World Bank sees faster China growth, slower forex reserve rise

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Beijing: Massive policy stimulus should keep China growing at a respectable rate this year and next, but a robust recovery is unlikely given global weakness and soft non-government investment, the World Bank said on Thursday. In a quarterly update, the Bank raised its forecast for gross domestic product growth this year to 7.2%, still below Beijing’s official target of 8.0% but up from the 6.5% it projected in March. Growth in 2010 was likely to be just a bit stronger, at 7.7%, the report said.

The Bank expects China’s foreign exchange reserves to grow by $218 billion this year, the smallest increase since 2005, after leaping by $419 billion in 2008 and $462 billion in 2007.

That is largely because the Bank is now forecasting a whopping capital account deficit of $170 billion this year, driven by a variety of financial outflows including undisclosed transactions between the central bank and financial institutions and a growing stream of outbound foreign direct investment.

These outflows already totalled $109 billion in the first quarter, limiting the increase in forex reserves in the January-March period to just $8 billion. China’s reserves were $1.95 trillion at the end of the first quarter, the world’s largest stockpile.

“There seems to have been an intention to let capital flow out of China in these various guises,” Louis Kuijs, an economist in the World Bank’s Beijing office, told a news conference.

He said such outflows would chime with China’s oft-stated desire to diversify the country’s foreign assets. Beijing is hunting in particular for energy and commodity investments.

“We may well see in future additional such changes in the composition of capital flows ... given the perception of risks and returns of different types of foreign assets,” Kuijs said.

The forecast on reserves brings the World Bank broadly into line with those of private-sector economists. HSBC, for example, expects reserves to grow by $154 billion in 2009.

The report welcomed an unfolding surge in government-influenced investment, triggered by a 4 trillion yuan ($585 billion) stimulus package announced in November.

“However, it is unlikely to lead to a rapid, broad-based recovery in China, given the current global environment and the subdued short-term prospects for market-based investment. China’s economic growth is unlikely to rebound to a high single-digit pace before the world economy recovers to solid growth,” it said.