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TOPWRAP 1-Upturn seen in China and Japan but caution prevails

Published 06/17/2009, 11:14 PM
Updated 06/17/2009, 11:24 PM

* World Bank raises China growth forecast; still wary

* Japan manufacturers less gloomy - Reuters Tankan

* Obama urges biggest financial reforms since 1930s

* Nikkei falls as banking shares hit

* Business group sees UK economy shrinking 3.8 pct this year (For more on the global crisis, click)

By Alan Wheatley and Izumi Nakagawa

BEIJING/TOKYO, June 18 (Reuters) - Massive stimulus spending will keep China growing at a respectable clip but a rapid rebound is unlikely, the World Bank said, while a Reuters survey showed confidence among Japanese manufacturers improved sharply in June.

Policymakers in the world's second- and third-largest economies have been cautiously optimistic on a recovery in their economies in recent days, after a collapse in global trade in 2008 slowed China's breakneck growth and pitched Japan into a deep recession.

U.S. President Barack Obama laid out tough regulatory reforms, vowing to halt "a cascade of mistakes ... over decades" that had eroded bank and market oversight and triggered the financial crisis.

Japanese shares fell 1.8 percent, although some markets elsewhere in Asia made slight gains.

A belief that the worst is past in the deepest global recession in six decades has driven world stocks up around 40 percent from a March low. Now investors have begun to seek further evidence of a real upturn.

"The market is feeling cautious after the strong gains of the last three months, and uncertain as to how strong the recovery will be and when it'll come through," said Shane Oliver, head of investment strategy at AMP Capital Investors in Australia.

CHINA GROWTH

In its quarterly update on the world's biggest emerging economy on Thursday, the World Bank raised its China forecast for economic growth this year to 7.2 percent from the 6.5 percent projected in March.

The bank welcomed an unfolding surge in government-influenced investment, triggered by Beijing's 4 trillion yuan ($585 billion) stimulus. And it said more domestic demand was helpful for the world economy.

"However, it is unlikely to lead to a rapid, broad-based recovery in China, given the current global environment and the subdued short-term prospects for market-based investment," it said.

"China's economic growth is unlikely to rebound to a high single-digit pace before the world economy recovers to solid growth."

On the capital account, the bank is now pencilling in whopping outflows of $170 billion this year, up from just $7 billion in 2008. As a result, the pace at which China adds foreign exchange reserves will slow dramatically.

In Japan, a Reuters poll showed manufacturers have grown much less pessimistic about business over the last month, but consumer reluctance to spend has reinforced concerns that the recovery from a deep recession will be long and slow.

Recent Japanese data has seen rising exports and industrial output, and that fed into a much higher reading in the Reuters Tankan for both manufacturers and the service sector.

The survey may point to a sharp rebound in the quarterly Bank of Japan Tankan survey, due out on July 1, from a record low in the first quarter, when businesses were reeling due to sliding global demand and a severe squeeze in corporate funding.

But while service-sector sentiment bounced off the record low hit in the Reuters survey in May, retailers complained that consumers were still not loosening their purse strings due to worsening job conditions.

"Japan's economy is very spotty and the speed of the recovery is different when you compare different parts of the economy," said Takahide Kiuchi, chief economist at Nomura Securities.

"The economy could run out of steam starting from the summer and it will be very easy to fall into a double dip. Exports of materials to China are doing well now, but final demand isn't increasing globally."

REGULATORY REFORM

Export-driven China and Japan have both been hit by collapsing demand from the United States and Europe in the wake of a banking crisis that erupted when a long credit boom fuelled increasingly risky lending, notably in U.S. mortgages.

In an effort to avoid a repeat, President Obama on Wednesday outlined wide-ranging reforms of financial regulation.

A centrepiece of the plan is giving the Federal Reserve new powers over "systemic risk" in the economy with the aim of preventing future disasters like September's collapse of Wall Street giant Lehman Brothers and the taxpayer bailout of American International Group, once the world's biggest insurer.

"My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression," Obama said in a speech at the White House.

In Britain, hard-hit by the downturn due to its long housing and credit booms and reliance on the financial industry, a business group predicted the economy would contract by 3.8 percent this year and see only a muted recovery in 2010.

The British Chambers of Commerce said on Thursday the worst of the recession was probably over and output would likely turn positive in the fourth quarter of this year.

But it said recovery was not guaranteed and there was a risk the economy could worsen again if record low interest rates and expansionary fiscal policy were withdrawn too early.

"A temporary rebound driven primarily by the stock cycle will not produce a sustainable recovery unless consumer spending, investment and exports start to improve," said BCC Chief Economist David Kern. (Writing by Alex Richardson; Editing by Jan Dahinten)

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