BEIJING– Despite the global recession, China’s economy grew 8.7 percent in 2009, and the growth momentum continued in the first months of 2010, according to the World Bank’s latest China Quarterly Update released [Mar. 17].

The Update, a regular assessment of China’s economy, finds that massive investment-led stimulus was key in driving the economy last year. But real estate investment gained prominence more recently and household consumption growth has held up very well.

Exports declined in 2009 as a whole, even as China gained global market share. With imports strong, net external trade was a major drag on growth in 2009 and the external current account surplus declined sharply. Exports rebounded strongly through 2009, though, and exceeded pre-crisis levels in early 2010. In a heated real estate market, surging property prices triggered policy measures to expand supply and curb speculation.

“We project 9.5 percent GDP growth for this year, with a shift in the composition,” said Ardo Hansson, Lead Economist for China. “Government-led investment is bound to decelerate. But, exports are likely to continue to recover amidst a pick up in the global economy, real estate activity is likely to grow strongly this year, and consumption should remain solid.” 

Inflation is on course to be significant in 2010, after being negative in 2009. But, with global price pressures likely to be subdued amidst large spare capacity internationally, China’s inflation is unlikely to reach high rates in 2010. We expect the external surplus to remain broadly unchanged this year.

Turning to policies, “the macroeconomic policy stance will have to be tighter this year than in 2009,” said Louis Kuijs, Senior Economist and main author of the Update. “Unlike in most other countries, overall output in China is close to potential. Thus, China needs a different macro stance than most other countries.”

According to the World Bank, the 2010 budget rightly implies a broadly neutral fiscal stance. Given the remaining uncertainty about the world economy, flexibility in its implementation is important. Inflation expectations can be contained by a tighter monetary stance and a stronger exchange rate, while monetary policy also has a key role to play in containing risks of asset price inflation. The case for a larger role for interest rates in monetary policy is strong. If policymakers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help.

The Update notes that ensuring economic and financial stability includes mitigating risks of a property bubble and avoiding strains on local government finances. With regard to the property market, stability calls for an appropriate macro stance and improving the functioning of markets. Meanwhile, concerns about the affordability of housing for lower income people would be best addressed by a long term government support framework.

The Bank thinks the central authorities have rightly increased vigilance over lending by local government investment platforms. Given China’s solid macroeconomic position, the local finance problems are unlikely to cause systemic stress. But the flow of new lending to the platforms needs to be contained and local government revenues need to become less dependent on land transaction revenues.

In the presentations to the National People’s Congress, the government emphasized the need to adjust the structure of the economy. As China is preparing for the 12th Five Year Plan, the key overall objectives are making further progress in “rebalancing” the economy, enhancing efficiency gains, moving to a more sustainable spatial transformation of economic activity and employment, further changing the role of the state in the economy, and taking account of China’s interaction with the rest of the world.

Visit www.worldbank.org/chinaquarterly to read the full report.