June 18 (Bloomberg) -- The World Bank raised its growth forecast for China this year and advised policy makers to delay until 2010 any additional stimulus plan to boost the world’s third-largest economy.
China’s economy will expand 7.2 percent in 2009 from a year earlier, up from a 6.5 percent forecast in March, the Washington-based lender said in a quarterly report released today in Beijing. Stocks gained after the announcement.
The World Bank joins Goldman Sachs Group Inc., Morgan Stanley and UBS AG. in raising growth forecasts this year after a 4 trillion yuan ($585 billion) stimulus package triggered record loans and surging investment. China, the biggest contributor to global growth in 2007, is relying on government spending as exports slump because of the world recession.
The bank said it’s “too early” to say there is a sustained recovery, citing the economy’s dependence on the stimulus and echoing a State Council caution yesterday against excessive optimism.
“Despite all the World Bank’s caution, it did feel compelled to raise its growth forecast,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “That’s indicative of increased confidence regarding the global outlook right now.”
Extra Stimulus
The bank said it’s “not necessary, and probably not appropriate” for China to add fiscal stimulus this year. Consumption is likely to slow, pushing down wages and employment, and the nation should retain room for stimulus in 2010, in case the global economy takes a turn for the worse, the bank said.
The Shanghai Composite Index rose 1.6 percent to an 11- month high. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, climbed 2.6 percent.
Gross domestic product grew 6.1 percent in the first quarter this year from a year earlier, the least since 1999, as exports slid because of the global recession.
The Chinese government forecasts an 8 percent expansion in 2009, which is the pace of growth it considers necessary to maintain employment and ensure stability. The economy is in a “critical” phase, the State Council said yesterday, warning that a recovery isn’t on solid foundations yet.
‘Improved Somewhat’
“Overall growth prospects have improved somewhat, compared to three months ago, but with little carry-over into 2010,” the World Bank said. “The massive monetary impulse of the first five months will support economic growth in the coming quarters.”
Goldman Sachs forecasts growth of 8.3 percent this year, Morgan Stanley estimates 7 percent and UBS predicts 7.5 percent.
“I don’t think China will see a V-shaped recovery back to high single-digit growth rates,” said Louis Kuijs, the World Bank’s senior economist for China in Beijing. “The impact of the policy stimulus next year can realistically not be as large as it has been this year.”
The World Bank, created after World War II to fight poverty, said “it may take time” before China’s currency, called the yuan or renminbi, becomes a major reserve currency.
“International experience suggests that several conditions need to be in place, including open capital markets; deep, liquid foreign exchange markets; well developed bond markets; and a more or less flexible exchange rate,” the report said. “It will take time before China has achieved these benchmarks.”
Export Slump
Exports slid for a seventh month in May, dropping by a record 26.4 percent from a year earlier. The bank’s report said trade overall is likely to subtract from growth this year.
“China is still, in a global context, not big enough that it’s going to be the locomotive for a global recovery,” said Ardo Hansson, the bank’s chief economist on China.
China contributed 19.5 percent of world growth in 2007, the most of any nation, according to the International Monetary Fund.
Other projections by the World Bank indicated a budget deficit of 4.9 percent of GDP this year, up from the 3 percent forecast by China.
The report also contains long-term advice, including the importance of educating the workforce.
“A transformation of economic growth strategy toward one that is more solidly based on efficiency and knowledge is widely recognized as essential to China’s long-term prosperity,” the World Bank said. “Although such a transformation calls for a greater capacity for innovation, Chinese enterprises are not fully ready for it.”
The lender noted that the education level of China’s labor force is similar to Taiwan’s in the 1970s.
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