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CHINA'S economic growth is expected to ease slightly to 7.6 per cent this year from 7.7 per cent in 2013 and to moderate further to 7.5 per cent next year, the World Bank said yesterday while cautioning that structural transformation of the world's second largest economy is unlikely to be an even process.
"The rebalancing is not smooth, and quarterly growth is volatile," the World Bank noted in its latest China Economic Update. Recent data suggest, however, that "growth has stabilised and growth momentum is expected to accelerate in the second quarter of 2014".
The World Bank report came a day after the International Monetary Fund published the results of a regular economic consultation with Chinese authorities in which the IMF forecast that China's growth should be around 7.5 per cent this year, but could slip to 7 per cent in 2015.
The IMF said bluntly that "activity in China since the global financial crisis has been too dependent on credit and investment, including in real estate. While this has supported growth and provided a boost to global demand, it is not sustainable and (creates) rising vulnerabilities."
Both institutions expressed overall confidence in the China's ability to achieve a controlled slowdown or soft landing while also pointing to a series of risks.
"Recent growth rates (in China) have been significantly below levels observed over the past decade as drivers of economic growth shift from manufacturing to services on the supply side, and from investment to consumption on the demand side," the World Bank said in its update.
The growth slowdown in the first quarter of this year "reflected a combination of dissipating effects of earlier growth-support measures, subdued external environment, and tighter credit, especially for real estate activities".
In recent months, however, economic activity, including industrial production has started to show signs of acceleration, the World Bank said. This is "expected to continue into the next two quarters of this year - partly reflecting the effect of new growth-supporting measures, robust consumption, and a recovery of external demand".
A planned decline in Chinese investment growth will be largely offset by a gradual increase in consumption growth, supported by an increase in household incomes, the World Bank said.
"The fundamental drivers of the global recovery remain intact and should provide a favourable tailwind to China's net export growth. However, headwinds from a gradual deceleration of credit growth can be expected to weigh on domestic economic activity."
The World Bank said that the main channels of a possible disorderly unwinding are related to local government financing, which in case of a disorderly deleveraging could trigger a sharp slowdown in investment growth, and to prospects of sectors such as real estate, which in case of an abrupt change in the cost of capital could result in debt service difficulties.
It called for fiscal and financial sector reforms to address financial stability risks in the medium term. The first task involves effectively managing rapid credit growth, including the less well-regulated shadow banking system.
"The second, gradual and orderly deleveraging of large stock of local government debt accumulated through off-budget and quasi-fiscal platforms. Both of these reforms could potentially be disruptive to growth in the short run."
The IMF said, meanwhile, that activity in China since the global financial crisis "has been too dependent on credit and investment, including in real estate".