China’s economic outlook remains favorable despite some recent signs of softening, the World Bank said yesterday.

The Washington-based bank maintained a 9.5 percent projection for China’s economic growth this year and predicted an increase of 8.5 percent for 2011 in its latest China Quarterly Update.

The report foresaw that China would make more use of interest rates to help manage its development and reduce the risks from surging housing prices and overinvestment.

"China’s growth should be less investment-driven this year and benefit from more favorable external trade, while consumption is likely to remain supported by a strong labor market," said Ardo Hansson, the bank’s lead economist for China. "The external surplus should decline somewhat further this year."

Contrary to many economists’ forecasts, Hansson said China’s inflation is likely to be contained this year by the absence of price pressures globally. He saw little likelihood of a wage-price spiral.

"Inflation has picked up somewhat, but core inflation remains low," he said.

China’s gross domestic product surged 11.9 percent from a year earlier in the first quarter, the fastest pace in more than two years. The strong growth rate not only demonstrated China’s quick emergence from the global financial crisis, but also triggered concerns of an overheated economy.

But the economy has shown signs of slowing since April, when the growth of industrial production and fixed asset investment began to moderate.

"So far this year, the slowdown in government-led investment after last year’s massive stimulus has partly been offset by strong real estate investment," the World Bank report said. "Household consumption growth has held up well, reflecting a favorable labor market."

"Despite a rapid recovery of export volumes since the trough in early 2009, China’s trade surplus has declined further due to surging import volumes and declining terms of trade," the report said.

China reported its first trade deficit in more than six years in March. The figure returned to surplus in April and May, but at less than half the surplus value of a year ago.

"In light of the robust growth prospects, it makes sense to further normalize the overall macroeconomic stance to contain the key macroeconomic risks," said Louis Kuijs, senior economist and main author of the report. "Substantial uncertainty around a favorable outlook calls for policy flexibility rather than continued stimulus by default."

Kuijs said China’s central authorities are rightly aiming to control lending by local government investment.