On optimism about China: There is good news and bad news for China in our view, at the moment. The good news is that China, it's just about the only major economy that has continued to grow and continued to grow respectably. We just released an official new forecast [this week], a quarterly update, and we discussed the picture there. We feel that China is on course to grow something around 7 percent this year which we think is respectable, given the global climate -- the world outside China is going to shrink about 3 percent.

The World Bank is not all that optimistic, over two years. China is a large economy, but quite integrated in terms of trade and inward FDI. So, what has happened now is: exports are still the main drag on growth. They're very important for China, in terms of the importance of growth, more important than in India or Brazil. There are some people now who say China is continuing to grow -- exports are important and will continue to be mediocre. What's kept growth up is stimulus.

But you cannot undertake this large a stimulus for too many years in a row. Even China can't undertake a stimulus next year. In terms of momentum, when we look at next year, we don't really expect it to accelerate. It will grow respectably, but it doesn't meet -- there's anxiety here, there's this expectation that the economy will accelerate.

So, we have this massive pull from the government. But in our view, the conditions of the marketplace, the manufacturing sector especially, which is large and important -- China is facing the same problems as worldwide. Spare capacity puts downward pressure -- and so when you think about the appetite of firms in the market economy, their appetite for investment is not going to be that great.

So with exports also not expected to take off very impressively, we feel that one cannot expect really rapid growth.

On the engine of Chinese growth: Where is this growth coming from? It's coming from an impressive policy stimulus, a monetary stimulus. China was very fast in conceiving and implementing this policy, what everybody refers to as the "$4 trillion stimulus plan." It's about infrastructure spending and other projects that in China can fairly quickly be implemented, given their backlog.

On rapid expansion before the slowdown: China entered the crisis from a period of extremely rapid growth, when the government was trying to hold down growth by being tighter on the project-approval side, and with monetary policy. China still relies quite heavily on credit control. So doing the good years, those were tightly enforced. So when the crisis started to hit, the authorities took off the lid and the banks were then encouraged to lend. That fiscal and monetary stimulus is filtered to the economy -- quite rapidly and quite quickly.

On imports and experts: China entered 2009 with a very large current account surplus. On top of that, capital flows could be positive or negative. But it has this basic balance, which is the main driver of its foreign reserves accumulation.

When we look at what may happen, we think in terms of current account or trade balance -- its exports will do badly. Its imports have started to pick up in terms of policy stimulus. But import prices have fallen sharply because raw material prices have dropped. So China's terms of trade are improving. That is offsetting the impact on the real side.

Same thing on FDI -- we have weaker net FDI, but still significantly positive. The underlying forces will not stop functioning. They will moderate a little bit, now and over the next few quarters. But ultimately, they'll continue to accumulate.

On rebalancing: We at the World Bank and China's government is really working on rebalancing China's economy -- or, really, the way the economy grows over the next five, six, seven years. That rebalancing is towards a more domestic demand driven, service sector demand driven economy, with less inequality.

Now, progress with that rebalancing has not been very fast so far. But as the global crisis has intensified, senior Chinese policymakers have stated that the new global environment means that project is more important. The government is intensifying efforts to take care there.

What's happened since then? We've seen a lot of new spending. This massive infrastructure investment -- some foreign critics say that this will just add to its manufacturing capacity. But a lot of these investments are domestically oriented, household oriented: sewage systems, public transport, things like that. Not steel factories.

There have also been policies to boost consumption, often via subsidies. The government has really started giving subsidies to people in rural areas. And it's seemed to be successful.

Still, these policy changes are short-term. We still feel that there are important areas of structural policy that need to see more progress for China to convincingly rebalance the way that it will grow. These areas are really complicated ones -- they're on the agenda, and it's going to be a long-term project.

On growing China's service sector: It's important for countries to have a large middle class. The key for China is to make that happen in a way that doesn't stifle growth. In our view, China needs more service sector activity. And what kind? Basically, the whole range, from lowbrow to highbrow, really, across the board.

When we think about the service sector, on the one hand it could get a lot more productivity growth and economic growth by liberalizing and opening up to private participation in the service sectors that have been reserved for state owned enterprises. China could get a lot of bang for its buck by opening up sectors like the financial sector, transport, logistics, media. Media, of course, has a political connotation -- I mean, more like telecom. These are gigantic markets served by large enterprises, but not by competition. That's one area.

The other way in which it can see more activity is basically by changing the relative attractiveness of producing services versus products. What we mean by that is -- one of the reasons why China has been so successful in the last decade, is that it became really attractive for firms to build factories and churn out products. If all of your inputs are cheap -- land for free, if you don't care about the environment, if your water is cheap, your labor -- if all of that is cheap and the government is facilitating it, you'll come and stay with your factory. But the country subsidizing industrialists -- it's been too good at that.

The service sector has been underemphasized. These regulations tend to benefit the incumbent firms in incumbent industries. And they've been a constraint on growth in the service sector. So we feel by rebalancing that attractiveness -- by taking away some of the under-pricing of inputs into industry and removing these barriers around the service sector -- that's an important driver of this equilibrium.

On urbanization: This is the other major plank of reform you can expect to see in the next year or two. Hundreds of millions of people work as migrants in cities, keeping their families in the countryside and send money back. It would be better if China would create more thriving cities, where people can move with their families. Then, you get these virtuous circles: one person's spending is another person's income, right there.

When we do modeling exercises, we find that by removing some constraints China could get a lot of mileage in its service sector. What does that mean? Well, more restaurants, travel agencies, insurance agencies, whatever businesses people might want to open. More like the U.S. in China!

That means liberalization of some laws, though, and that takes time. China has a system of registration combined with entitlements. If you're registered as a rural person, you can't knock on the door of the urban government, even if you live there, and ask for public services. You're like an illegal immigrant. You can't have them. So, further liberalizations of the system will help. Along with land reform. But, again, we're talking on a much longer timeframe there. This can't happen overnight.

Land reform is really especially complicated. There are a lot of party members who are traditionally not in favor of land reform -- because it could lead to situations that other countries have had, which are unstable politically. On a big scale, China needs to work on getting rich parts of the government and rich areas to give things to poor areas. So, the strong central government moving prudently, that's really important there.

On the fear of asset bubbles: Well, China's capital account is not yet open. Not that some dollars, some financial capital doesn't somehow manage to get in. But it's very hard to move sums in and out without the government knowing. Some domestic economists pay a lot of attention to hot money inflows. But I don't think they're as large as people say they are. You can't have asset bubbles without them -- and so, that's not a concern at all right now.

Louis Kuijs is a senior economist for the World Bank in China.