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By Kevin Hamlin

March 18 (Bloomberg) -- China’s economy is showing “early signs” of stabilizing as government-backed investment counters a slump in exports, the World Bank says.

The lender cut its forecast for the nation’s economic growth this year to 6.5 percent in a quarterly report released in Beijing today. Its estimate was 7.5 percent in November.

China is weathering the global slowdown better than many nations because its banks were largely unscathed by the financial crisis and the government quickly implemented a 4 trillion yuan ($585 billion) stimulus plan, the lender said. Government-influenced investment will surge 26 percent this year and contribute three-quarters of the economic expansion, it said.

“The government’s stimulus is working,” said Louis Kuijs, a senior economist at the World Bank in Beijing. “China’s fundamentals are strong enough to ride out this storm.”

Premier Wen Jiabao said last week that the nation’s 8 percent growth target was “difficult but possible,” adding that the government could add stimulus measures at any time. The spending plan through 2010 includes roads, power grids, pipelines and low-cost housing.

A “substantial part” of China’s surging lending in the first two months of this year was money for infrastructure projects, the World Bank said. Private-sector investment will retreat in 2009 after contributing the bulk of fixed-asset spending in the past two years, leaving the government the key role, it said.

Investment, Consumption

Still, the government should focus less on short-term targets for GDP and more on boosting consumption to rebalance the economy away from capital-intensive industrial investment, the lender said.

The new and former World Bank forecasts both predict the weakest growth since 1990, after a slowdown deepened in the fourth quarter of last year.

“There have at least been early signs of stabilization, although, given the international weakness, it is too early to expect a sustained rebound,” the lender said. “China’s growth can only rebound significantly and sustainably if the world economy recovers, and this does not seem likely to happen soon.”

The central bank has “further scope for expansionary monetary policy,” the report said, without making forecasts for interest rates or bank reserve requirements. JPMorgan Chase & Co. predicts reductions in both within a month.

Deflation Risk

The government can counter the risk of deflation by removing price controls to let costs rise for “some industrial inputs -- energy, water, utilities, natural resources and the environment,” the report said.

Depreciation of the yuan would be unlikely to stimulate export demand and unhelpful for boosting consumption, the World Bank said. The exchange rate will be supported “in the medium term” by the nation’s current-account surplus, it said.

Exports will shrink this year, the report said.

The global slowdown has underscored the need for the world’s third-biggest economy to rely more on domestic consumption and less on investment and trade, the bank said.

The government has “room to do more” to improve health, education and social security and to boost incomes, it said.

This year’s planned fiscal deficit, which may be equivalent to 3.2 percent of gross domestic product, is “sizable but manageable,” the report said.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@

from:bloomberg.net