China Is Adjusting to Slower Economic Growth, Says New World Bank Report

BEIJING, July 1, 2015 – Growth in China is expected to decelerate to 7.1 percent in 2015 and 6.9 percent by 2017, reflecting a growth trajectory that is slower but more balanced and sustainable – a “new normal” for the world’s second-largest economy, according to the World Bank’s China Economic Update released today.

“In the short run, the slowdown in China’s economy growth means the government is making inroads with structural adjustments and policy efforts to address financial vulnerabilities. Over the medium term, these efforts are helping China gradually shift its growth model from manufacturing to services, from investment to consumption, and from exports to domestic spending,” said Karlis Smits, Senior Economist and main author of the report.

The government’s polices to slow rapid credit growth, contain shadow banking and limit borrowing by local governments have led to slower investment growth in areas such as real estate, the report says. To prevent growth from slowing down too much, China also announced a series of limited, targeted stimulus measures, according to the report, a regular assessment of China’s economy.

“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," saidChorching Goh, Lead Economist for China.

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. The real estate market remains weak, with excess inventory and, in most cities, softening property prices.

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

To keep the economy on the right track, the report recommends, for example, a better allocation of credit, which in turn requires financial sector reforms. The investment-driven growth model helped China’s economy take off, but reforms are needed to enable the financial system to support sectors that can maintain reasonable growth over the medium-term.