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China hope against slowdown

By Xin Zhiming (China Daily)
Updated: 2008-02-21 08:41

Beset by lingering economic woes, the world can seek support in China, which has plenty of options to cope with any risk of a domestic slowdown, said David Dollar, the World Bank's country director for China.

"We remain cautiously optimistic about the Chinese economy," he told China Daily in an exclusive interview.

The World Bank forecast in its latest China report this month that the country's economy will grow by 9.6 percent in 2008, compared with the previous estimate of 10.8 percent.

The recent snowstorms that hit the country's central and southern regions will only have a "temporary" effect on the overall economy, he said.

The CPI in January hit an 11-year high of 7.1 percent, but "a bit disturbing" was all that Dollar thought about it.

Even if the world economic slowdown worsens, as is widely expected, "China still has a lot of options keeping the world economy healthy", he said.

The US economy, battered by the subprime crisis and the resultant credit crunch, is now thought to be standing on the verge of recession. The International Monetary Fund has already marked down its forecast for US growth to 1.5 percent this year.

As the US crisis spreads, the world economy is expected to slow down significantly this year. The World Bank has said it may expand by 3.3 percent this year, down from 3.6 percent last year.

The global economic slowdown will have some effect on China, reducing foreign demand for Chinese products, but China's growth would still be "very healthy" at 9.6 percent, Dollar said. "China would be the main source of growth for the world economy if it gets anywhere close to that forecast."

China has a number of cards at its disposal if the global economic situation worsens, he said.

The World Bank feels that if the global economy does indeed encounter an unexpectedly large slowdown, China can quickly come up with fiscal stimulus measures. It can offer subsidies to combat rising prices, said the bank's report.

"It can put more money in the rural economy, rural health and education," Dollar said. "This will be very good for social issues and also for the macroeconomy under that circumstance."

As part of their cooperation programs, the World Bank is helping China design rural health reform plans, Dollar said.

The government is trying to build a harmonious society and a new prosperous countryside, as part of which it has scrapped the agricultural tax for farmers, initiated a rural cooperative health scheme and guaranteed free nine-year compulsory education for poor rural children.

Dollar said those measures, although beneficial for farmers and the economy as a whole, would not provide instant stimulus for the economy. "The most convenient stimulus would be to put money in people's pockets quickly," he said, suggesting tax cuts to stimulate consumption.

"China has pretty high value-added taxes," he said. If the country cuts value-added taxes in 2008, people would rush to spend, which would boost consumption, he said. "A tax cut is always the best stimulus."

China has slashed personal income taxes. It has also selected the three northeastern provinces to pilot a value-added tax reform since 2004 to lower the tax rate.

The current value-added tax regime was started in 1994, when the country was experiencing the risk of overheating driven by fierce infrastructure construction and fixed-asset investment. The tax regime was aimed at offering a hand in curbing growth, and was thus designed to disallow tax deductions for manufacturers to purchase equipment.