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WB chief economist warns China of deflation, overcapacity

World Bank senior vice president and chief economist Justin Yifu Lin has warned that China's sustained development will require re-balancing the economy.

China had sound fiscal position and 2 trillion U.S. dollars of foreign reserves, plus room for industrial and technological upgrading, Lin said during the 2009 Nobel Laureates Beijing Forum on Wednesday.

"I think it's a good time for the government to focus more efforts on rebalancing the economy and getting more growth out of the domestic economy," he said.

"Besides industrial restructuring, China should pay more attention to the restructuring in the financial sector."

Small and medium-sized enterprises, which employed 80 percent of workers, lacked access to financial services because the sector was dominated by large banks that mainly served large companies, he said.

"The small businesses' lack of access to financial services curbs their growth and employment, which would cause larger income gaps."

He said the Chinese government had succeeded in dampening the impact of the global economic crisis, especially with its 4-trillion-yuan stimulus package unveiled last year.

Eighty percent of the package would go to infrastructure construction, of which half of the funds were expected to be spent in projects relating to energy conservation and environmental protection.

"These investments can boost consumption and create more jobs in the short term. In the longer term, they can lead to a sustainable development," he said.

"People think investment would cause inflation, but I'm more worried about deflation," he said.

"A major challenge faced by the Chinese and global economy is the risk of excess capacity. If the problem isn't eliminated, it may cause deflation. More jobs may be lost and corporate bankruptcies surge as spending and investments slide, compounding the crisis."

The Washington-based World Bank last week raised its 2009 growth forecast for China from 7.2 percent to 8.4 percent, following similar moves by the International Monetary Fund and the Asian Development Bank.

Economists expect China to be the first major economy to emerge from the worst global slump since the 1930s.

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