The World Bank joins Goldman Sachs Group Inc., Morgan Stanley and UBS AG. in raising growth forecasts this year after a 4 trillion yuan (US$585 billion) stimulus package triggered record loans and surging investment. China, the biggest contributor to global growth in 2007, is relying on government spending as exports slump because of the world recession.

The bank said it’s “too early” to say there is a sustained recovery, citing the economy’s dependence on the stimulus and echoing a State Council caution Wednesday against excessive optimism.

“Despite all the World Bank’s caution, it did feel compelled to raise its growth forecast,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “That’s indicative of increased confidence regarding the global outlook right now.”

Extra stimulus

The bank said it’s “not necessary, and probably not appropriate” for China to add fiscal stimulus this year. Consumption is likely to slow, pushing down wages and employment, and the nation should retain room for stimulus in 2010, in case the global economy takes a turn for the worse, the bank said.

The Shanghai Composite Index rose 1.6 percent to an 11-month high. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, climbed 2.6 percent.

Gross domestic product grew 6.1 percent in the first quarter this year from a year earlier, the least since 1999, as exports slid because of the global recession.

The Chinese government forecasts an 8 percent expansion in 2009, which is the pace of growth it considers necessary to maintain employment and ensure stability. The economy is in a “critical” phase, the State Council said Thursday, warning that a recovery isn’t on solid foundations yet.

‘Improved somewhat’

“Overall growth prospects have improved somewhat, compared to three months ago, but with little carryover into 2010,” the World Bank said. “The massive monetary impulse of the first five months will support economic growth in the coming quarters.”

Goldman Sachs forecasts growth of 8.3 percent this year, Morgan Stanley estimates 7 percent and UBS predicts 7.5 percent.

“I don’t think China will see a V-shaped recovery back to high single-digit growth rates,” said Louis Kuijs, the World Bank’s senior economist for China in Beijing. “The impact of the policy stimulus next year can realistically not be as large as it has been this year.”

The World Bank, created after World War II to fight poverty, said “it may take time” before China’s currency, called the yuan or renminbi, becomes a major reserve currency.

“International experience suggests that several conditions need to be in place, including open capital markets; deep, liquid foreign exchange markets; well developed bond markets; and a more or less flexible exchange rate,” the report said. “It will take time before China has achieved these benchmarks.”

Source: Bloomberg