World Bank warns of Chinese bubble

City A.M. Reporter
THE World Bank raised its 2010 growth and inflation forecasts for China and recommended a tighter monetary policy as well as a stronger exchange rate to restrain inflation expectations and asset bubbles.

The bank revised its projection of gross domestic product growth this year to 9.5 per cent from 8.7 per cent in its previous China quarterly update in November and nine per cent in a regional report released in January.

For 2011 the bank pencilled in GDP growth of 8.7 per cent – exactly the same rate China enjoyed in 2009 as the economy responded to massive monetary and fiscal stimulus.

“In China the economy has held up very well during the global crisis and growth prospects for this year and next year remain quite good” Louis Kuijs, senior economist in the bank’s Beijing office said.

Growth this year of 9.5 per cent would vault China past Japan and make it the world’s second-biggest economy.

UBS also raised its 2010 GDP forecast yesterday, to 10 per cent from nine per cent, citing the momentum of domestic demand and a likely recovery in net exports back to pre-crisis levels.

The World Bank now expects consumer prices to rise by 3.7 per cent on average this year – it had forecast two per cent in November – and by 2.8 per cent in 2011.

China has set a three per cent inflation target this year, but the bank said a rate of 4-5 per cent is not a major problem in many emerging markets in the throes of reform and development.