The World Bank has slashed the growth forecast for the Chinese economy to 9.6 per cent from the previous projection of 10.8 per cent for the year 2008. However, amid concerns of a slowdown in Europe and America, the bank says that it is still a sturdy growth figure. In a quarterly report released on Monday, the bank also notes that China is well placed to deal with a contained global slowdown.“The direct impact of the international financial turmoil on China’s financial markets has also been small, because capital flows are restricted by controls on portfolio flows,” the World Bank says. Also, the bank observes that the Chinese financial institutions have low direct exposure to US subprime securities.However, the bank notes that the main impact of the international turmoil on China comes via the real economy. “With over 40 per cent of China’s exports going to Europe and the US, exports will be affected considerably by the slowdown in the high income countries, which are most affected by the financial turmoil. In light of these considerations, we now project for GDP growth of 9.6 per cent for 2008,” the bank said in the report.Affirming the elbowroom available to Chinese policymakers, the bank says that even in case of a more pronounced global slowdown and impact on its economy, China is in a strong macroeconomic position to stimulate demand. The report says that the Chinese can do this by adjusting their fiscal stance on spending and tax cuts and easing credit controls. However, the bank is reticent on the issue of lowering interest rates and relaxing liquidity management citing the concerns about inflation, which is facing push from high food prices.The bank heaps scorn on the policy of maintaining a relatively fixed exchange rate regime engendering high external reserves stemming from large current account surpluses. The large balance of payment surpluses boost liquidity, thus calling for sterilization, which the People’s Bank of China, the nation’s central bank, does by issuing central bank bills and hiking reserve rates. The World Bank opines, “The surplus will remain large even with weak global growth, thus continuing to put pressure on the currency, inject liquidity and compromise monetary policy.”“The government’s desire to rely more on interest rates in the conduct of monetary policy will over time require a more flexible exchange rate regime. In the meantime, monetary policy may continue to rely on credit controls and liquidity management,” the bank says.
