China's real economy is still holding up well and China's economic fundaments are strong enough though it is hit hard by the global crisis, says the World Bank's latest China Quarterly Update released on Wednesday.

In the report the World Bank downgrades China's GDP growth for 2009 to 6.5 percent as China's exports have declined sharply since November 2008. But that rate is still well above the 1.5 percent growth of World Bank's projection for the world economy.

"China is a relative bright spot in an otherwise gloomy global economy," said David Dollar, World Bank's country director for China at the press conference for the release of the report.

The report concludes that China's banks have been largely unscathed by the international financial turmoil and that the economy still has plenty of space to implement forceful stimulus measures. Private consumption in the country is resilient and should be able to grow significantly.

Louis Kuijs, the report's main author and senior economist of World Bank, thinks that the growth will be mainly driven by government-influenced investment and by focusing on infrastructure construction China is doing what other major economies like the US and EU are doing in its first response to fight against the crisis.

"It is right for China to make the fiscal stimulus package as the key part of the response to the crisis," said Mr. Dollar. However, both Mr. Dollar and Mr. Kuijs suggested that China not need additional general fiscal stimulus packages but instead target more at a better social security net.

Mr. Dollar added that China should further open its service sector and give more support to small and medium-sized enterprises because the future growth will come from the service sector and SMEs.

Mr. Kuijs attributes the export fall to the shrinking international demand. "There is nothing wrong with China's competitiveness," he said. Therefore, as the world economy will continue the downward movement, China's exports will face an overall grim year for 2009, although there may have some recovery if the problem of credit financing can be solved.

He did not rule out the risk of deflation as the CPI and PPI are both down for several months and there is still downward pressure on prices. But he believed that China has enough tools and weapons to deal with that if the risk is getting imminent in the future.

The report also warned that the 6.5 percent growth is much lower than the potential growth. The spare capacity as a result may lead to weaker market-based investment, less job growth and migration, downward pressure on prices, redirection of exports to the domestic market and import substitution in the coming years.

By People's Daily Online