China’s policymakers must avert stock and property market bubbles after lending swelled to a record $1.27 trillion this year, the World Bank said.

The Washington-based lender raised China’s economic growth forecast for this year to 8.4 percent from 7.2 percent and Beijing-based senior economist Louis Kuijs said the central bank will “eventually” have to rein in credit to ensure resources are properly allocated.

The Shanghai Composite Index has surged 72 percent this year after Chinese authorities enacted a $586-billion stimulus plan, lowered banks’ cash reserve requirements and reduced the one-year lending rate to a five-year low. The World Bank also said China will need to do more to rebalance the economy toward consumption and services and away from investment and industry.

“Risks of asset-price bubbles and misallocation of resources amidst abundant liquidity need to be addressed,” Kuijs said. While there’s currently no need for a “major tightening,” the costs of sustaining the current expansionary policy stance “will increase over time,” he said.

China may tighten monetary policy from the second quarter of next year because of stronger growth and rising consumer prices, Goldman Sachs Group Inc. said on October 29. Li Dongrong, an assistant governor at the central bank, said on November 1 that China will maintain a “relatively loose monetary policy.”

Stimulus spending and the surge in lending helped gross domestic product grow 8.9 percent in the three months to September 30, the fastest expansion in a year.

The World Bank said the economy will grow 8.7 percent in 2010, more than an earlier estimate of 7.7 percent. Rebounding housing construction and a turnaround for exports will help the economy pick up next year even as overall growth in investment falls by about half, the lender said in today’s report.

“More policy measures will be needed to rebalance growth in China,” the World Bank said. “Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome.”

Recent initiatives to increase investment in health, education and the social safety net, as well as improving access to finance for small and medium-sized enterprises, are steps in the right direction, the World Bank said. China is likely to record growth over the next five years of about 8 percent annually, it said.

International Monetary Fund managing director Dominique Strauss-Kahn said he anticipates China will address its “undervalued” currency to achieve greater dependence on domestic demand rather than exports.

China has prevented the yuan from appreciating since July 2008, stoking tensions with American manufacturers. Over the previous three years, the Chinese government had allowed the currency to advance 21 percent against the dollar.

The exchange rate needs to appreciate “in the coming years but I think that the process which is now at work is a process which goes in this direction,” Strauss-Kahn said in an interview on Bloomberg Television in Washington. The global financial crisis has already started rebalancing the world economy as US consumers are saving more and China moves toward a “more domestic-led” growth model, he said.

Exports, meanwhile, are likely to resume contributing to China’s economic growth next year, the World Bank said.