China must rebalance economy: World Bank chief

photo AFP

Robert Zoellick said the world's second-largest economy would have to focus more on domestic demand, and warned that the coming months would be a "sensitive time" for many of the major developed economies.

"It's hard for me to see that a continued reliance on export-led and investment-led growth will work for China over the next 10 years," he told journalists at the end of a five-day official visit to China.

"And that challenge will even become clearer if the major developed countries have a hard time resuming their growth. So China needs to rebalance its economy, rely on more domestic demand, and increase consumption."

The World Bank in July reclassified China as an upper middle income economy, putting it in a group of nations that he said needed to move on from the growth models they relied on while they were poor.

Zoellick said inflation remained the biggest short-term challenge for China's leaders, but that moves to rein in rising prices appeared to be working.

"It's too early to conclude that this has been solved, but I think China has been moving in the right direction," he said.

Beijing has been struggling to tame inflation, which hit a three-year peak of 6.5 per cent in July. The August figure will be published on Friday.

The government has raised interest rates five times since October and tightened lending restrictions numerous times this year to stem a flood of credit in the economy.

It has also allowed the yuan to strengthen at a faster pace in recent weeks to help curb imported inflation.

Zoellick said it was time for all countries -- and not just China -- to review their growth model, as a poor US jobs report on Friday added to fears that the world's largest economy is facing another recession.

"I believe this autumn will be a sensitive time for many of the major developed countries," he said, repeating a warning in a speech Saturday that the global economy was heading into a new "danger zone".

Zoellick also warned that European banks would come under pressure if governments failed to reassure investors about the security of their debt.

"If the values of sovereign debts strengthen in Europe, the banks will be stronger. But if the governments are unable to deal with the sovereign debt issues, it will undoubtedly put strain on the banks," said Zoellick.

His comments come after ratings agency Standard & Poor's last week said a second-quarter slowdown had increased the risk of a double dip recession in Europe, but that the region should escape with sluggish growth this year.