World Bank Raises Forecast for China?s Economy

The World Bank yesterday became the latest major institution to raise its forecast for growth in China?a reflection of that country?s rapid rebound this year?though it cautioned that more policy adjustments would be necessary in the medium term to ensure the country?s recovery would be sustained.

China?s giant economy is now expected to grow 8.4 percent this year, according to the World Bank?s latest projection, rather than by the 72 percent it had forecast in June. It forecasts 8.7 percent growth for next year.

The new 2009 estimate is just shy of the 8.5 percent being projected by the International Monetary Fund, which likewise raised its forecast for China and the rest of Asia last week, and also echoes recent upward revisions by economists at several private-sector banks.

China?s remarkable rebound stems mostly from a massive spending package, of $585 billion, which the government announced a year ago. Lower interest rates and vastly increased lending by the country?s state-owned banks also have helped offset the fallout from the collapse in demand in Europe and the US, which has hit export industries in China?and else-where in Asia?hard

Chinese export growth is likely to resume, helped by strong fundamental competitiveness and the recent depreciation of the nominal effective exchange rate, the World Bank said in its quarterly review of China yesterday.

?Net exports are likely to stop being a drag on growth,? it said.

But the challenge, according to the institution, would be to continue weaning China off its reliance on exports and stimulate domestic demand.

Although the bank said that China had already seen broad-based domestic demand growth, it stressed that more was needed.

?Following on earlier initiatives, some steps have been taken in recent months to rebalance and boost domestic demand including increasing the presence of the government in health, education, and social safety? and other measures like improving small and medium-sized companies? access to financing, the World Bank said.

?But more policy measures will be needed to rebalance growth in China, given the strong underlying momentum of the traditional pattern. Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome.?

Meanwhile, the speed of the rebound coupled with vast liquidity as state-owned banks cranked up lending to help boost growth, has prompted a debate about whether some of the stimulus measures should now be reined in. A rapid rise in stock and property prices also has fueled this debate, as some analysts worry that a bubble may be in the making.

?In our view, macroeconomic conditions in the real economy do not yet call for a major tightening,? Louis Kuijs, the main author of the World Bank?s update, said in a statement. ?However, risks of asset price bubbles and misallocation of resources in the face of abundant liquidity are real, and the overall monetary stance will have to be tightened eventually.?

Meanwhile, China?s powerful rebound is benefiting others in the region, the World Bank said in a separate report on East Asia and the Pacific, a region that groups China with emerging economies in Southeast Asia like Indonesia, Thailand and Cambodia, but does not include India and Japan.

?Countries exporting consumer durables, electronic components and raw materials to China have felt the positive flow on effects,? it said, adding that it now expected the region to grow 6.7 percent this year.

But the World Bank also cautioned that ?despite Indonesia and Vietnam performing well, developing East Asia excluding China is projected to grow at around 1 percent in 2009??a slower pace than in South Asia and the Middle East and North Africa, and only slightly stronger than sub-Saharan Africa. garment output and to a certain extent tourism and construction. Even offset by continued agriculture growth, this adds up to negative 2.2 percent,? World Bank Country Economist Stephane Guimbert said yesterday at the report?s launch in Phnom Penh.

?It?s s important to see the impact of agricultural sector next year,? he said. ?If you add that, with some rebound in construction and tourism, that?s where we will see a modest recovery.?

The World Bank report describes how 2009 has been difficult for the country?s economy, which by contrast saw 6.5 percent growth in 2008 and prior to that had experienced a decade of double-digit growth.

Garment exports fell 26 percent in the first six months of this year and the Cambodia garment industry?s market share in the US dropped from 3.2 to 2.8 percent, which the report described as a ?worrisome development?

Tourism arrivals also dropped in the first half of the year, and approved construction projects dropped by 25 percent from the same period a year before. The number of garment factories also plummeted by 18 percent and new business registrations fell 40 percent in the first six months of the year compared to the same period the year before, according to the report.

The report estimates that foreign direct investment in 2009 will reach only $510 million, 37 percent lower than in 2008, which saw $815 million in FDI, and lower than the $866 million in 2007.

The report warns that Cambodian banks will need intensive supervision as nonperforming loans are on the rise, and that credit issued to the private sector is still small.
Ivailo Izvorski, World Bank Senior Economist and principal author of the report said job losses in Cambodia?s garment sector, which have surpassed 54,000, was one of several worrying signs for the sector.

Speaking from Washington via remote videoconference in a question-and-answer session screened at the Bank?s Phnom Penh office, he said, ?There are three or four key sectors in the economy and garments is one of them, where all these workers have lost their jobs and factories are closed and now we see this very negative development in that its garments are losing market share in the US. Perhaps there are deeper structural problems with competitiveness.?

The World Bank?s prediction, like the IMFs and ADB?s, contradicts a positive forecast of 2.1 percent made by Prime Minister Hun Sen in a June government circular. A statement issued last week by the Council of Ministers predicted 7 percent growth for next year.

Council of Minister?s spokesman Phay Siphan referred questions to the Ministry of Finance, where Secretary of State Chea Pheng Cheang referred questions to Secretary of State Hang Chuon Naron who could not be reached.

Kang Chandararot, executive director of the Cambodia Institute of Development Study, said the 7 percent forecast by the government is overly optimistic as the world economy will need to recover before rekindling demand for garments and tourism as well as boosting FDI to previous levels.

?We need to consider them for next year, and I think next year they will not be able to accelerate next year,? he said.

Still, he said, more than 2 percent growth is possible this year, partly because of the $1 billion of foreign aid in the country, government spending and because tourists arrivals are beginning to rebound in the second half of this year.

Chan Sophal, president of the Cambodian Economic Association, said the predictions from the World Bank are reasonable and that many institutions initially underestimated the affect of the global economic crisis.

?It?s about the world economy and Cambodia is very exposed to the outside world. So it?s out of Cambodia?s control,? he said.

For that reason, it?s unclear just how much the tourism and construction sector will rebound, he said.

Still, Stephen Higgins, CEO of ANZ Royal Bank, said uncertainty in the global market makes predictions difficult particularly for 2010.

He said nonperforming loans have affected all banks in Cambodia, and could restrict the amount of loans issued while the number of quality borrowers with good cash flow is currently quite low

?It?s a demand issue. There? not enough borrowers,? he said.

Sourced = The Cambodia Daily