World Bank warns China at risk from global trade imbalances

The bank based its new prediction on the "still surprisingly strong" 9.6 per cent growth in gross domestic product seen in the third quarter, and said the prospects for the world's second-largest economy "remain sound".

The bank forecast 2011 growth of a scaled-back but still robust 8.7 per cent.

It suggested in its latest quarterly update on China that a more flexible exchange rate mechanism would allow for more policy options such as further interest rate hikes, which would help Beijing contain mounting inflation.

"The combination of large current account surpluses in some countries, including China, and large current account deficits in other countries, notably the US, poses financial and economic risks, including from possible tension and contentious policy responses to them," the bank said.

It said those risks were "probably the key ones for China", adding: "In this connection, a lack of success in rebalancing China's growth pattern would be among the more serious medium-term risks, for China and the world economy."

Global trade woes and the prospect of a looming "currency war" are expected to dominate discussions at next week's Group of 20 summit in Seoul.

G20 finance ministers vowed to move towards more market-determined exchange rate systems and "refrain from competitive devaluation of currencies" when they met last month in the South Korean city of Gyeongju.

The United States and Europe accuse China of deliberately holding down the value of the yuan to benefit exporters. The currency has appreciated about two percent against the dollar since Beijing pledged in June to loosen its grip.

China says that irresponsibly loose US monetary policy is causing a wave of speculative cash to flood emerging markets in search of higher non-dollar returns.

The World Bank said those capital inflows would "add to the upward pressure on the renminbi", or yuan, but should be "more manageable" in China, adding they "should not be a reason not to raise interest rates".

China's central bank last month raised one-year lending and deposit rates for the first time in nearly three years as Beijing ramped up efforts to contain rising inflation and cool the red-hot real estate market.

The World Bank, which provides financial and technical aid to developing nations, upped its 2010 growth forecast from 9.5 per cent, much higher than the government's own target of eight percent.

China posted first-quarter economic growth of 11.9 per cent and 10.3 per cent expansion in the second quarter.

It emphasised the need for China to wean itself off its dependence on exports and continue to boost domestic demand, saying: "China's economy, its role in the world economy and its external surplus are now substantially larger than five years ago."