(COURTESY OF THE WORLD BANK CHINA OFFICE)

One year after the financial crisis, China has successfully restarted its growth engine while the developed world is still mired in recession. But will the fervent growth be sustainable and what risks will befall the country in the New Year? Ardo Hansson, a lead economist for the World Bank China Office, sat down with Beijing Review reporter Hu Yue to share his views on these issues. Edited excerpts follow:

Beijing Review: How have China's stimulus measures contributed to the economic recovery? Do you think the current economic growth is sustainable?

Ardo Hansson: China's stimulus measures have swiftly lifted the economy out of what would have been a much deeper downturn. I think the growth will be sustained for a few years, but at a slightly slower rate than it previously experienced because of the global economic situation.

RISING DEMAND: Potential buyers select houses at the Taiyuan Real Estate Exhibition held in April 2009 in Shanxi Province (YAN YAN)

The stimulus packages have many positive features, including their quick implementation and sizable scale, and sent out a clear signal the government would not leave the economy to find equilibrium on its own.

The most effective element of the stimulus was credit growth, and that is where China stands out from many other countries and probably part of the reason why China is now growing much faster than most other economies around the world. The Chinese authorities were able to mobilize the banks to put enormous amounts of credit into the economy, an influence very few governments in the world have over their economies.

But one thing we are unsure of is what is going on at the local government level. Much of the stimulus was actually implemented by local governments, making it difficult to monitor how they are spending the stimulus money.

What role has China played in driving up the world economy?

In the post-crisis period, China made a significant contribution by supporting the demand for raw materials, machinery and equipment. Nevertheless, the Chinese economy is still not large enough to pull the world economy out of the recession on its own.

Moving forward, the country's internal economic rebalancing will help stimulate domestic demands for imports from deficit countries, which is a necessary advantage for a more sustainable and balanced world economy.

Is it necessary for China to maintain its proactive fiscal policy and appropriately accommodative monetary policy next year?

In broad terms, continuing the stimulus would be more appropriate than starting to pull back. Some forms of stimulus are still needed to pave the way for restoring the economy's health. But one concern is the economy might become reliant on vibrant credit growth, which cannot be sustained.

Do you think the current real estate bubble will pose a major challenge to the economy?

Clearly China's real estate market is big enough to arouse concerns pertaining to the overall economic performance. Excess liquidity in the property market need not be a long-run problem since housing demands should remain buoyant. However, there is the risk that price surges may lead to a negative adjustment in the short term. Such cyclical volatility is obviously a threat to the health of the market and the real economy as people may channel all their resources into the sector for speculation.

Some indicators of housing affordability, like the ratio between household earnings and house prices, have not reached a level where it has to worry about a downward recession. Still, near-term prospects for the real estate sector will become less hopeful if the authorities are forced to tighten monetary policies in the event of renewed inflation.

What is your opinion on the Chinese consumer market?

Consumption has always been the most stable component of the economy and is growing at a pace close to that of the overall GDP. It is now appropriate for policymakers to begin reducing generous tax breaks and try to replace them with more permanent incentives. A positive factor is the potential for wages to grow more rapidly. Chinese companies could become more profitable and therefore be able to pay somewhat higher wages.

What major challenges will the Chinese economy face next year?

The global recession will continue to cause a ripple effect that will disrupt the Chinese economy. And despite initial signs of easing, banking woes in the rest of the world still need time to recover.

Another challenge is insufficient reform. The recent focus of China's economic policies has been on the quantity and quality of spending, but more efforts are needed to deepen economic reforms, such as improving the social security systems including health, education and pensions.

Meanwhile, the risks of trade frictions involving China are building up as countries come under pressure to protect their own industries. As a country that has benefited from globalization, China could suffer considerably at the hands of increased trade restrictions.

Inflation may not be a serious problem next year since excess capacity will continue to dominate in the short run. Increases in asset prices have not spilled over to prices of consumer goods, but further down the road, inflationary fears will be much more serious if credit is continuously poured into the economy.