China faces Europe risk, soft landing possible – World Bank


China’s economy faces growing risks from Europe’s sovereign debt crisis and from debt held by local Chinese governments but it could engineer a soft landing by easing monetary policy, the World Bank said.

In a semi-annual East Asia and Pacific economic update, the World Bank nudged up its 2011 growth forecast for China but expects growth to moderate from next year as overseas economies slow and Beijing steers the economy to rely less on investment and manufacturing.

The lender also slashed growth forecasts for developing Asia, excluding China, due to weak export demand from developed countries and as widespread flooding has hit Thailand’s manufacturing base, Reuters reports.
“On balance, we believe that while there are issues (in China), they are being managed and the magnitude of those issues does not add up to something that would lead necessarily to a major slowdown as some have talked about,” Bert Hofman, World Bank chief economist for East Asia and the Pacific, said.

China will grow 9.1 percent this year, the World Bank said, slightly higher than the bank’s previous forecast of 9.0 percent growth issued in March. In 2012, growth will slow to 8.4 percent, it said.

China can continue growing at a 9 to 10 percent per annum pace for the foreseeable future, based on the experience of other countries with a per capita gross domestic product of around $5,000 (3,198.16 pounds), Hofman said, which is slightly more than China’s per capita GDP.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports, the bank said. Monetary policy tightening also slowed investment this year, but there is now more room to normalise policy as inflation is waning, the bank said.

China’s Vice Premier Wang Qishan said over the weekend that a long-term global recession is certain and China should focus on solving problems in its economy.

Policies to curb gains in land prices could put some local governments that borrowed heavily under pressure, the World Bank said.

Still, deleveraging is unlikely to match the scale of the U.S. property market as Chinese households tend to put more money down in advance and have smaller mortgages, according to the report.

A recent World Bank study with the International Monetary Fund also showed that China’s banking system can withstand exchange rate and interest rate shocks, Hofman said.

Excluding China, developing East Asia will expand 4.7 percent this year, much slower than the previous forecast of 5.3 percent growth, as a slowdown in developed countries and tighter monetary policy dented growth, the bank said.

Investors shifting money out of Asian countries could lead to more stock and bond market volatility, but this could help some countries that are trying to contain asset prices, the report said.

Asian countries could also face significant spillover if a disorderly sovereign debt restructuring in Europe hurts the flow of trade and financing, the bank said.

Malaysia in particular could be vulnerable if European banks suddenly curtail lending as it has loans from European banks worth more than 25 percent of its GDP, the report said.

Barring this scenario, portfolio flows could continue to favour Asia for some time to come, according to the bank.
“There is a lot of liquidity out there that will start looking for yields again once financial stability settles in again,” Hofman said.

Public finances give many Asian countries room to boost stimulus spending if needed, but governments should focus on long-term investments to improve education, social security and labour productivity, the bank said.