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World Bank: China Needs Tighter Monetary Policy to Control Growth

The World Bank says China's economy grew faster than expected in the first quarter of this year, largely due to increasing exports. The bank says the economy should now begin to slow, but China should tighten monetary policy to keep credit and investment growth in check.

The World Bank has issued a revised projection for China's 2006 economic growth rate to 9.5 percent, up from an earlier estimate of 9.1.

The bank's quarterly economic report says much of the growth is due to stronger exports, which have helped push China's foreign exchange reserves to $875 billion - the highest in the world.

The report says all that excess cash is causing problems in other areas of the economy.

It warns for example that high levels of cash can lead to excess speculation in real estate - a situation already prevalent in China. Too much cash on hand could also induce Chinese banks to lend money without sufficient controls, adding to an already serious problem of non-performing loans.

Louis Kuijs, a senior economist on China for the World Bank and the main author of the report, says China needs to increase interest rates to reduce the money supply, but says the rise should be gradual.

"Any drastic tightening in China would reduce imports and therefore blow up the trade surplus, which could lead to further complications on monetary policy and may also aggravate tensions in the international sphere," he said.

China's trade surplus with the United States has come in for broad criticism in Washington. Government officials and members of Congress have charged that Beijing has increased its exports by keeping the value of its currency artificially low.

Kuijs says speeding up the appreciation of the Chinese currency, the yuan, could help reduce liquidity by reducing the money available from exports.

"A faster pace of acceleration would also help with reducing the current account surplus, and re-balancing the growth pattern in China away from reliance on exports more to domestic demand," he said.

Kuijs says other ways the Chinese government can raise domestic consumption include increased spending on public services, speeding up financial sector reforms, and shifting subsidies from the manufacturing to the service sector.