China's economy is forecast to expand 9.3 percent this year, moderating to 8.7 percent in 2006, strengthening the case for projecting a "soft landing," the bank said in its China Quarterly Update.
"China's growth is holding up unexpectedly well," Bert Hofman, the World Bank's chief economist for China, told a briefing in Beijing. "We had expected a bit more of a slowdown."
Chinese policy makers have been scrambling for the past two years to engineer a gentle slowdown of the economy, aiming to cool down overheated sectors without throwing millions out of their jobs.
They now seem to be succeeding as an expected slowdown in exports will probably be partly offset by more active spending at home by consumers and enterprises.
Exports in 2006 are expected to rise 15.5 percent, down from a forecast 23.6 percent for this year, the World Bank said.
The slowdown will come despite a pickup in global demand because of supply-side factors including a levelling off in foreign direct investment, which typically ends up being used to build new factories in export zones.
Domestic consumption next year is seen growing 7.3 percent, up slightly from a seven-percent increase this year. "Household consumption will be supported by recent high income growth. In addition, planned tax policy should support household after-tax incomes in 2006," the report said.
One recent tax measure that could help boost consumer spending is a doubling of the personal income tax threshold to 1,600 yuan (198 dollars). "(It) will reduce the tax burden and exempt many income earners from paying income tax."
On the other hand, consumer spending in the countryside, which for the past quarter century has seen far more moderate growth than the cities, will remain a weak link.
It will be difficult to sustain the recent rapid rural income growth given the one-off nature of recent measures benefiting China's 800 million rural dwellers, including a removal of agricultural taxes and rural fees.
Meanwhile, investment could still overheat because of increased liquidity in the banking sector, the World Bank said. "Investment is likely to continue to grow faster than consumption into 2006, and policy measures may be required to dampen investment," the report warned.
While China's overall growth is likely to remain among the highest in the world, the government is faced with the challenge of adjusting overall growth patterns, it said.
Inequality is on the rise, not just between the cities and the countryside, but also internally within rural and urban communities, said Hofman.
"It's your neighbour that gets rich," he said. "You actually see that people who used to be all equal suddenly see much more variation. Some have much better cars than the others, much better apartments than others."
Policy makers could try to create greater equality by taxing the rich, but that might backfire as it would weaken the incentive to work, the World Bank said.
A better way would be for China to encourage the flow of people from the stagnant countryside to the vibrant cities, according to Louis Kuijs, a senior economist with the World Bank in Beijing.
"One can do that by creating more jobs in the cities," he said. "That would mean a less capital-intensive, more labour-intensive pattern of growth, especially more labor-intensive growth in the urban sectors."