World Bank Raises China GDP Growth & Inflation Outlook

The World Bank said Wednesday it expects China's consumer price index to rise beyond the government's target level this year, and warned that inflation could worsen if the economy's breakneck pace of expansion is left unchecked.

In its Quarterly Economic Report, the World Bank forecast China's consumer price index to rise 4.6% this year, up from its previous forecast of 3.2% and above Beijing's target of under 3%. It expects the CPI to rise 3.8% next year. The bank also raised its forecast for China's gross domestic product growth this year to 11.3% from 10.4% previously, and expects growth next year to reach 10.8%. China's GDP rose 11.1% in 2006. China's 11.9% GDP growth in the second quarter this year and a swelling trade surplus have raised concerns about economic overheating and the risk of inflation becoming more widespread. "If growth were to continue at the speed of the second quarter, supply constraints may emerge eventually, raising the possibility of higher inflation," the report said, adding China has little spare capacity left. However, the World Bank said inflation in China has so far been confined to food items, and price pressures aren't yet widespread or serious. It said it expects the inflation rate to ease gradually later this year, on moderating price increases for industrial commodities such as steel. Rising prices of pork and other food items were behind the 6.5% surge in China's CPI in August, the fastest increase in consumer prices since December 1996. Retail sales rose 17.1% in August from a year earlier, accelerating from the 16.4% growth in June. "Excess demand pressures need to be avoided," the World Bank said, adding Beijing ought to further tighten liquidity by issuing special bonds, raising banks' reserve requirement ratio or selling more central bank bills. "Deposit rates should be further increased to retain deposits in the banking system and limit their flows into the stock market," it said. The state-run China Daily said in an editorial Wednesday that Chinese policymakers should be more hawkish on inflation, adding to expectations the central bank will tighten policy after most of the key August economic data are issued this week. "As inflation continues to surge, policymakers should respond more aggressively and promptly," the editorial said. The World Bank said a potential economic slowdown in the U.S. caused by problems in the subprime mortgage sector could affect China more than other economies because of its reliance on exports. But a mild slowdown in the global economy would help China curb its economic growth and inflation, as well as the growth in its trade surplus. "China has a very strong macroeconomic position when you think about its fiscal and external positions. That means China would have the room to adjust macroeconomic policies if there is a slowdown in the world economy that starts to look a bit more drastic than we currently expect," Bert Hofman, World Bank's China lead economist, said in a briefing. The bank said China ought to let the yuan appreciate as it tries to adjust external imbalances. It said slowing the growth of China's trade surplus is "Beijing's main macroeconomic task."