Prospects improve for soft landing, risks of overheating moderating

The World Bank lowered its forecast for China's economic growth rate in 2012 on Thursday in a quarterly report, saying GDP growth may dip to a 13-year low.

It cut its forecast to 8.2 percent from the 8.4 percent estimate issued in January.

It also raised the 2013 growth forecast to 8.6 percent from an earlier estimate of 8.3 percent, saying a mild recovery in external demand next year may shore up growth.

"China's gradual slowdown is expected to continue through 2012, as consumption growth slows somewhat, investment growth decelerates more pronouncedly and external demand remains weak," said Ardo Hansson, lead economist for China.

He said the inflection point for growth in 2012 will likely be around mid-year.

Domestic demand will contribute 8.4 percentage points to growth in 2012 as consumption growth slows slightly, partly due to base effects, and investment growth decelerates rather sharply, said the report.

On Friday, the National Bureau of Statistics is set to release first-quarter figures. Growth for the world's second-largest economy is likely to show the smallest gain in almost three years, according to a Bloomberg survey. Predictions range from 7.5 percent to 7.9 percent.

Inflation will be about 3.2 percent in 2012, as growth slows, commodity-price pressures fade and the property market cools further, according to the report.

"The risks of overheating are moderating, increasing the prospects to achieve a soft landing," said the bank.

It said that risk factors include the weak and uncertain growth prospects of high-income economies and the "ongoing correction" in China's property markets.

Sufficient policy space exists to respond to downside risks, but any policy response would need to be carefully crafted, keeping in mind long-term effects and objectives, it warned.

The report notes that the burden of any policy response should initially fall on fiscal policy, and measures supporting consumption should be a first priority.

Relative to the previous episode of fiscal easing, any stimulus would ideally be less credit-fueled, less local government-funded and less infrastructure-oriented, it said.

"Policy options to lift consumption would include targeted tax cuts, particularly consumption taxes and social contributions, social welfare spending and other social expenditures, such as on education, healthcare and pensions," said Hansson.

Reserve requirements could be adjusted to ease the availability of credit, but policy rate action should be reserved for potential downside scenarios, since real interest rates are already accommodative, said the bank.

"In this very volatile environment, the primary issue is keeping flexibility to look at data that are out from month to month and be ready to move," said Hansson.

The central bank has lowered banks' reserve requirement ratios twice since November, but it hasn't changed interest rates since the latest increase in July.

Analysts have forecast more RRR cuts this year, and some predicted a cut in interest rates in the coming months.

Reducing rates should be the "last resort" to shore up growth because rates are relatively low, he said.

"The current episode of cyclical weakness shows the limits of China's export-, credit- and investment-led growth model.

"As already predicated in the 12th Five-Year Plan (2011-15), strong progress on the structural reform agenda will help China achieve the objective of improving the quality of its development," said Philip Schellekens, senior economist and lead author of the report.

"As to how to rebalance, many observers emphasize financial-sector reform and exchange-rate appreciation. These are important measures.

"They would, however, need to be part of a comprehensive set of reforms to channel new resources to new sectors, rather than traditional ones," said Louis Kuijs, project director at the Hong Kong-based Fung Global Institute.

wangxiaotian@chinadaily.com.cn

(China Daily 04/13/2012 page13)