The resurgent People’s Republic of China’s (PRC) economy remains on track to grow 9.6% this year, and 9.1% in 2011, but policymakers will need to boost domestic consumption to make growth more sustainable and inclusive in the long term, says the Asian Development Bank (ADB) in a major new report.

The Asian Development Outlook 2010 Update (ADO Update)left growth forecasts for the PRC in 2010 and 2011 unchanged from ADB’s projections in April. It noted that next year’s mild pullback in growth reflects an expected phase out of stimulus measures adopted in the wake of the global economic crisis, and more subdued industrial output.

For the longer term, policymakers will need to consider fiscal policy adjustments and other measures to step up private consumption and to help rebalance the economy and sustain growth.

“Fiscal policy can play an important role in promoting a more consumption-driven and services-oriented economic model, particularly if it is complemented by other mutually supportive and consistent policies,” says Jong-Wha Lee, ADB’s Chief Economist.

Among measures to encourage consumption and promote a rebalancing of growth are allocating more fiscal resources to public services to raise the disposable income of households, strengthening social safety nets, increasing the supply of low-income housing, expanding property taxes, and boosting fiscal transfers from the central government to the provinces.

“Longer term, failure to decisively implement the agenda to rebalance the PRC economy risks jeopardizing the sustainability of growth,” says Dr. Lee.

In the first half of 2010, the report notes, the economy continued to rebound strongly, with net exports turning positive in the second quarter for the first time since the onset of the global recession. Overseas investors returned aggressively with foreign direct investments expanding by about 20% in the first seven months from a year earlier, while retail sales grew 18.2% in the first 8 months, and about 6.4 million new jobs were created in urban areas in the first half.

Consumer price pressures remained relatively subdued, with some expected utilities tariff increases put on hold, and the average annual inflation rate is now projected at 3.2% for 2010, down from 3.6% forecast in April. The 2011 rate at 3.2% is unchanged from the April forecast.

GDP growth for the third quarter of 2010 is seen at about 9%, dipping to 8% in the fourth, with merchandise export growth likely to decelerate in the second half of 2010, as a result of a base effect from the year before, subdued demand, and the expiration of PRC tax rebates. Private consumption is likely to remain brisk, underpinned by growth in employment and incomes.

The fiscal deficit as a percentage of GDP is expected to narrow in 2011, while growth in fixed asset investment, which has been easing in 2010, is likely to moderate further.

ADB says the downside risks to its updated outlook include fragile external demand, exacerbated by European fiscal and debt concerns, a weakening euro, and a worse-than-expected deterioration in the quality of bank assets resulting from excessive lending.