Reuters | Fri Jun 18, 2010 | 1:09pm IST
China’s economic prospects remain good despite the frailty of the global recovery, while a spate of big pay increases is unlikely to touch off a wage-price spiral, the World Bank said on Friday. In a quarterly economic update, the bank reiterated its recommendation that China raise interest rates and allow more exchange rate flexibility so it can better tailor monetary policy to its domestic needs. A string of high-profile pay rises in southern China, some exceeding 20 percent, was partly a cyclical phenomenon reflecting a strong rebound in the labour market after the financial crisis put a lid on wage growth, the Washington-based lender said. "Viewed over a two-year horizon, these increases are within historical norms," the report said. It said the response to demands for pay rises would vary from company to company. "However, given the flexibility of China’s labour market and the track record of China’s overall manufacturing sector in absorbing wage increases and keeping unit labour cost growth down, this is unlikely to set in motion an unwarranted wage-inflation spiral."
Going further, the bank said manufacturers have been so successful in containing costs, boosting competitiveness and upgrading products that China gained market share and exporters improved their margins during the downturn. In the first five months of 2010 export volumes were an estimated 10 percent higher than two years earlier — before the global crisis, even though partner countries’ imports were still below pre-crisis levels, the bank noted. China’s advance is being helped by strong productivity growth, which has cushioned the impact of downward price pressures for manufactured goods globally, it added. "Indeed, profit margins in sectors that export a large share of output such as textiles and electronics now exceed pre-crisis levels, even though export prices are still down substantially."
Export volumes are likely to slow as the year wears on as global restocking is completed and demand cools, especially from Europe, China’s largest trading partner, the report said. The bank identified debt worries in high-income countries as a big risk for the world economy and, by extension, for China. "Market concerns about sovereign liquidity and solvency in the euro zone periphery or elsewhere could turn into a real and contagious sovereign debt crisis." "Most of the markets’ attention has so far been on Europe. However, the U.S. fiscal outlook is also precarious," it added. Increased global risk matters for China, the world’s leading exporter. "But, overall growth prospects remain solid and much less uncertain than a year ago," the bank concluded.
It said it now expected a "more pronounced" deceleration in growth after a strong start to 2010 as last year’s super-loose macro-policy stance moves back towards normal and steps to cool the real estate sector start to bite. Still, it kept its forecast for 2010 gross domestic product growth unchanged at 9.5 percent and pencilled in 8.5 percent for 2011. That is a touch lower than the 8.7 percent forecast in the bank’s previous update in March but is the same as the projection in the bank’s Global Economic Prospects published on June 10. Risks to the growth forecast are two-way and balanced, Friday’s report said. Recent property tightening steps had reduced the threat from rapidly rising housing prices, but last year’s monetary stimulus could still cause problems for local government finances and lead to bad loans, the bank said.