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World Bank upwardly adjusts GDP growth for third time
By Liu Weiling & Dai Yan (China Daily)
Updated: 2005-11-04 06:18

China's economy is looking to have a "very soft landing," though the government should continue to keep a close eye on investment growth and develop a new growth model, the World Bank said yesterday.

In its latest quarterly update, the bank forecast the growth of China's gross domestic product (GDP) to be 9.3 per cent for this year and 8.7 per cent for 2006 with inflation remaining under control.

It was the third time this year that the World Bank has positively re-adjusted its growth projection for China, following predictions of 8.3 per cent in April and 9 per cent in August. This time the bank attributed the country's higher-than-expected economic growth to the rapid growth in domestic demand.

Domestic demand accounted for some 75 per cent of growth in the third quarter, compared to 40 per cent in the first half of the year, the bank said.

"The latest figures suggest a pick-up in domestic demand, while the contribution of trade to growth is falling," Bert Hofman, the bank's lead China economist, said.

"This is good news for China's trade surplus, which is now likely to come down as a result of these demand developments."

Recent trade patterns are in line with buoyant domestic activity. China's export growth averaged over 30 per cent in the first eight months, but dropped to 26 per cent in September, whereas import growth is on the rise.

During the second half of 2004 and the first half of 2005, weak domestic demand, triggered by policy tightening, significantly affected imports, in particular steel, chemicals, machinery and equipment. Recently, import growth recovered from 14 per cent year-on-year in the first half to 24 per cent in August-September. Steel imports traditionally a good indicator for construction activity also increased in September.

But at the same time, World Bank warned that China should watch the apparent pick-up in investment, and the recent rise in liquidity in the banking system, which may yet spill over into higher credit growth.

"In the current circumstances, more rapid growth in credit and investment would be unwelcome," it said. "Investment is already considered to be too high and concerns about over-investment triggered the tightening measures in 2004," Hofman said.

Fixed asset investment has unexpectedly rebounded in China recently. Its growth picked up to 28.5 per cent in the third quarter, from 26.4 per cent in the first half, despite moderate credit growth and profit growth that is considerably below that of last year.

The bank said new policy measures may be required to dampen investment as recent indicators suggest that consumption growth may still lag behind investment next year.

And when China's government wants to make growth less investment-based and more consumer based, public finance measures can play a key role to increase the share of consumption in GDP, it continued.

"Shifting government spending from investment to health and education would directly reduce national saving and investment in favour of consumption," the bank said.

(China Daily 11/04/2005 page9)

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