shrinking private sector investment.

The downgrade widens the gap between the generally pessimistic forecasts emerging from international economists and estimates published within China, which mainly predict that the country will hit its official government target of 8 per cent growth.

Fewer than a third of 73 Chinese economists surveyed last month by the National Bureau of Statistics said they expected gross domestic product to grow by less than 8 per cent this year. The average forecast was exactly 8 per cent.

Many independent economists say the constant repetition of the government's target could lead officials at lower levels to falsify figures or to try to meet growth targets through wasteful infrastructure projects.

In its quarterly report released on Wednesday the World Bank praised China for its efforts to stimulate the economy but warned that exports were likely to shrink this year and that government spending would not entirely replace falling market-based investment.

"We don't see a major rebound happening in China until the world economy rebounds," said Louis Kuijs, senior economist in the World Bank's Beijing office.

Apart from exports, the other main driver of China's economy in recent years has been real estate investment, which appears to have hit a wall as prices and sales volumes slump.

The World Bank predicts the property market will remain weak "for much of 2009", limiting the spending power of local governments, which rely heavily on revenues from land sales and bear much of the responsibility for health, education and social security.

According to official figures, local government's income from land transfers fell 20 per cent last year to Rmb960bn ($140bn, euro 107bn, pound 100bn).

In order to fund their portion of Beijing's much-vaunted Rmb4,000bn stimulus package, local governments are expected to turn to state-run banks for help, raising fears that the banks will be expected to act as piggy banks for pet political projects.

"Banks should not be pressured to ramp up lending beyond prudent levels," said the World Bank report. "This would risk creating new (non-performing loans) ... and would also be seen as rolling back significant progress in moving to more market-based allocation of credit."

Chinese banks have been largely unscathed by the global financial crisis, but are likely to feel the effects indirectly as recent investments in the export and real estate sectors go bad and companies default on loans.

Despite the problems facing the economy, officials recite the mantra that 8 per cent growth is likely this year, and to make upbeat remarks on an imminent rebound. The optimism appears partly related to a campaign of confidence by Wen Jiabao, the premier, who has repeatedly said that "confidence is more precious than gold and currency" in dealing with the crisis.

Copyright The Financial Times Limited 2009

Jamil Anderlini in Beijing
Source: