In its latest quarterly update, the bank forecast gross domestic product growth of 9.3 percent for this year and 8.7 percent for 2006 with consumer price inflation averaging 2.0 percent in both years.

"Recent developments strengthen the case for projecting a very soft landing," the report said. It particularly welcomed a rebound in domestic demand, which made up 75 percent of growth in the third quarter, compared with 40 percent in the first half.

A possible weakening in the US economy along with high oil and commodity prices meant the international risks were largely on the downside for China.

But home-grown risks point upwards, including the chance of greater-than-expected household spending on the back of fast-rising incomes, which in the first half of 2005 were 17 percent higher than a year earlier.

"The risk that a profit squeeze would trigger a pronounced slowdown in investment and a wider economic slowdown seems small, given the stable macroeconomic environment, underlying growth potential, and favourable financial conditions," the bank added.

A greater threat was that policy makers would fail to rein in investment in industries facing potential overcapacity.

"With enterprises sometimes more market-share oriented than profit oriented, there is a risk of further pressure on prices, corporate sector balance sheet problems, and a new round of non-performing loans," the bank said.

This danger was amplified by a build-up of cash in the banking system that could be turned into new lending and investment. This needed "careful monitoring, and perhaps corrective measures."

Money supply growth has accelerated markedly in recent months, a trend that the bank attributed to a decision by the central bank to sterilise, or mop up, far less of the yuan it issues when it buys dollars flowing into China.

The result has been a sharp drop in money market yields, in line with official policy of deterring speculative inflows of capital scenting gains from an appreciation in the yuan.

Rough estimates suggest the policy has worked, the World Bank said: inflows not related to foreign direct investment fell from more than $8 billion a month in the first half of 2005 to less than half of that in the third quarter.

"Given the current domestic context, it may be difficult, though, to rely too long on this policy. The low money market rate needed to stave off capital inflows does not seem consistent with strong economic growth and concerns about high investment."