June 18 (Bloomberg) -- The World Bank raised its growth forecast for China this year and advised policy makers to delay until 2010 any additional stimulus plan to boost the world’s third-largest economy.

China’s economy will expand 7.2 percent in 2009 from a year earlier, up from a 6.5 percent forecast in March, the Washington-based lender said in a quarterly report released today in Beijing. Stocks gained after the announcement.

Goldman Sachs Group Inc., Morgan Stanley and UBS AG have also raised growth forecasts this year after a 4 trillion-yuan ($585 billion) stimulus plan boosted loans and investment. China, the biggest contributor to global growth in 2007, is grappling with slumping exports, and the World Bank said foreign-exchange reserves will grow this year at the slowest pace since 2005.

“The massive monetary impulse will fuel economic growth in coming quarters,” said Louis Kuijs, the World Bank’s senior economist for China in Beijing. “I don’t think China will see a V-shaped recovery back to high single-digit growth rates.”

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 yesterday, warning that a recovery isn’t on solid foundations yet.

“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.”

Foreign Reserves

Plummeting exports will contribute to a slower $218 billion growth in foreign-exchange reserves this year to $2.17 trillion, the lender said. The reserves surged $418 billion last year and $462 billion in 2007.

“There seems to have been an intent to let capital go out of China,” said Kuijs, referring to a series of overseas acquisitions by Chinese enterprises such as Hunan Valin Iron & Steel Group’s purchase of a 17.3 percent stake in Fortescue Metals Group Ltd. for A$1.3 billion ($1 billion).

Premier Wen Jiabao has expressed concern about the “safety” of China’s dollar assets and Kuijs said the outflows were consistent with a strategy of diversifying the country’s foreign reserves.

China may spend more than $500 billion on foreign resource investments over the next eight years, according to Deloitte Touche Tohmatsu.

Extra Stimulus

The World 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 from a year earlier, the least since 1999, as exports slid because of the global recession.

“Overall growth prospects have improved somewhat, compared to three months ago, but with little carry-over 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.

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.

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.”

Exports slid for a seventh month in May, dropping by a record 26.4 percent from a year earlier. The bank’s report said trade overall is likely to subtract from growth this year.

“China is still, in a global context, not big enough that it’s going to be the locomotive for a global recovery,” said Ardo Hansson, the bank’s chief economist on China.

China contributed 19.5 percent of world growth in 2007, the most of any nation, according to the International Monetary Fund.

Other projections by the World Bank indicated a budget deficit of 4.9 percent of GDP this year, up from the 3 percent forecast by China.

The report also contains long-term advice, including the importance of educating the workforce.

“A transformation of economic growth strategy toward one that is more solidly based on efficiency and knowledge is widely recognized as essential to China’s long-term prosperity,” the World Bank said. “Although such a transformation calls for a greater capacity for innovation, Chinese enterprises are not fully ready for it.”

The lender noted that the education level of China’s labor force is similar to Taiwan’s in the 1970s.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: June 18, 2009 07:39 EDT