The World Bank says the outlook for China's economy remains benign as it will benefit from solid export demand and profits and credit developments suggest that investment remains robust.

The international setting is favorable, the bank said in its latest China Quarterly Update, which offers an update on recent economic and social developments and policies in China and presents findings from the ongoing World Bank work on China.

"After a good outcome for the world economy in 2005, forecasts for the US economy in 2006 remain positive, Europe's growth prospects are strengthening somewhat, and in Japan domestic demand is perking up," the bank said.

The bank said external demand for China, therefore, is expected to hold up well in 2006, which should prevent a too abrupt a deceleration in exports stemming from negative domestic supply side effects -- including a leveling off of foreign direct investment, some exchange rate appreciation, tax measures taken to discourage energy-intensive exports, as well as domestic demand recovery.

The World Bank projects that international industrial commodities prices will ease in 2006.

"While there are upward risks to this forecast, the rate of increase should decline considerably, which -- combined with a stronger exchange rate -- is driving our projection that increases of China's raw material prices should ease from 5.9 percent year on year in the fourth quarter to about 2 percent by mid-2006," according to the report.

The bank said that should mitigate inflationary pressures in China's commodity-intensive economy.

But it warned of international risks, including a disorderly adjustment in global imbalances and trade tensions, even though China's trade surpluses are likely to come down.

"The main domestic risk is that abundant liquidity will re-fuel credit and investment."

It said domestic economic conditions favor "stable, relatively fast growth".

The conditions include a favorable macroeconomic and financial setting and strong confidence.

In this climate, and given solid profit growth -- 20 percent year on year in the first 11 months of 2005, investment growth should remain strong, although probably not as high as in 2005, it said.

"We project GDP (growth domestic product) growth of 9.2 percent in 2006 (based on new data) and moderate inflation, with headline inflation depending on the possible adjustment of administered prices for public utilities (e.g., electricity, water, gas) and fuel planned for 2006.

With export growth easing and domestic demand strong, the current account surplus should decline in 2006, although it will take a while before it declines substantially, it said.

Changing the composition of domestic demand may take time. Household consumption will be supported by solid income growth, particularly in urban areas, some tax initiatives and other fiscal initiatives, including some further support for rural areas and an expected 15 percent wage increase for civil servants.

"But we do not see a dramatic pickup in consumption soon, largely because it is difficult to significantly boost rural income growth in China without much faster out-migration."

Despite a favorable (one-off) impact of removing agricultural taxes and rural fees, real rural per-capita income growth declined in 2005 to 6.2 percent, and compared to 9.6 percent in urban areas, it explained.

Rebalancing the composition of demand will have to hinge to a large extent on policies addressing structural issues, including public finance measures, financial sector reform, dividend policy and corporate governance, and these take time.

Probably the most viable way to change the composition of demand towards consumption is to move ahead on a dividend policy for SOEs and to ensure the revenues go through the overall budgeting process so that they can finance reforms in education, health, and social security, said the bank.

Source: Xinhua