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POLITICAL ECONOMY
China must act to prevent hard landing: World Bank
by Staff Writers
Beijing (AFP) May 23, 2012


China's economic growth will ease further this year, presenting policy makers in Beijing with the challenge of preventing an excessively abrupt slowdown, the World Bank said in a report Wednesday.

The bank warned slower expansion in China would ripple across Asia and the Pacific, but said the region remained resilient to Europe's economic woes, describing it as a "bright light" in a world mired in low growth.

"China's near-term policy challenge is to sustain growth through a soft landing," the bank said in its half-yearly review of Asia's developing economies.

"While the prospects for a gradual slowdown remain high, there are concerns that growth could slow too quickly. However, sufficient policy space exists to respond to downside risks."

The World Bank predicted that China's economy, the world's second-largest, will expand 8.2 percent in 2012, down from 9.2 percent in 2011 and 10.4 percent in 2010.

"A further slowing of demand (in high-income countries) would ripple quickly through East Asia's production and trade networks, where China occupies a central position," it said.

"Second, the main domestic downside risk arises from the ongoing correction in China's property markets, even though such an adjustment has so far remained gradual and orderly."

Concerns over slowing growth have intensified in China after weak economic data for April was released last week. Growth in industrial production, imports, exports, fixed-asset investment and bank lending all eased in April.

Since then, Beijing has lowered the amount of money that banks are required to hold in their coffers, and economists predict more measures are to come.

The Chinese government has set a growth target of 7.5 percent for 2012, mainly in a bid to keep unemployment under control and avoid social unrest.

The World Bank said China has the means to boost fiscal spending, but should avoid the kind of massive infrastructure spending that characterised its response to the crisis in 2008.

"Fiscal measures to support consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority," it said.

Slower growth in China will pull down the region as a whole, with the developing economies in Asia and the Pacific expected to expand 7.6 percent in 2012 from 8.2 percent in 2011, the bank said, but it kept an optimistic tone.

"In a world where growth is stuttering along in most regions, East Asia and the Pacific is a bright light," said Pamela Cox, World Bank vice president for East Asia.

"It is a region that is resilient to Europe. Europe is a cloud on the horizon, but it is not pouring rain yet in East Asia," she said, referring to the sovereign debt crisis in Asia's key export markets.

Commodity exporters throughout the region experienced a boom in 2011, but may be vulnerable if China goes through a faster slowdown than anticipated, triggering an unexpected drop in commodity prices.

"If (China) were to slow down further, that might have an effect on commodity prices... so it is something to take account of," said Bert Hofman, the bank's chief economist for the region.

"Some countries like Australia have a very diversified economy, but some countries that are more narrowly based and rely predominantly on commodity exports might prepare for a situation where commodity prices might be a little lower."

The bank said this should prompt developing countries in the region to speed up an existing trend for relying less on exports and more on domestic demand to maintain high growth.

"Some countries will need to stimulate household consumption," said Bryce Quillin, World Bank economist and lead author of the report.

"In others, enhanced investment, particularly in infrastructure, offers the potential to sustain growth provided this does not exacerbate domestic demand pressures."

Hofman said the region as a whole seemed well positioned to weather new global volatility.

"Many countries run current account surpluses and hold high levels of international reserves. Banking systems are generally well-capitalised," he said.

"Still, risks emanating from Europe have the potential to affect the region through links in trade and finance."

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