China's economy is showing signs of softening after its strong stimulus-fueled rebound last year, the World Bank says in its latest quarterly update.
Industrial production and other key indicators show the pace of growth moderating albeit remaining relatively strong, supported by real estate investment and a recovery in export demand, said the report, released Friday.
"China's economic outlook remains favorable," the World Bank said, forecasting growth at 9.5 percent this year and 8.5 percent in 2011, with "risks both ways."
China's economy, the world's third largest, shook off the global recession to expand a stunning 11.9 percent in the first quarter but is certain to decelerate in coming months, the report said.
"Given all the policy tightening measures and what we see going on in the rest of the rest of the world probably, the second half will be a bit softer so in balance things will even off," Ardo Hansen, the World Bank's lead economist for China, said in a webcast interview ahead of the report's release.
The World Bank likewise forecasts "favorable" prospects for the global economy, with growth estimated at 3.2 percent for this year and 3.3 percent for 2011. But it said risks to that outlook were large because of the debt mountains that some countries are burdened with.
The run-up in debt in countries using the euro "could turn into a real and contagious debt crisis" that threatens still fragile economic recoveries in Europe and the US, it said.
In China, private real estate investment has helped make up for an easing in government-backed stimulus spending, the World Bank said. But concerns that excess investment and speculative purchases were driving prices to unsustainably high levels prompted a tightening of bank lending, cooling growth in the property sector.
Strains on local government finances following the blow-out spending of the past couple years and possible increases in bad loans are among the most serious risks, the report said.
China needs to rebalance growth away from investment, while remaining flexible, it said, urging greater flexibility in interest rates.
China's export growth remains strong, though rising costs for raw materials have eroded the country's cost advantage since prices for manufactured goods have not risen at the same pace, the report said. It did not mention rising labor costs.
Reliable figures on migrant wages are hard to come by. But the report said average rural wages rose 16.4 percent in the first quarter of the year from a year earlier.
Relatively strong job creation has helped support robust consumer demand, helping move China toward greater reliance on domestic-led, rather than export-driven growth.
The World Bank report praised Beijing's recent moves to encourage more investment by the private sector, noting that state-owned companies have benefited disproportionately from the government's 4 trillion yuan ($586 billion) stimulus package and other moves to support growth after the economy stalled in 2008.
But it suggests the government should rein in its relatively expansionary monetary policy to reduce risks from excess investment.
"Heightened uncertainty calls for policy flexibility rather than continued stimulus by default," it says.
One key to keeping spending under control will be to improve incentives for local authorities, who tend to focus only on their own interests - such as maximizing revenues from taxes and land sales - to gain from longer-term rebalancing of the economy, the report says.
In the longer term, World Bank research suggests that China's annual economic growth rate will fall to an average of 7 percent in 2016-2020 - about the level the government has said is its target for sustainable growth.