The East Asian economy is forecast to expand by 8.7 percent this year supported by a recovery in global demand and capital inflows, growth in consumer spending and sustained stimulus, the World Bank said in a report issued Wednesday.

The Washington-based World Bank has upgraded its forecast from November's 6.7 percent, reflecting its growing confidence in the region.

"East Asia has emerged stronger from the global crisis and rapid growth will be possible in the coming years even in a weakened global economy," the World Bank said in its latest East Asia and Pacific Economic Update.

The World Bank noted the return of capital flows to the region, with most of the 700 billion to 800 billion U.S. dollars worth of capital flows this year going to East Asia.

"Capital flows to East Asia will be supported by expectations of robust growth based on solid fundamentals and prudent policies that are likely to be adjusted with more agility to the changed circumstances of the global economy than in other developing regions," the World Bank said.

East Asian countries, after all, proved to be resilient during the global meltdown, growing at 7 percent in 2009. While this is slower compared with the 8.5 percent expansion posted in 2008, East Asia's modest growth assured that it remains the fastest growing region among the world's developing economies.

The World Bank attributes this to the timely implementation of monetary and fiscal policies, a well-managed deficit and the introduction of social protection mechanisms that protected the poor from the worst effects of the slowdown.

But more than that, China's growing influence as an economic powerhouse led, and will continue to lead, the region's growth.

"China strongly influenced developments in the region" with its monetary and fiscal stimulus policies limiting the slowdown, according to the EAP update.

"Take China out of regional averages and growth in the rest of developing East Asia was a mere 1.3 percent in 2009," it said.

Despite the rosy prospects, the World Bank noted that the region faces several challenges. For one, it warned against the rapid withdrawal of economic stimulus policies and advised the need to return to a pre-crisis private sector-driven growth which will be more sustainable.

"In that setting, the developing countries of East Asia will need to carefully manage the withdrawal of fiscal stimulus measures in the short term while returning to their structural reform agendas to promote growth in the long term," said Vikram Nehru, World Bank chief economist for the East Asia and Pacific region.

The World Bank said deeper regional integration should be encouraged given the slower growth in the U.S. and Europe. China also needs to rebalance its economy, enabling a larger role for the service sector and private consumption, thus moving it away from investment-heavy, export-led growth.

Middle income countries in the region such as the Philippines, Vietnam, Indonesia, Malaysia and Thailand should invest in human capital to encourage moving up the value chain in production and exports.

Nehru said that the rise of China and India in the world market is placing more pressure on countries like the Philippines, Malaysia, Thailand, Indonesia, and Vietnam.

"Now, with the rise of China on one hand and the rise of India on the other, there is enormous pressure for these countries to start moving up the value chain. To move up the value chain requires increased investments in not just infrastructure but also in human capital, in human skills," he said.