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2009-02-15 | All chapters

China Must Push Harder on Rebalancing - World Bank
Reuters 

China must move more aggressively to rebalance its economy away from industry and investment and towards services and consumption, particularly with growth slowing, the World Bank said on 12th February.

In a review of Beijing's progress on implementing its current five-year plan, which runs through 2010, the World Bank said that limited movement on rebalancing was hindering progress on reducing the big current account surplus, improving energy efficiency, and reducing urban-rural income disparities.

The report was prepared last year, before the full impact of the global financial crisis became clear in the form of rapidly shrinking exports and resulting widespread layoffs at factories.

But the World Bank said its recommendations, which include a stronger yuan <CNY=CFXS> and greater spending on social welfare, health care and education, are as valid now as ever.

"Indeed, in several ways, current economic conditions strengthen the case for rebalancing," Louis Kuijs, senior economist with the World Bank in Beijing, said in a statement.

"The subdued prospects for the global economy have increased the importance of boosting domestic demand and domestic consumption, which also is a key element of the rebalancing agenda," Kuijs said.

Economists have long said that China needs to rely less on investment and exports and more on domestic consumption, as evidenced by the abrupt slowdown in economic growth, to an annual 6.8 percent in the fourth quarter of 2008 from 13 percent in all of 2007, as U.S. and European demand has shrivelled.

Notably, the World Bank said that the lack of progress on rebalancing had limited job creation, as the reliance on heavy industry meant fewer jobs than would have been created if the labour-intensive services sector played more of a role in driving growth.

The government, concerned that the shedding of millions of jobs among migrant workers could have destabilising consequences, has made boosting employment a pillar of its economic work this year.
The World Bank highlighted the following policies as being needed to stimulate consumption, reduce domestic savings and promote the services sector:

-- Continuing to shift government spending from investment to social welfare, health and education.

-- Strengthening the yuan's <CNY=CFXS> exchange rate further, which would shift production from "tradables" to "non-tradables" and make monetary policy more independent.

-- Pursuing further financial reforms to improve the efficiency of capital allocation, which it said would benefit the services sector and small- and medium-sized enterprises.

-- Expanding the dividends paid by state-owned firms.

-- Accelerating reform of energy prices so that they better reflect their full cost.

-- Removing restrictions on the development of the services sector, for example by addressing monopolies and oligopolies in several important service sectors. (Reporting by Jason Subler; Editing by Neil Fullick)

Source: http://uk.reuters.com/article/marketsNewsUS/idUKPEK36741020090212?pageNumber=1