China will benefit from solid export demand this year but it will take time for consumption to play a much-desired bigger role in generating growth, the World Bank said yesterday.

If local governments continue to be obsessed with pursuing high growth numbers, it threatens to derail the State's plan to shift its focus to stimulating spending rather than investing heavily on infrastructure.

A port is seen in this photo taken on January 11, 2006 in Nanjing, East China's Jiangsu Province. [newsphoto/file] 

In its China Quarterly Update released yesterday, the bank presented a robust outlook for China's economy in 2006, projecting a 9.2 per cent gross domestic product growth for the year based on recently-revised data, which it said is equivalent to its earlier forecast of 8.7 per cent based on the old data.

While domestic demand took the lead over net exports in fuelling growth in the second half of last year, strong external demand this year "should prevent too abrupt a deceleration in exports stemming from negative domestic supply side effects," including a levelling off of foreign direct investment (FDI), some exchange rate appreciation and tax measures taken to discourage energy-intensive exports, noted the update.

China's strategic focus is to boost domestic demand for the next five years, trying to reduce the economy's reliance on foreign trade. And the consensus is consumption should play a bigger role in promoting growth, after a few years when investment growth for a large part faster than expected was the major engine of growth.

While household consumption will be supported by solid income growth as well as tax and fiscal incentives, the World Bank said it did not expect a dramatic pickup in consumption soon, noting the difficulty in significantly boosting rural income growth.

"Rebalancing the composition of demand will have to rely 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," it said.

Investment is expected to remain strong due to factors such as favourable macroeconomic conditions, strong confidence, solid profit growth and, particularly, ample liquidity in the banking system, said Bert Hofman, World Bank's lead economist for China.

"Monetary policy could in the short run focus on absorbing some of the excess liquidity to reduce the risk of excessive credit growth," he said.

While this task maybe somewhat complicated by rapid financial innovation, Hofman said a more flexible exchange rate mechanism of the renminbi would have a stronger effect this year on reducing the pressure of sterilizing foreign currency inflows.

China's move last July to let its currency appreciate by 2 per cent and link it to a basket of currencies instead of the US dollar alone has achieved "a fair amount of success," he said, noting a presumable sharp decrease in non-FDI inflows in the second half of last year.