World Bank sees risks as China rebalances

Forecast of 7.6pc growth for year comes with warning over impact of pressures including action on local-level debts amid slowing trend

PUBLISHED : Saturday, 07 June, 2014, 1:13am
UPDATED : Saturday, 07 June, 2014, 1:36am

The mainland's economic growth is expected to moderate over the next few years as the economy continues to rebalance, the World Bank said in a report yesterday.

The Washington-based lender warned in its latest economic update that the world's second-largest economy was facing rising risks from an abrupt deleveraging of local government debt, a sharp cooling down of the property market and an uncertain export recovery.

"A rebalancing of growth from investment to consumption and from industry to services continues, but there are challenges and rebalancing is slow," the World Bank said.

It expects the mainland economy will grow by 7.6 per cent this year, supported by local policies and global demand recovery, but that the rate of growth may slow to 7.5 per cent next year and 7.4 per cent in 2016.

The International Monetary Fund said on Thursday that the mainland's gross domestic product would grow by 7.5 per cent this year but was expected to fall to around 7 per cent next year.

The central government's economic growth target for this year is 7.5 per cent.

"The prospect of growth falling below the government target will likely trigger accommodative fiscal and monetary policies," the World Bank said.

The central government has launched a series of targeted measures to spur growth, including lowering required reserve ratios at some banks, after first-quarter growth fell below this year's target.

However, Beijing has also pledged not to introduce further huge stimulus campaigns, like the four trillion yuan package implemented during the global financial crisis in 2008 to 2009 that has been blamed for exacerbating the debt problems of local governments.

The report said the mainland economy had shown signs of a pick-up in recent weeks, and that was likely to last for the next two quarters. The improvements had been reflected in robust consumption and recovering external demand.

President Xi Jinping said last month that China needed to adapt to a "new normal" pace of economic expansion. In its 12th five-year plan, covering the years from 2011 to 2015, the central government said it aimed to achieve average economic growth of 7 per cent a year.

World Bank senior economist Karlis Smits said yesterday there were signs the central government might set a lower growth target for next year to help reduce imbalances in the economy.

The World Bank urged Beijing to speed up fiscal and financial sector reforms to deal with the medium-term risks in the economy.

The reforms needed included "effectively managing and supervising rapid credit growth", especially in the shadow banking system, and reducing local government debt that has accumulated through off-budget and quasi-fiscal activities.

"Delays in implementing coherent reforms could perpetuate resource misallocation, undermine the health of the banking system, threaten the debt sustainability of local governments, and increase the fiscal costs of reforms," the bank said.

Reuters, Agence France-Presse