World Bank sees slower China growth, higher inflation

The World Bank on Monday scaled back its projection for Chinese growth and raised its forecast for inflation but said Beijing was in a strong position to stoke demand if the global economy turns down sharply.

The bank said in a quarterly update that it now expects gross domestic product to expand 9.6 per cent in 2008, which would be the slowest growth since 2002.

In its previous report in September, just as the global credit crunch was intensifying, the bank projected 10.8 per cent growth in 2008.

"Given the current uncertainty about the global outlook, the risks are larger than normal, especially the downside risks," the bank said.

But the lender's Beijing economists said China was well placed to cope with a moderate global slowdown thanks to robust domestic fundamentals, including high profitability and improving consumption.

"China enters 2008 with very strong momentum in the domestic economy," senior economist Louis Kuijs told a news conference.

China could easily pump up the economy further if needed by relaxing fiscal policy -- China has a tiny budget deficit -- or by easing credit curbs that the central bank has been enforcing to prevent overheating.

"Inflation concerns make lowering interest rates or relaxing liquidity management less obvious. Uncertainties in the outlook call for vigilance and flexibility," the report said.

The bank now expects consumer prices to rise 4.6 per cent on average this year, up from 3.8 per cent projected in September.

Inflation in the year to December was 6.5 per cent, close to an 11-year high, and financial markets suspect the rate will top 7 per cent in January and February because of food shortages caused by the worst winter weather in 50 years.

The bank expects the impact of the fierce weather on output and prices to be temporary and says inflationary pressures should ebb later in the year, not least because the rate of increase in international food prices will slow.

But there were also upside risks to inflation from higher land use fees, cuts in export tax rebates and the costs of complying with new labour laws, the bank said.

It said the global slowdown could have a silver lining for China by helping to reduce the economy's reliance on exports, which have grown much less rapidly than imports in recent months.

The bank expects China's current account surplus, the broadest measure of trade, to fall to 9.3 per cent of GDP this year from an estimated 11.0 per cent in 2007.

"We may be closer to a moderation in the growth of China's trade surplus," Kuijs said.