China needs to take more policy action to contain the rising trade surplus - the main macroeconomic issue for China, according to a World Bank report released yesterday.

 

Meanwhile, the World Bank maintained its 2007 forecast for China's economic growth rate at 11.3 percent, based on a bulging trade volume and fast-expanding domestic demand.

 

"China's macroeconomic prospects generally remain good," said the World Bank in its East Asia and Pacific Update report, which also predicted that growth may ease a bit in 2008 to 10.8 percent.

 

"Domestically, prospects remain buoyant. With profit and credit growth strong, investment is likely to continue to expand strongly."

 

The World Bank estimated in April this year that China's gross domestic product will grow 9.6 percent and raised the forecast in May to 10.4 percent. In September, it lifted the estimation again to 11.3 percent.

 

The GDP growth is boosted by a continued strong contribution of external trade and an investment-driven recovery in domestic demand.

 

The recent international financial-markets turmoil may affect China's economy, but the nation is well-placed to absorb the impact, said the report. However it added that "the external balance remains China's main macroeconomic issue."

 

In October, China's trade surplus reached a record high of US$27.05 billion, accelerating 13.5 percent year on year.

 

"Reducing the external imbalance may become an important contribution from China to world growth," said the report.

 

"The government has taken some largely tax-based measures to slow export growth. However, given the size of the surplus and the drivers behind the surplus, significantly more policy action is likely to be needed."

 

The policy package urged by the World Bank include:

 

More exchange-rate flexibility;

 

Tightened liquidity;

 

Increased interest rates;

 

A change in fiscal spending, with more emphasis on health and education;

 

Increased reform in the financial sector.

 

Structural policies to switch focus from manufacturing to the services industry and to remove the remaining obstacles to rural-urban migration are also listed as key points.

 

Meanwhile, the decade-high consumer prices in China are not likely exert a serious influence over the economy.

 

"The consumer prices rose to a decade high in part due to high pork costs after a pig disease," the report said. "However, prices of many other food items have risen in line with higher international food prices. So far, the price pressures have been confined to food."

 

(Shanghai Daily November 16, 2007)