China Must Avert Loan-Fueled Bubbles, World Bank Says

By Bloomberg News

Nov. 4 (Bloomberg) -- China’s policy makers must avert stock and property market bubbles after lending swelled to a record $1.27 trillion this year, the World Bank said.

The Washington-based lender raised China’s economic growth forecast for this year to 8.4 percent from 7.2 percent and Beijing-based senior economist Louis Kuijs said the central bank will “eventually” have to rein in credit to ensure resources are properly allocated.

The Shanghai Composite Index has surged 72 percent this year after Chinese authorities enacted a $586 billion stimulus plan, lowered banks’ cash reserve requirements and reduced the one-year lending rate to a five-year low. The World Bank also said China will need to do more to rebalance the economy toward consumption and services and away from investment and industry.

“Risks of asset-price bubbles and misallocation of resources amidst abundant liquidity need to be addressed,” Kuijs said. While there’s currently no need for a “major tightening,” the costs of sustaining the current expansionary policy stance “will increase over time,” he said.

China may tighten monetary policy from the second quarter of next year because of stronger growth and rising consumer prices, Goldman Sachs Group Inc. said Oct. 29. Li Dongrong, an assistant governor at the central bank, said on Nov. 1 that China will maintain a “relatively loose monetary policy.”

The Shanghai Composite climbed 0.2 percent at 2:43 p.m., little changed from before the report was released.

Overheating Concern

“Policy makers have been quite successful in bottoming out the economy,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong. “Next year, there’ll be concerns over overheating, particularly when we see asset prices going up further. There’ll be talk of tightening and policy makers have more work to do.”

China’s banking regulator plans to review debt levels at some real-estate developers on concern the companies’ borrowings are fueling excessive gains in property prices, according to a person familiar with the matter. Home prices rose at the fastest pace in a year in September.

“If there’s not a bubble now it’s building up,” said Ardo Hansson, the World Bank’s chief economist on China in Beijing. “More and more” of the new credit is going into mortgages and “the view that something should be done is quite right.”

Hong Kong Bubble

In Hong Kong, authorities have tightened lending to rein in home prices. The International Monetary Fund said yesterday it shares the Hong Kong government’s concerns that there could be a sharp run-up in prices for property and financial assets.

Stimulus spending and the surge in lending helped China’s gross domestic product grow 8.9 percent in the three months to Sept. 30, the fastest expansion in a year.

The World Bank said the economy will grow 8.7 percent in 2010, more than an earlier estimate of 7.7 percent. Rebounding housing construction and a turnaround for exports will help the economy pick up next year even as overall growth in investment falls by about half, the lender said in today’s report.

“More policy measures will be needed to rebalance growth in China,” the World Bank said. “Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome.”

Stronger Safety Net

Recent initiatives to increase investment in health, education and the social safety net, as well as improving access to finance for smaller companies, are steps in the right direction, the World Bank said. China is likely to post growth over the next five years of about 8 percent annually, it said.

International Monetary Fund Managing Director Dominique Strauss-Kahn said he anticipates China will address its “undervalued” currency to achieve greater dependence on domestic demand rather than exports.

The global financial crisis has already started rebalancing the world economy as U.S. consumers are saving more and China moves toward a “more domestic-led” growth model, Strauss-Kahn said in an interview yesterday on Bloomberg Television in Washington.

China has prevented the yuan from appreciating since July 2008, stoking tensions with American manufacturers.

“On trade matters there are tensions building up and there are risks of various tit-for-tat measures,” said Hansson.

Because China needs to reduce its trade surplus and boost domestic demand an appreciation of the yuan “is probably something that is in the pipeline,” while a depreciation of the dollar is “probably going to be part of the natural order of things,” Hansson said.

Manufacturing investment will remain under pressure next year because of spare capacity in China and abroad, the World Bank said. That will help keep “underlying inflationary pressures” largely absent, the report said.

To contact the Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net