China Needs to ‘Rebalance’ Economy, World Bank Says

By Nipa Piboontanasawat and Kevin Hamlin

Nov. 25 (Bloomberg) -- China should do more to rebalance its economy from investment, exports and industry to consumption and services as it rolls out a $586 billion stimulus package, the World Bank said.

“Additional measures are necessary to make headway with rebalancing the pattern of growth,” the Washington-based lender said today. Steps should include extra spending on health, education and social welfare and raising energy and resource prices, it said.

The World Bank cut its forecast for China’s economic growth next year to 7.5 percent from 9.2 percent in the previous quarterly report after the global financial crisis deepened. More than half of the expansion will come from “government-influenced spending,” after the State Council this month announced measures including infrastructure projects, the report said.

“China urgently needs to rebalance its growth towards domestic demand,” said Mark Williams, an economist at Capital Economics Ltd. in London. “With the world economy facing a painful downturn it can no longer rely on consumers overseas to lift it up.”

China’s economy, the world’s fourth largest, expanded 9 percent in the third quarter from a year earlier, the slowest pace since 2003. The World Bank’s forecast is for the weakest growth in almost two decades next year.

‘Sharp’ Export Decline

“The impact of the international financial and economic turmoil on China’s economy has been manageable so far, but is expected to intensify,” Louis Kuijs, a World Bank economist, said in Beijing. “Looking ahead, prospects are for a sharp reduction in export growth.”

Country director David Dollar said the nation is in the “early stage” of talks with the lender on providing money for loans to other developing nations. He wouldn’t give more details.

The World Bank praised China for keeping the yuan stable against the dollar as the U.S. currency strengthened.

“China’s exchange-rate policy has thus been a source of stability in regional and global financial markets,” the lender said. China’s “effective exchange rate has strengthened considerably,” it said.

The U.S. Dollar Index, which tracks the dollar against six major currencies including the euro and the pound, has climbed 19 percent since the end of June. The yuan has gained 0.4 percent against the U.S. currency in that time.

Health, Welfare, Yuan

Strengthening further the exchange rate and increasing the yuan’s flexibility would help to rebalance the economy, partly by making monetary policy more effective, the World Bank said.

Boosting spending on health, education and social welfare would aid low-income earners and “reduce the reluctance to consume,” the report said. Some measures announced in the stimulus package, such as rural subsidies, will help, it said.

Charging industries the full cost of energy, water, utilities, and natural resources would also aid rebalancing efforts, the World Bank said.

The economy will probably grow 9.4 percent this year, down from a previous estimate of 9.8 percent, it said, noting a “particularly pronounced” slowdown in the housing market.

China’s export slowdown is set to spread from destinations including the European Union to emerging markets, where more than half the nation’s shipments go, the report said. The World Bank predicts imports worldwide will shrink next year for the first time since 1982.

Inflation “is no longer an issue of concern for the immediate future” and is likely to cool to 2 percent in 2009 from 6.5 percent this year, the World Bank said.

China’s foreign-exchange reserves, already the world’s biggest, will likely swell to $2.045 trillion this year and $2.547 trillion by the end of 2009, the report said.

To contact the reporters on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net