Zoellick Predicts China ‘Soft Landing’ Even as Growth Model Unsustainable

Bloomberg

China is likely to see little slowdown in growth this year even as its government needs to overhaul its economy to manage expansion over the next two decades, World Bank President Robert Zoellick said. The economy will probably have a “soft landing” in the near term, Zoellick said today in Beijing, introducing « China 2030, » a report by the lender and Chinese state researchers. The nation needs to redefine the government’s role, alter the structure of state enterprises and gradually allow market- set interest rates, according to the executive summary.

Policy makers inside and outside China are grappling with how the engine of growth for the world economy will weather Europe’s debt crisis in the short term and avoid a sharper slowdown over the longer term. Some recommendations today echo previous reports; the World Bank in June 2010 urged more use of interest rates to manage the economy.

“As China’s leaders know, the country’s current economic- growth model is not sustainable,” Zoellick said in a speech today. He told reporters later that “in the near term, I personally believe that China is likely to have a soft landing.”

The World Bank said in November that China is heading for a small slowdown of growth in excess of 8 percent in 2012 and has fiscal scope to cushion its economy from an escalation in Europe’s debt crisis. Gross domestic product expanded 9.2 percent last year.

‘Hukou’ System

China needs to rely more on markets and the private sector, alter its “hukou,” or residency-permit, system and provide basic social protection to all its citizens, Zoellick said today. The report was co-authored by the banks and the Development Research Center of China’s State Council.

The MSCI Asia Pacific Index (MXAP) of stocks fell 0.2 percent at 12:52 p.m. in Tokyo. The Shanghai Composite Index rose 0.7 percent at the 11:30 a.m. local-time break, on track for the seventh straight daily gain.

Zoellick said today’s report is meant to give direction and recognizes that ideas need further debate before details can be implemented. The full report is scheduled for release at about 4 p.m. local time today, according to the Washington-based lender.

The report was conceived to help China avoid the so-called middle-income trap that often stalls the productivity and income growth of countries when their per capita incomes reach $3,000 to $6,000, Zoellick said in September.

Economic Restructuring

Also at today’s event, Chinese Finance Minister Xie Xuren said the government will continue to deepen changes and accelerate economic restructuring. It will also focus more on employment, he said.

The government needs to commercialize the banking system and deepen capital markets, according to a summary of the report released by the World Bank. China’s growing weight in world trade, the size of its economy and its role as the world’s largest creditor will make the internationalization of the yuan “inevitable,” according to a press release issued separately.

“Support for reforms will be stronger if the plans are based on full participation throughout all levels of society,” the press release said. “The biggest risk is that vested interests will try to thwart reforms.”

The report urges China to “strengthen the fiscal system” and ensure that “local governments have adequate financing to meet heavy and rising expenditure responsibilities,” according to the summary. Local governments had 10.7 trillion yuan ($1.7 trillion) in debt at the end of 2010, 79 percent due to banks, according to the country’s first audit released in June.

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