The World Bank Thursday projected China's economic growth of 9.2 percent in 2006, which is based on the newly revised gross domestic product data and is equivalent to an unchanged forecast of about 8.7 percent based on the old one.

In its China Quarterly Update released Thursday, the bank presented a benign outlook for China's economy in 2006, saying China will benefit from solid export demand, while profit and credit developments suggest robust investment in 2006.

Bert Hofman, lead economist for China with the bank, said: "consumption may not accelerate much in 2006, though, held back by subdued rural income prospects."

China's economy faces international risks including a disorderly adjustment in global imbalances and trade tensions, even though its trade surpluses are likely to fall, he said.

The main domestic risk is that ample liquidity, or free cash in the banking and corporate sector that may be used as credit loans or for investment, will refuel credit and investment, he explained.

For macroeconomic policy, he said, this setting implies that the "prudent" stance announced last year by the Chinese government is appropriate for this year as well.

"Monetary policy could in the short run focus on absorbing some of the excess liquidity to reduce the risk of excessive credit growth," said the economist.

"This task may be complicated somewhat by the rapid financial innovation, whose impact should be closely watched. The overall fiscal stance needs little change for now, but a shift towards social spending is needed to redress China's macroeconomic and structural imbalances."

Over time, with a rebalanced economy that relies more on services and consumption, tax revenues may come under pressures. That would need to be countered by reform in tax structure and administration and medium-term expenditure restraint, he said.

China's economic growth hardly slowed in 2005, with domestic demand firmly taking the lead over net trade in the second half, according to the quarterly update.

While China's 2005 trade surplus recently grabbed the headlines, the contribution of net trade to growth had already turned negative by the end of last year, with solid consumption growth and strong investment growth, while exports decelerated.

"Notwithstanding the large build-up of foreign reserves in 2005, lower non-FDI capital inflows in the second half suggest that the new exchange rate regime should over time add to domestic stability," the bank said in the report.

Source: Xinhua