China's internal macro challenges remain manageable, but the
external imbalance is on the rise, the?World Bank?said at
the China Quarterly Update on Wednesday.
"Thus, policy measures that address domestic concerns could
ideally also reduce the external imbalance," says Bert Hofman, Lead
Economist for China.
"The government has already decided on a dividend policy for
SOEs and a more rapid increase in spending on health and education,
and has stepped up the pace of currency appreciation. These
measures tend to reduce investment and increase consumption, and
are thus steps in the right direction."
Meanwhile, containing investment growth and inefficiency on a
more sustainable basis calls for structural policies that address
the underlying causes of inefficiency and excess investment.
Economic growth eased slightly in the second half of 2006.
Investment cooled in the second half in response to tightening
measures introduced mid-2006. However, as exports continued to
outpace imports by a wide margin, the impact on overall growth was
largely offset and the external surplus reached new highs, while
foreign reserve accumulation continued apace. Surging stock prices
prompted measures to slow new funds moving into the stock
market.
The Quarterly Update finds that near term prospects
remain broadly favorable. Chinese exporters and manufacturers have
been affected by several recent policy measures to rebalance the
economy, including tax measures and appreciation, and more such
measures are likely to follow. However, continued productivity
growth and a resilient world economy promise only a minor export
slowdown. Domestically, the fundamental drivers of investment
remain, and investment is therefore unlikely to slow drastically in
2007, while boosting consumption will remain challenging,
particularly in rural areas. In all, the World Bank's projection
for GDP growth in 2007 remains unchanged at 9.6 percent. The
external imbalance is unlikely to shrink much in the near term, and
the World Bank considers a significant surge in inflation
unlikely.
While growth has been impressive in recent years, in the medium
term China will increasingly rely on new sources of growth. "China
still has a vast potential for catching up in productivity, but
China's industry, investment and export based growth has become
increasingly problematic because of trade tensions and
environmental and resource constraints," says Louis Kuijs, senior
Economist on China and main author of the Quarterly.
"With a growth pattern that relies more on services, and more
labor-intensive urban growth, more of growth could come from
reallocation of labor out of agriculture." Growth along such
rebalanced patterns could boost urban employment, wages and
household incomes and reduce rural-urban disparities, while
mitigating external imbalances.
The third national financial work conference held in January set
out directions for major financial sector reform. The Quarterly
Update discusses the reforms in the key areas of rural
finance, foreign exchange management, and policy banks. On rural
finance, it was decided to reduce the access thresholds for
financial institutions to attract a more diverse set of providers
and to continue the reforms of the Agricultural Bank of China.
Looking ahead, the Quarterly notes that rural finance would also
benefit from interest rate liberalization and further reforms in
existing providers.
(China.org.cn February 14, 2007)