BEIJING : The World Bank warned Wednesday that the risk of a sharp correction in China's stock market could rise if prices continued to soar, but argued the impact on the overall economy would be limited.

"If prices were to continue to rise rapidly, risks of a sudden change in mood and sharp negative correction could increase," the World Bank said in its quarterly update on the Chinese economy.

"The main impact could be damage to the new-found confidence in the Chinese capital market."

China's stock markets have tripled in value since 2005 and raised concerns of a major correction.

However, the World Bank argued the impact on the real economy via reduced consumption and investment was likely to remain limited.

The reason is that the total value of stocks held by individual investors is no more than one sixth the overall Chinese gross domestic product, according to the World Bank.

In addition, the exposure of the banking system to the stock market, directly or indirectly, seems limited, it said.

It cited an estimate from a state think tank that the exposure may add up to 300 billion yuan, which is a modest one percent of the total deposit base and 5.5 percent of stock market capitalisation of tradeable shares.

"Nevertheless, large losses of financial wealth for specific groups, especially vulnerable groups like retirees and low income earners, could be a policy risk," it said.

"It could lead to pressure to bail them out, resulting in fiscal costs on the one hand, and moral hazard on the other."

- AFP