The World Bank maintained its 2007 forecast for China's economic growth rate at 11.3 percent and predicted that growth may slow only modestly in 2008 to 10.8 percent. The bank attributed the high gross domestic product (GDP) growth mainly to the continued strong contribution of external trade and investment- driven recovery in domestic demand.

"China's macroeconomic prospects generally remain good," the World Bank announced on November 15. According to the six-month report, prospects remain buoyant domestically. With profit and credit growth strong, investment is likely to continue to expand solidly. Consumption is expected to remain strong as well, although a high consumer price index and inflation could constrain real consumption growth.

The World Bank estimated in April that China's GDP would grow 9.6 percent and raised its forecast to 10.4 percent in May. In September, it lifted the estimate once again to 11.3 percent during its China Quarterly Update.

According to figures released by the National Bureau of Statistics, in the first three quarters, the country's GDP grew 11.5 percent over a year ago. The quarterly GDP growth rates were 11.1 percent, 11.9 percent and 11.5 percent, respectively, year on year. On November 16, the State Information Center, an information research institution under the State Council, predicted that China's GDP would grow 11.4 percent for the whole year of 2007 while the growth for the fourth quarter would be 11.2 percent.

Blows from sub-prime crisis limited

Although concerns about the U.S. sub-prime crisis and increasing global oil prices are growing, the World Bank still believes China is well-placed to absorb the impact. According to the report, China is the largest overseas holder of U.S. mortgage-backed securities--around $260 billion-mostly through its international reserve holdings and through holdings in commercial banks. But most of these holdings are backed by private firms in the United States such as Fannie Mae, the largest buyer and backer of home mortgages in the United States.

The main impact of the banking international turmoil is likely to run via the real economy. Although the world economy still retains momentum, China will be affected more than most other large emerging markets by an economic slowdown in key markets. This is mainly because of the importance exports have on China's economy. At the same time, China is better placed than many countries to deal with the impact. "A moderate global slowdown would mitigate pressures of concern to policymakers on overall growth, inflation, and the trade surplus, while China's strong macroeconomic position provides room to adjust the domestic policy stance, if necessary," the report said.

Moreover, the recent World Bank report also said that the impact of the sub-prime crisis on East Asia will be modest. Preliminary assessments suggest that direct exposures of East Asian financial institutions to sub-prime risks have been relatively limited, although risks may increase if global economic instability and the tightening of credit markets intensifies and leads to further declines in prices of various other structured assets held by banks.

Record-high oil prices, meanwhile, will test the resilience of the region's economies next year, the bank said. Amid surging global demand and supply tightness, average crude oil price has risen from about $53 a barrel in January to more than $90 in early November. At $90 a barrel, the price of oil would be linked to an income loss in the region of about 1.1 percent of GDP in 2008, according to the bank's calculations.

Curbing trade surplus

The external balance remains China's main macroeconomic issue, said the World Bank's report. According to figures from the General Administration of Customs of China, in October, China's trade surplus reached a record high of $27.05 billion, accelerating 13.5 percent year on year.

The World Bank report notes that China has become a major export market for the rest of East Asia but warns that economies need to remain focused on finding new ways to meet China's ever-changing and highly competitive market. "The new challenge for China's East Asian neighbors will be in making the transition from supplying inputs for China's exports to also supplying its domestic market-something that might require significantly different research, production, branding and marketing skills and channels," said Milan Brahmbhatt, the report's lead author.

In the long term, the key challenge remains to rebalance the economy. According to the World Bank, a package of policies to deal with these challenges would include real exchange rate appreciation, with, over time, more exchange rate flexibility; monetary policies that tighten liquidity and increase interest rates; a change in the composition of fiscal spending, with more spending on health and education; further financial sector reforms; structural policies that change the relative attractiveness of manufacturing versus services; and removal of remaining obstacles to rural-urban migration.