The World Bank yesterday raised its growth forecast for the Chinese economy next year, citing favourable domestic macroeconomic prospects.

The Washington-based bank expects China to register a 9.6 per cent growth in its gross domestic product (GDP) in 2007, up from its previous forecast of 9.3 per cent made in August, the bank said in its latest quarterly China Economic Report released yesterday.

The bank's growth forecast for the Chinese economy this year remained unchanged at 10.4 per cent.

The Chinese economy expanded 10.4 per cent in the third quarter, down from a decade-high 11.3 per cent recorded in the second quarter.

"Prospects for the Chinese economy remain robust," the bank said.

"Looking ahead, underlying domestic economic conditions remain favourable to rapid growth," it said, pointing to 30 per cent annual corporate profit growth, ample liquidity in the banking system and robust enterprise investment growth.

Although the government's macroeconomic control measures to slow down investment growth have already had a significant impact, government-led investment in "bottleneck" infrastructure such as transport and energy is likely to remain buoyant, the lender said.

The bank noted domestic consumption "should continue to benefit from rising incomes, particularly in urban areas."

In addition, the external environment, where prospects for a soft landing of the world economy remain good, is also favourable for the Chinese economy in the next year.

"China is relatively well-placed to deal with a mild global slowdown, which would tone down overall activity and reduce the current account surplus," the lender said in the report.

China's key economic challenge is to rebalance its economy, the World Bank said.

"Concerns about high investment growth and the pattern of growth have to be addressed by structural reforms," said Louis Kuijs, the World Bank's senior economist on China and one of the authors of the report.

China should shift the pattern of growth from industry to services, and rely more on domestic consumption and less on investment and exports, the bank suggested.

The prices of land, energy, water, utilities and other natural resources need to rise to encourage the shift from manufacturing to services, the bank suggested.

Kuijs suggests government spending should focus on education, healthcare, infrastructure and household consumption to stimulate economic growth.

But the World Bank said the Chinese economy faces other risks, both internal and external.

"Upside risks remain as investment growth may rebound with abundant liquidity in the banking system and higher profit growth," it said in the report.

Continuing to mop up liquidity in the banking system remains necessary, the bank said, noting that abundant bank liquidity is at the core of rapid credit growth.

Meanwhile, China's money supply growth rebounded in October.

M2, the broadest measure of money supply that covers cash in circulation and deposits, jumped 17.1 per cent year-on-year last month, up from the previous month's 16.8 per cent, figures from People's Bank of China showed.

China's economy also faces several global risks, the World Bank cautioned. "On the economic front, disorderly adjustment of the still large 'global imbalances' large current account deficits and large surpluses in some countries remains a key risk," the bank said.

Source: China Daily