RESIDENTIAL SPENDING SPREE: Newly built houses for survivors of the May 12, 2008 earthquake in Shifang of Sichuan Province, one of the hardest hit cities in the province, await occupants. China has stimulated the economy with massive infrastructure investment, including reconstruction in the quake-hit province (LIAO WENFEI)

In a sooner-than-expected turn of events, the Chinese economy has shaken off the economic downturn, experiencing only a few financial bumps as it moves toward prosperous times. But uncertainties still loom large, as rapid growth no longer seems to be the country's main concern—economic rebalancing for greater sustainability has since taken top priority. In its latest China Quarterly Update released in March, the World Bank pointed to the Chinese economy's prospects and offered suggestions for structural reforms. Edited excerpts follow:

Massive investment-led stimulus was key to driving the economy last year, but real estate investment has since taken prominence, while household consumption remains steady. After weakening in early 2009, labor market conditions improved, and employment and wage growth have held up well through the early months of 2010. Income and consumption were further supported by falling consumer prices throughout 2009 and government measures, such as lower consumption taxes for small cars and subsidies for household electrical appliance purchases in rural areas.

Overall, exports declined in 2009, even as China gained a larger global market share. With a steady flow of imports, external trade was a major drag on growth in 2009, leading to a sharp decline in the external current account surplus. In a heated real estate market, surging property prices triggered policy measures to expand affordable housing supply and curb speculation. Inflation is on course to be a significant burden in 2010, after remaining negative in 2009. But, with global price pressures likely to be subdued amidst large spare capacity internationally, China's inflation is unlikely to reach high rates in 2010.

Macroeconomic risks include a property bubble and stress on local government finances. Since late 2008, local governments have ramped up infrastructure spending while simultaneously being pressured to spend more on health, education and social security, for which they are in large part responsible. With monetary conditions likely to become tighter and land revenues possibly slowing down or even declining, local government finances may become strained.

At the heart of concerns are local government investment platforms established to finance infrastructure construction and urban development. Problems may emerge if the infrastructure projects do not generate enough growth or revenues to pay the operating and interest costs, in addition to repaying loans.

Given China's solid macroeconomic position, the local financial problems are unlikely to cause systemic stress. But the flow of new lending to the platforms needs to be maintained and local government revenues need to become less dependent on land transaction revenues. As a country with a surplus, China has room in deciding how to deal with such problems, since the government debt is largely held domestically.