China can hit target of 7.5% growth next year: report

The Business Times
26 November 2008
China can hit target of 7.5% growth next year: report
Higher government spending will play a key role, says World Bank

By ANTHONY ROWLEY
IN TOKYO

CHINA can pull off its gamble on achieving 7.5 per cent GDP growth next year, when most other major economies are expected to be in recession, by means of massive government spending on the economy, the World Bank said yesterday.

And the huge switch from private to public-sector consumption and investment planned for 2009 should not strain China's budget unduly, officials suggested.

Speaking from Beijing, the World Bank officials also had praise for what they said was China's contribution to helping preserve 'stability' in Asia and beyond during the current financial and economic crisis by allowing the renminbi to appreciate in line with a strengthening US dollar, rather than seeking to depreciate it in the interests of protecting exports.

'Domestic factors have made China's economy slow down in 2008,' the World Bank said in its latest China Quarterly Update, while forecasting GDP growth of 9.4 per cent for this year compared with 11.9 per cent in 2007.

But 'Chinese authorities have adopted a more expansionary macro-economic stance and higher government-influenced spending is going to play a key role in 2009,' the World Bank said.

Some economists predict a hard landing for China next year as the developed world slumps into recession, with growth forecasts going as low as 5 per cent. But in its latest update on China, the World Bank argues that even with low export growth and weak domestic demand the Chinese economy can still move forward strongly in 2009 on the back of planned fiscal stimulus.

The size of the shift from private to public sector-led growth means that public spending will account for 56 per cent of next year's growth in China compared with 24 per cent in 2007, World Bank officials said. China announced a US$586 billion package of infrastructure and other public-sector spending on Nov 10 and other official measures are expected to be rolled out, including some aimed at boosting household spending.

This should not strain China's finances, according to World Bank country director for China David Dollar. 'The government is in a better position to undertake fiscal expansion than in most other countries,' he said.

Government revenues have been healthy in recent years and any shortfall can be financed by issuing bonds or drawing on government deposits with the central bank, he added.

Speaking from Beijing, Mr Dollar and other officials declined to comment on concerns by some economists that China's growth next year could fall to levels where unemployment causes social strains. Improved official 'safety nets' should ensure minimum pay plus health and education benefits for unemployed workers to ride out a period of unemployment, they said.

The unemployment risk is greatest in China's light manufacturing sector, such as toys and textiles, where export demand has fallen, causing factories to close and forcing migrant workers to return from urban to rural areas. Planned job creation in infrastructure areas such as urban transport, water and sanitation and public housing cannot compensate for this, officials acknowledged.

But most of the more than 50 per cent of China's total exports which goes to emerging economies in Asia and elsewhere takes the form of machinery and equipment such as electronics and motor vehicles and these exports have held up relatively well so far, officials said.

China has so far been able to compensate for weakening export demand by increasing its competitiveness and gaining market share, they added.

While problems in China's real estate sector have moved 'upstream' to impact demand for raw materials such as steel and cement, they have not had a very damaging effect on the Chinese banking system, said World Bank senior China economist Louis Kuijs. Only around 20 per cent of bank assets consists of mortgages and construction loans, he added.