World Bank Says China Recovery Hopes May Be Premature

May 20 (Bloomberg) -- Enthusiasm about an economic recovery in China may be “premature” as private investment lags behind government spending, the World Bank said.

“Until we see a recovery in private investment, it’s hard to get too excited about the future,” David Dollar, country director for China, said at a forum in Beijing today.

The Shanghai Composite Index has climbed 47 percent this year on optimism that a 4 trillion yuan ($586 billion) stimulus package will revive growth after exports collapsed because of the global recession. The world’s third-biggest economy is “struggling” and may fall short of the government’s target of an 8 percent expansion this year, Oppenheimer & Co. said this week.

Private investment, the main driver of growth, was “way down” in the first quarter, Dollar said, without citing a figure. Manufacturers have excess capacity and “a lot of the real-estate sector is over-built,” he said.

Shanghai’s stock index fell 0.1 percent as of the break in trading at 11:30 a.m. local time.

While China is the only one of the world’s five biggest economies that is still expanding, growth slowed to 6.1 percent in the first quarter, the weakest pace since at least 1999.

Stimulus spending has “stabilized” the Chinese economy, Dollar said, adding that it can’t be the source of long-term sustainable growth and the country needs to do more to increase consumption.

Borrowing Costs

China should raise the ceiling on interest rates for deposits, encouraging spending by improving returns for savers, he said.

A 30.5 percent gain in urban fixed-asset investment in the first four months from a year earlier, sparked by the stimulus plan, stoked investors’ optimism that a recovery is building.

Mark Williams, an economist with Capital Economics Ltd. in London, said May 15 that the official numbers don’t tally with other indicators, such as steel prices and excavator sales, suggesting that investment remains weak.

A recovery “lacks momentum” and hopes for a rapid rebound are receding, Williams said.

The central bank cautioned in a quarterly monetary policy report released May 6 that surging lending has been overly concentrated on government projects at the expense of small businesses. The recovery’s foundations aren’t solid, it said.

The World Bank is a lender formed after World War II to help nations reduce poverty.