China Focus: Chinese economy rebalances amid resilient regional growth

China must manage the interplay between near-term growth and long-term economic rebalancing, as uncertainty in major developed economies weighs on the broadly positive outlook for developing economies in East Asia and the Pacific.

BALANCING ACT

"China's transition to slower but structurally rebalanced growth continues," the World Bank said Thursday in a report titled "East Asia and Pacific Economic Update."

The bank expects the Chinese economy to slow gradually as it rebalances toward consumption and services and forecast growth of 6.5 percent in 2017 and 6.3 percent in 2018, compared with 6.7 percent in 2016.

"In China, growth will continue to moderate, reflecting the impact of the government's measures to reduce excess capacity and credit expansion," said the report, adding that the real estate sector is expected to slow.

Since October, dozens of cities have announced measures to prevent home prices from rising out of control.

China should continue to give priority to reducing excess capacity, curbing the credit surge, lowering debt leverage in the corporate sector and reforming state-owned enterprises, Sudhir Shetty, chief economist of the World Bank's East Asia and Pacific Region, said in a video conference at the launch of the report.

China has begun to tackle those issues and should show results in the medium term, Shetty told reporters.

"Chinese policymakers will manage the balancing act," which means that they will continue with long-term structural reforms, support new growth engines of the economy, and facilitate the economy transitioning towards services and high value-added products, Shetty said.

REFORM OPPORTUNITY

Growth in the first quarter may prove stronger than the bank's prediction for the year and provide opportunities to advance structural reform, contain credit expansion and improve efficiency, said John Litwack, World Bank lead economist for China.

Adding to recent positive signs, Thursday's data showed foreign trade growing well in the first quarter, a pickup in external demand and a firming domestic economy, giving policymakers with more room to maneuver.

The strong start to the year has helped ease worries that growth may slow too sharply, preventing authorities from meeting their target of creating over 11 million jobs this year, 1 million more than last year's target.

The World Bank also recommended tighter regulation of shadow banking, addressing rising household mortgages, and complementing reduced industrial capacity with better social and labor policies.

GLOBAL RISKS

Despite broadly positive prospects for the next three years in the East Asian and Pacific region, the World Bank highlighted problems that may exacerbate the vulnerability of some economies.

Facing interest rate increases in the United States, protectionism, credit expansion and high levels of debt in several East Asian countries, the bank recommended prudent macroeconomic management to ensure sustainable fiscal balances in the medium term.

As a whole, developing economies in East Asia and Pacific are expected to expand at 6.2 percent in 2017 and 6.1 percent in 2018, driven by domestic demand, and recovery of the global economy and commodity prices.

However, for growth to be sustained, countries in the region will need to "reduce fiscal vulnerabilities while improving the quality of public spending and fostering global and regional integration," said Victoria Kwakwa, World Bank Vice President for East Asia and Pacific. Endi