World Bank cuts China 2009 GDP forecast to 6.5 pct

By Alan Wheatley, China Economics Editor

BEIJING, March 18 (Reuters) - The World Bank lowered its forecast for China's 2009 economic growth on Wednesday but warned Beijing that it would be thwarting its own medium-term goals if it tried to offset the slowdown by further boosting investment.

In a quarterly economic update, the bank cut its projection of gross domestic product growth this year to 6.5 percent from the 7.5 percent outcome it had forecast in November. It said there were both upward and downward risks to its outlook.

The global crisis would be a drag both this year and next, mainly via weaker exports and non-government investment, but the bank said China's economic fundamentals were still strong enough to give policymakers the luxury of looking well beyond 2009. The bank welcomed the inclusion of steps to boost consumption in the government's 4 trillion yuan ($585 billion) stimulus package since over-reliance on capital-intensive investment could damage the pace of job creation and the quality of growth. Indeed, it said there was room for a further shift towards consumption and for less emphasis on capital spending in order to rebalance the economy so that growth is more sustainable economically, socially and environmentally.

"The fundamentals for China are strong enough to ride out this storm, and it may be just as appropriate to shift the focus as much as possible to the medium and long-term challenges instead of a very narrow focus on short-term growth objectives," Louis Kuijs, the senior economist in the bank's Beijing office, said at a news conference to launch the report. The bank said it expected 16-17 million non-farm jobs to disappear this year but it played down the social repercussions.

"Somewhat lower overall growth is not likely to jeopardize China's economy or social stability, especially if the adverse consequences of dislocation and layoffs are alleviated by using and expanding the social safety net," the report said. The median forecast in a Reuters poll of economists published on Wednesday is for GDP to expand by 7.8 percent this year, narrowly missing Beijing's target of 8 percent. For a table with details of the World Bank's forecasts. For a graphic on China's growth over the past three decades.

COULD BE WORSE

The bank's advice flies in the face of the ruling Communist Party's determination to do whatever is necessary to meet its self-imposed target of 8 percent growth this year. Last Friday, Premier Wen Jiabao said the government was ready to roll out extra stimulus measures if needed. But the World Bank said Beijing should keep some of its powder dry in case growth next year proves even weaker. What's more, the government cannot hope to take up all the slack left by the collapse in exports and knock-on drop in private investment; for a start, there may be limits to how much money can be spent efficiently on traditional investment schemes. As it is, the bank already expects 4.9 percentage points of its projected 6.5 percent growth this year to stem from government-influenced investment and public-sector consumption.

"China's economy cannot escape the impact of the global weakness. Government-influenced activity makes up a modest share of the total: it cannot and should not offset fully the downward pressures on market-based activity," the report said. The bank tempered this message of resignation with the assurance that China would continue to grow substantially faster than most other countries this year and next. Indeed, the stimulus is already supporting activity and sentiment, even if it is too early to expect a sustained rebound, the World Bank said. The bank said it expected the yuan to keep strengthening in the next decade given China's prospective balance-of-payments and productivity trends. Kuijs described the outlook for exports this year as "grim" and "sombre". But he said depreciating the currency in the short term would not help revive exports, because global demand is so weak, and would slow China's switch to consumption-led growth.