BEIJING, June 18 (Reuters) - Massive policy stimulus should enable China to keep growing at a respectable rate this year and next, but a robust recovery is unlikely given the weak global environment and softness in non-government investment, the World Bank said on Thursday.
In its quarterly update on the world's third-largest economy, the bank raised its forecast for gross domestic product growth this year to 7.2 percent from the 6.5 percent projected in its previous report in March.
The bank welcomed an unfolding surge in government-influenced investment, triggered by Beijing's 4 trillion yuan ($585 billion) stimulus package. 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. China's economic growth is unlikely to rebound to a high single-digit pace before the world economy recovers to solid growth," it said.
Growth in 2010 was likely to be 7.7 percent, the bank said, offering its first view of next year's performance.
A boom in bank lending in the first five months of the year would support growth in coming quarters. While the full-year outcome might not meet the official target of 8 percent, it would be "very respectable" given the global setting, the report said.
"On current projections it is not necessary, and probably not appropriate, to add more traditional fiscal stimulus in 2009," the bank said.
With its budget deficit set to leap to 4.9 percent of GDP this year from 0.4 percent in 2008, the government should instead keep some powder dry in case it is needed next year.
Policymakers should also have the confidence to emphasise forward-looking policies and structural reforms to promote service-driven consumption and energy efficiency, the bank said.
SLOWER RESERVE GROWTH
One of the key risks to the bank's forecast is that market-based investment will be lower than expected in light of excess capacity and poor profit prospects in many industries.
A full 6 percentage points of this year's projected 7.2 percent GDP growth will come from spending and investment that is either carried out or directly influenced by the government, with additional stimulus from lower tax revenues, the report said.
Government-influenced investment rose 39 percent in the first four months, up from an estimated 13 percent in 2008; by contrast, market-based investment rose just 12.6 percent, much less than last year's 20 percent increase.
The bank's definition of government-influenced investment covers utilities, transport, scientific research, water and environmental conservation, education, health care, social security, culture, sport and public administration.
It called the medium-term sales prospects for the real estate market reasonably good. But the outlook for some other sectors was less favourable as extensive spare capacity was exerting serious downward pressure on producer prices and profits.
"Thus, market-based investment may remain subdued for a while, particularly in manufacturing, where foreign sales make up between one-fourth and one-third of the total," the report said.
With net exports set to subtract from growth in 2009, after contributing 0.8 percentage point of last year's 9.0 percent rise in GDP, the bank forecast that China's current account surplus would shrink to 8.0 percent of GDP this year from 9.8 percent.
On the capital account, the bank is now pencilling in whopping outflows of $170 billion this year, up from just $7 billion in 2008, due to factors such as outward foreign direct investment, losses on foreign assets, repatriation of profits and "hot money" outflows.
As a result, the pace at which China accumulates official foreign exchange reserves will slow dramatically. The bank expects they will rise by $218 billion this year after increasing by $419 billion in 2008 and $462 billion in 2007.
However, the report noted that estimates of underlying capital flows are cloaked in uncertainty. As recently as March, the bank was assuming that China's capital account would be in balance this year.
In an illustrative scenario of China's medium-term prospects, the bank said exports could grow 9 percent a year over the next decade, 10 percentage points less than in the past 10 years.
That in turn would lower GDP growth by 2 percentage points a year. "This is significant, but not dramatic, compared to average GDP growth of 10 percent in the previous decade," the bank said.
For a table of the World bank's forecasts, double click on [PEK53561] (Reporting by Alan Wheatley; Editing by Ken Wills)