China's growth rate will decline to 7.5 percent next year, said the World Bank

    China's growth rate will fall to 7.5 per cent next year – its slowest for nearly two decades – the World Bank said yesterday as it sharply cut its outlook for the country's economy.

    In its quarterly report on the Chinese economy, the bank reduced its forecast from the 9.2 per cent growth it had been predicting only three months ago and said that the government should accelerate steps to rebalance the economy away from exports and investment towards more domestic consumption.

    The sharp cut reflects the rapid deterioration in the Chinese economy over the last two months, as a slowdown in the local housing market has combined with weaker demand from export markets.

     The Chinese economy expanded by 11.9 per cent last year and has been growing at double-digit rates since 2002, although activity was cooling gradually in the first half of the year before the international crisis deepened.

    “The impact of the international financial and economic turmoil on China's economy has been manageable so far, but is expected to intensify,” said Louis Kuijs, economist at the World Bank in Beijing. “Looking ahead, prospects are for a sharp reduction in export growth.”

    Even the reduced growth rate next year would rely heavily on higher public spending, the bank said. While government spending contributed 1.5 percentage points of growth last year, it would add 4 percentage points in 2009.

    Mr Kuijs said that China had ample room to lift public spending in the face of the rapid slowdown after running modest fiscal surpluses in recent years, and predicted that the budget deficit next year would rise to 2.6 per cent of GDP.

    However, the bank said it could be difficult to spend the money in an efficient and transparent manner, given the large size of the likely fiscal stimulus and the speed with which it was being executed.

    The government should introduce policies that improve living standards, rather than just invest in infrastructure.

    This should include more health and education spending and transfer payments to low-income groups, said the bank.