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World Bank: China 2010 Economic Growth To Rise Modestly; Tightening To Come

BEIJING -(Dow Jones)- China's economy is likely to grow modestly faster next year, setting the stage for the government to withdraw some of its pro-growth policies, the World Bank said Wednesday.

In its latest quarterly update, the bank forecast China's economy will grow 8.7% in 2010, slightly higher than its revised estimate of 8.4% for 2009. The improvement next year will come from better export performance and a property sector that is continuing to strengthen, the bank said.

The bank had in June forecast China's gross domestic product would grow 7.2% this year, but the latest official data has outpaced those expectations. The bank's revision comes two weeks after government figures showed GDP in the first three quarters of the year rose 7.7% from a year earlier.

Senior Chinese policy makers have said they are confident China will meet its 8% growth target for this year. Most private analysts also agree that the target is all but assured now, which has caused the policy debate in China to shift.

China's economic data in the first three quarters of this year confirm the country's recovery is consolidating and, with more robust data going forward, Beijing's macro-policy stance will have to be less expansive, said Louis Kuijs, senior economist for the World Bank in China and main author of the China Quarterly Update.

"Monetary policy should lead the tightening efforts," Kuijs said.

Beijing's government-led CNY4 trillion stimulus program is due to run its course at the end of 2010, and there is still concern private demand is too weak to pick up the slack. The state banking system's massive increase in lending has clearly supported the economy, but also led to worries about speculative capital inflating housing and stock prices.

The risks of flush liquidity resulting in asset bubbles and wasted investment mean China's "overall monetary stance will have to be tightened eventually," the World Bank said. But such a move is still likely some ways off: "In our view, macroeconomic conditions in the real economy do not yet call for a major tightening," the bank said in its update.

The World Bank advised China to keep fiscal policy neutral or mildly supportive next year: in other words, keeping the size of the budget deficit unchanged or slightly wider. The bank forecast the government's budget gap to reach 3.3% of GDP this year, and widen further to 4.1% of GDP.

Inflationary pressures should be damped by excess capacity in some industries, the bank said. It estimated China's consumer price index, the key price gauge, will fall 0.8% this year and rise 2% next year.

It said growth in M2, China's broadest measure of money supply, is likely to reach 27% by the end of this year, and slow to 17% in 2010. Under the People's Bank of China's "moderately loose" monetary policy, China's M2 grew 29.3% by the end of September from a year earlier, the fastest growth this year yet.

Though trade is expected to recover gradually next year, China's current account surplus should shrink, the bank said.

China's current account surplus this year should shrink to $261 billion, from $426 billion last year, the bank said. It said it expects the current account surplus to fall further to $213 billion in 2010.

-By J.R. Wu, Dow Jones Newswires; 8610 8400-7799; jr.wu@dowjones.com

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  11-03-092315ET
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