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Warning against share correction

By Zhang Yu (China Daily)
Updated: 2007-05-31 06:41

The World Bank has raised its forecast for China's economic growth but warned that food price pressures could spill over to cause more general price increases.

It also warned of a sharp correction in the booming stock market, a warning that came the same day the bourse saw a 6.5 percent fall.

Any sharp correction, the multilateral agency said, could damage the new-found confidence in the capital market.

It could also result in large losses of financial wealth, especially for vulnerable groups like retirees and low-income earners, said the report.

China's economy may grow 10.4 percent this year, the World Bank said in its quarterly update released yesterday, up from a November forecast of 9.6 percent growth.

"The international economy is far better than we thought and China's domestic policy stance is less tight than expected, that's the two reasons why we revised up the forecast," said Bert Hotman, chief China economist at the World Bank's Beijing office.

In the first quarter of this year, China's economy expanded 11.1 percent year-on-year, up from 10.5 percent in the second half of 2006. "Growth continues to be powered by the traditional engines of external trade and investment," said the report.

Although the World Bank believes China's overall economy does not appear overheated in demand-supply terms, it expressed concerns over food price pressures and the potential stock market risks.

International grain prices have increased sharply recently. Up untill April, they rose around 20 percent, with maize price rises particularly high due to low stock and higher demand as well as rapid growth of maize-based biofuel production.

"Rising international food prices have their consequences for China as well and could push up inflation further," said Hotman. Food makes up one-third of consumer spending and the CPI (consumer price index) basket in China.

Price rise has picked up from last year's 1.5 percent. The World Bank has raised its inflation projection this year to 3.2 percent, up from February's prediction of 2.5 percent. This estimate is well above the central bank's target of 3 percent.

"Avoiding or limiting second-round impact of food prices via other prices and wages is important," said the report.

Concerns of a spillover have already been raised over the recent sharp rises in pork prices.

The World Bank also believes the underpricing of IPOs will make China lose a large amount of state property to institutional investors. The "debut price" of IPOs was on average 70 percent higher than the IPO price in the first two months of this year in China.