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The World Bank this week raised its forecast of China’s economic growth in 2011 for the second time in as many months and said it was too early for Beijing to halt policy tightening, not least because of inflationary risks, according to CNBC.com.

In its latest quarterly update of the world’s second-largest economy, the bank slashed its projection of China’s 2011 current account surplus to 3.6% of gross domestic product — comfortably below the 4% ceiling mooted by U.S. Treasury Secretary Timothy Geithner for G20 countries.

Following stronger-than-expected outcomes in the past two quarters, GDP is now likely to expand 9.3% in 2011, slower than last year’s 10.3% but still a “healthy” rate, the World Bank said.

It had forecast 9.0% in a regional survey in March and 8.7% in its previous China update last November.

The bank, which pencilled in GDP growth of 8.7% for 2012, said there were risks both ways to its forecasts, although the report accentuated the downside dangers.

As a result, flexibility in both monetary and fiscal policy was key.

“The macro stance needs to be normalized fully to address macro risks including on inflation and the property market,” the report said.

The bank raised its forecast of year-average consumer price inflation this year to 5.0 %. Just last month it had projected 4.7%; in November it was expecting 3.3%.

Nevertheless, the bank said inflation, which rose to a 32-month high of 5.4% in the year to March, was unlikely to climb further as food price increases were slowing.

The higher global commodity prices that have helped fuel Chinese inflation prompted the World Bank to scale back its forecast of China’s 2011 current account surplus to $264 billion from $356 billion in November.

That would reduce the surplus to 3.6% of GDP from 5.1% in 2010 and 10.1% as recently as 2007.

The World Bank said strong domestic demand and relative price changes has reduced the relative importance of external trade for China. The share of exports in GDP, for example, fell to 29% last year from a peak of 39% in 2006.

The yuan’s real exchange rate has also risen more than commonly assumed if measured against the broadest measure of inflation — China’s GDP deflator — instead of the narrower consumer price index.

By this gauge, the currency rose 6.6% a year on average against the dollar between 2005 and 2010 and by 5.5% a year against a basket of currencies of China’s trading partners, the bank calculated. Source: CNBC.com

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