1st LD-Writethru-China Focus: Balancing reforms, growth remains China's priority: World Bank

Amid moderated economic growth, China's efforts to transition to a more balanced growth trajectory are being closely watched, with a World Bank report suggesting the country strikes a balance between ongoing reforms and managing short-term demand.

China's growth slowdown is not unexpected. In fact, it is desirable in the short and medium-term perspective, as the country prioritizes balancing reforms and managing short-term demand, the World Bank said on Wednesday.

In the short term, China's economic moderation reflects policies to slow rapid credit growth, contain shadow banking, limit borrowing by local governments and reduce excess capacity in industry, which address the vulnerabilities that built up after the 2008 global financial crisis, the World Bank said in its latest China Economic Update released in Beijing.

"In the short run, the slowdown in China's economic growth means the government is making inroads with structural adjustments and policy efforts to address financial vulnerabilities," said Karlis Smits, Senior Economist and main author of the report.

"Over the medium term, lower growth is consistent with a gradual shift in China's growth model, from manufacturing to services, from investment to consumption, and from exports to domestic spending," noted the report.

"In 2015, it remains a priority for China to balance reforms and short-term growth because large-scale, broad-based stimulus measures aimed at supporting growth may conflict with efforts to make the economy more sustainable in the medium run," said Chorching Goh, Lead Economist for China.

"Engineering a gradual shift to a more sustainable growth path poses challenges for policy makers, given real-sector weaknesses and financial-system vulnerabilities," noted the report, a regular assessment of the world's second largest economy.

Efforts to cut excess capacity in heavy industry, dampen unproductive risk taking in shadow banking, and solidify budget constraints for local governments will help make investment more efficient and realign growth over the medium term. However, such reforms will depress economic activity in the short term, it added.

The World Bank predicted China's economy would expand 7.1 percent in 2015 and 7 percent in 2016.

China's economy grew 7.4 percent in 2014, the slowest rate for 24 years, albeit with more focus on higher-quality and innovation-driven growth.

The transition to the "new normal" will require sustained productivity growth that demands the cultivation of indigenous innovative capacity, noted the report.

The global lender believed that China's economic structure is slowly changing. On the one hand, economic activity remains constrained by overcapacity in heavy industries, decelerating export growth and regulatory tightening on nontraditional lending, while the real estate market remains weak with excess inventory and softening property prices in most cities.

On the other hand, growth in services remains robust, especially in advanced services such as banking and insurance, and in recent years, consumption has grown slightly faster than investment, it added.

De-leveraging the economy while maintaining growth requires a better allocation of credit, which in turn requires financial sector reforms, suggested the World Bank.

"China's financial system was developed to serve the old investment-driven growth model, effective during earlier phases but less so now. So, reforms should enable the financial system to reallocate of credit to those sectors that can maintain reasonable growth over the medium-term," it said. Endi