China's economic overheating risk declined in 2004: World Bank

Asian Economic News, Feb 7, 2005

BEIJING, Feb. 4 Kyodo

While China's economy continued to grow at a brisk pace in 2004, the risk of overheating has declined as measures to slow the pace of expansion cooled down domestic demand and investment growth, the World Bank said Friday.

The Washington-based institution's Beijing Office said in its China Quarterly Update report that the country faces a favorable economic outlook in 2005, backed by prospects of a healthy expansion in the global economy, robust increase in domestic demand and waning underlying inflation pressures.

''The 9.5 percent growth for 2004 surprised many,'' Bert Hofman, head of the office's Economics Unit, said in a statement. ''But domestic demand and investment growth are clearly slowing down.''

In the second half of 2004, domestic demand grew by 8.5 percent over the same period a year earlier, compared to almost 11 percent in the first half of 2004, the report said.

The 9.5 percent growth in China's gross domestic product in 2004 marked the fastest growth in eight years. It followed a 9.3 percent expansion in the previous year.

On the prospects for 2005, the report said, ''The external environment and domestic macroeconomic conditions suggest a favorable outlook.''

The global economy is expected to grow a healthy 3.2 percent, which is lower than the record year 2004, but still healthy, the report said.

The country's exports are expected to receive an additional boost from the removal of restrictions on textile exports as well as the weakening of the dollar, to which the nation's currency, the yuan, is pegged, the report said.

Current trends also suggest robust domestic demand growth, the report said, adding that investment growth is expected to slow somewhat but still show double-digit growth.

According to the report, key macroeconomic risks include a renewed pickup in investment growth, as well as further increases in foreign exchange holdings from capital inflows and the trade surplus, which could complicate monetary management.

On the yuan's tight peg to the dollar, the report only said that ''maintaining exchange rate stability while improving the exchange rate system remains a key objective of the authorities.''

China has kept the yuan pegged at around 8.28 to the dollar since the 1997-1998 Asian financial crisis.

The country has been under pressure to let its currency float freely. U.S. politicians and companies in particular argue the current arrangement keeps the yuan undervalued, giving Chinese exporters an unfair advantage in global markets.