World Bank: Soft-landing in economy likely
The Chinese economy is likely to land soft, the World Bank said Tuesday.
China's domestic demand remains strong but underlying inflationary pressures are limited. This reduces the possibility of further drastic macroeconomic measures to cool down the economy and land hard, it said in the latest East Asia and Pacific Regional Update, the World Bank's biannual look at the region's economies.
It predicted China's gross domestic product (GDP) to grow by 9.25 per cent for all of 2004, as compared to 9.7 per cent for the first half and 9.5 per cent for the first three quarters of the year.
The bank's forecast rate for China's economy in 2005 is 8 per cent.
Slowed economic growth in China will be positive for the Asian economy.
"Although China's growth, investment and imports may also slow gradually, this would be more sustainable and add a measure of stability to the regional economy," the report said.
However, Asian exports still will make their strongest performance since 1988, supported by Chinese demand, together with the global recovery, a rebound in the global high-tech industry and strong commodity prices, it said.
China's policy measures to cool down the economy are starting to show some success, Bert Hofman, the bank's lead economist for China, said.
The nation's GDP growth decreased to 9.1 per cent year-on-year in the third quarter of 2004.
But it is too early to call the end of the investment boom, noting that underlying incentives for over-investment -- local government's desire for rapid growth -- have not changed, he said.
Growth has still been mainly driven by investment, although retail sales have also remained buoyant, the bank said.
However, China's October 29 increase in interest rates, "while modest, is encouraging, as it shows the authorities' willingness to use this instrument when needed, and signals a further move to more market-based macroeconomic management," Hofman said.
The report said China's underlying inflation pressures remain manageable, which provide support for the authorities' usage of measures that seemed targetted at preventing future over-supply in certain sectors rather than at further significantly tightening overall macroeconomic policies.
Against this background, the modest increase in interest rates serves mainly as a signal that the authorities would be ready to use the interest rate instrument more forcefully if required on the basis of developments on inflation or deposits, it said.
The report said East Asia's economies are growing at their swiftest pace since before the 1997-98 financial crisis.
Economic growth is expected to top 7 per cent for East Asia and the Pacific (excluding Japan), while developing economies in the region are expected to expand by more than 8 per cent.
But it said the regional economy in Asia is about to slow down.
"Although 2004 has been a strong year, recent data also suggest that the recovery in East Asia has peaked, and that economic activity is shifting into lower gear," said Homi Kharas, the bank's chief economist for the East Asia and Pacific region.
As for the other major economies in the world, the report said that growth in the developed world, including the United States, Japan, and Europe, will slow temporarily but build into a sustained expansion.