China faces a different and bigger challenge now to sustain its growth, said David Dollar, who is spending his final day today as China director of World Bank.

"The Chinese government faces its biggest challenge ever to put domestic consumption back on a sustainable path," Dollar told China Daily in an exclusive interview before he takes up his next job as the Economic and Financial Emissary of the US Embassy in Beijing.

Five years back when David Dollar started his WB stint in Beijing, he felt environmental problems were the biggest challenge for the nation. "I thought what challenged China most then was environmental degradation."

Dollar said he was impressed at how clear the air has become and how clean the water has turned in China in the past five years.

"However, the financial crisis has dealt a new challenge -- that of spurring domestic consumption. I think this is the biggest challenge that China faces now," said Dollar.

Policymakers need to widen institutional reforms and also prepare medium- and long-term development strategies, he said. At the same time China needs to spur domestic demand and increase household incomes for future growth.

He said even though the developed countries would come out of an economic slowdown, their consumption will not grow so fast.

"It means that they will import less from countries like China or in other words, exports will no longer be the mainstay in countries like China," said Dollar.

He said exports are important for China but it is hard to see how it will grow at 20 percent a year in the current global situation.

Dollar said he does not expect Sino-US trade to be weakened despite the slowdown in US imports from China. He said on the contrary China's imports from the US would increase in the future as domestic consumption increases.

"In this sense, the trade ties between China and the US will not be weakened, but the characters will change during the next five to 10 years," said Dollar.

Dollar said China needs other sources of stimulus and the good news is that household income is also increasing. It is also a good time for China to forge good policies aimed at encouraging domestic consumption.

"China needs some institutional changes to grow household incomes and I am cautiously optimistic about this," said Dollar.

Zheng Xinli, vice-president of China Center for International Economic Exchanges (CCIEE), echoed similar views on what he thought were the major challenges for the nation. CCIEE is the sponsor of the Global Think Tank Summit that opened in Beijing yesterday.

Dollar said household income increase and tax breaks cannot change the consumption pattern of Chinese households.

Zheng said the policy goal should be to make the Chinese families feel more secure in spending money.

To achieve that the nation should put in place pension schemes and health insurance schemes to make people feel confident on spending.

"If coordinated reforms are put in place, it will change household behavior and that will certainly put China on a sustainable path," said Dollar.

(China Daily July 3, 2009)