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The World Bank said Tuesday China's economy is expected to grow 10.4 percent this year and 9.3 percent in 2007.

Although China's gross domestic product expanded by 10.9 percent in the first half of the year, implying second quarter growth of 11.3 percent, a pace not seen since 1996, the outlook for the country's economy remains "favorable", prompting no need for overheating worries, the bank said in a quarterly report released in Beijing.

With production capacity continuing to expand in line with demand, inflation low and the current account in surplus, the main policy concern is not general overheating for now. In the long term, however, the continued investment boom warrants concerns about efficiency and makes more moderate growth desirable, explained the report.

The Bank has projected a mild slowdown in exports and fixed assets investment for the second half, which would imply a slight fall in GDP growth to under 10 percent at the end of the year, resulting in growth of 10.4 percent for the year as a whole.

Bert Hofman, the bank's Lead Economist for China, stressed that the country's investment has been increasingly driven by firm's profits and profitability rather than administrative agendas.

For instance, sectors like transport equipment, ordinary machinery, and the textile industry which were identified by China's National Development and Reform Commission as having seen particularly rapid fixed assets investment growth, saw particularly high profit growth.

The only exceptions, he said, were large sectors outside of core manufacturing where government policies including on pricing have a large influence.

Another noticeable point is that investment growth tended to be higher in sectors dominated by the private sector. The importance of state-owned enterprises in industrial sectors, in contrast, seems to have displayed a negative relationship with fixed assets investment growth, said the report.

The bank also attributed the strong fixed assets investment to local government behavior, saying local rather than central governments have more clouts in most economic decisions. From January to June, between 10 and 20 percent of investment was carried out by local governments, it said.

The main incentives for local governments include the criteria of government officials' performance, which are largely economic criteria including GDP growth and foreign direct investment, the importance for local government finances of revenues from land sales related to investment projects as well as value added taxation revenues on the production of goods.

The other positive signs of China's economy include the solidly expanding consumption driven by rising income and a more diversified trade structure, according to the report.

While China's trade surplus continued to surge, the export structure was also upgraded rapidly. The share of processing exports in total exports dropped from 54.7 percent last year to 51 percent in the first six months of this year.

"If this trend continues, external trade will benefit China not only by creating jobs, but also by generating more added value and profits," said the report.

(Xinhua News Agency August 15, 2006)