World Bank Cuts China 2012 Growth Outlook on Exports

The Washington-based lender cut its estimate for China’s expansion this year to 8.2 percent in a report released today in Beijing from a January projection of 8.4 percent.

The world’s second-largest economy lost additional steam in the first quarter, with a report by the statistics bureau tomorrow likely to show expansion was the smallest in almost three years, according to a Bloomberg News survey. The slowdown underscores the risks to the global recovery after the U.S. reported March job growth that trailed estimates and concern mounted that Europe’s sovereign debt crisis is worsening.

“With the economy slowing in the near term, the policy challenge is to ensure that this continues in a gradual fashion,” the World Bank said. “Sufficient policy space exists to facilitate an orderly adjustment and respond to downside risks if they were to materialize.”

Premier Wen Jiabao this month pledged to boost infrastructure investment, ensure “reasonable” liquidity and accelerate payments of export rebates amid cooling domestic and overseas demand last quarter. The central bank has lowered banks’ reserve ratios twice since November and a Bloomberg survey last month showed economists forecast more reductions this year.

‘Volatile Environment’

The government should increase fiscal spending to spur consumption and banks’ reserve requirements could be lowered to ease credit, the World Bank said.

“In this very volatile environment,” it’s necessary “to be very flexible, to look at data that are out from month to month and be ready to move,” Ardo Hansson, the World Bank’s chief economist for China, said at a briefing in Beijing when asked for an estimate of the scale of likely reserve-requirement cuts.

Room for lowering benchmark interest rates may be limited because such a move “could sow the seeds for inflationary pressure and speculative activities later on,” the institution said. China’s central bank has kept rates unchanged since the last increase in July.

Cutting rates should be the “last resort” to stimulate growth “because they are still relatively low right now,” Hansson said.

The benchmark one-year lending rate is 6.56 percent and the one-year savings rate is 3.5 percent. China’s inflation rate averaged 3.8 percent in the first quarter and 5.4 percent in 2011.

‘Mild Recovery’

A pickup in world trade next year may help drive a “mild recovery” in China’s expansion, the World Bank said, raising its 2013 growth forecast to 8.6 percent from a January estimate of 8.3 percent.

China’s trade surplus may drop to 3.1 percent of gross domestic product this year from 3.4 percent in 2011 while the current account excess will rise to 3 percent from 2.8 percent, according to the World Bank’s projections. China posted the largest trade deficit since at least 1989 in February as exports grew less than forecast and imports surged.

The shrinking trade surplus will result in a slower accumulation of foreign-exchange reserves and the Chinese currency will appreciate at a slower pace as long as the weak external environment weighs on export volumes and prices, the World Bank said.

Inflation in the nation this year will average 3.2 percent as growth slows, commodity-price “impulses” fade and the property market cools further, the report estimated.

Aging Population

China will face a “structural” slowdown in GDP expansion as the nation adjusts its growth model and experiences “major demographic change” including an aging population and a shrinking labor force, the World Bank said. It cited estimates that forecast a moderation to an annual 5 percent by 2030 from an average 8.5 percent from 2011 to 2015. Growth averaged 10.5 percent a year from 2007 to 2011.

A moderation in China, which accounts for 80 percent of the combined GDP of developing economies in East Asia, “distorts” the regional economic picture, the World Bank said in today’s report.

Growth in developing countries in the East Asia and Pacific region may slow to 7.8 percent this year from 8.2 percent in 2011. Excluding China, expansion would accelerate to 5.5 percent from 5.2 percent due to “sufficient vigor” in domestic demand in some economies, the lender estimated.