China Needs to Rebalance Its Economic Model

China needs to rebalance its economy to focus more on domestic demand, and even more so if the developed economies are slowing down again, warned Monday the President of the World Bank, Robert Zoellick.

“I can not imagine that the pursuit of growth led by exports and investment can work for China over the next decade,” said Zoellick at a press conference after a five-day visit to China.

“And this challenge is even more evident if the major economies are struggling to resume growth. While China needs to rebalance its economy, relying more on domestic demand and increase consumption”, he said.

As for the short term, inflation remains the biggest challenge that faces the second global economy, said Zoellick mentioning its potential for social destabilization.

China is grappling with inflation, despite numerous interest rate hikes and bank reserve requirements, in July inflation reached its highest level in over three years to 6.5%. The index for August is due Friday.

The government also let the Chinese currency yuan appreciate in recent months, in order to limit imported inflation.

All these policies were well inspired, according to Zoellick, but it will take time to really work.
“It is too early to say this (inflation) has been set, but I think China has gone in the right direction,” said the president of the World Bank.

He also warned that this fall a “sensitive period” would be open to world major economies and concluded that European banks would be under pressure if the governments failed to strengthen investor confidence in sovereign debt.

“If the value of sovereign debt is increasing in Europe, banks will be stronger. But if governments are not able to handle the issue of sovereign debt, it no doubt will affect the banks.”